Determine how this information can be used to shed light on the impact of corporate governance mechanisms on company performance.

Financial Modelling


The assignment question is shown below. Course members will be assessed on their analysis, presentation and associated discussion.

Maximum length: 3000 words (this does not include graphs, tables or appendices).

Deadline for Submission: 12th December 2019.


Read carefully the case notes below. Consider the information shown in CG1.xls.

Determine how this information can be used to shed light on the impact of corporate governance mechanisms on company performance.

Then write a report for the Directors of USS AG which addresses these issues.

Corporate Governance and Firm Performance

You have recently been appointed as an analyst within PMC Inc. PMC is a UK consultancy company that undertakes independent research for client organisations.

Your first client is a large asset management company (USS AG) which provides advice and administrative services to both individuals and companies in relation to portfolio selection and specific asset purchase (stocks, bonds, etc.).

The Directors of USS are interested in determining how corporate governance mechanisms influence company performance. In particular, the impact that ownership can have on different aspects of performance and the extent to which the separation of ownership and control provides opportunity for managers to undertake activities which have a negative effect upon performance.

You have been asked to undertake some quantitative analysis looking at this issue. While you are familiar with various different aspects of statistics and a number of statistical packages you have not undertaken a project of this nature before. Hence you start by conducting a literature search.

This search proves beneficial and you find that there are a number of existing studies which look at corporate governance and performance, although none specifically in a UK context.

In terms of theoretical work one of the overarching themes is that of the principal/agent problem. This suggests that the owners of a firm will want to pursue profit or value maximisation, but that on many occasions share ownership is so dispersed that the ability of shareholders to push managers in this direction is extremely limited. In contrast managers will have other objectives such as ‘empire building’ or a quest for higher salaries, with pursuit of these alternative objectives being possible (at the expense of profit) because control cannot be exerted by shareholders. This implies that in situations where share ownership is not dispersed and instead resides to a large extent in the hands of a single organisation or individual then it should be possible to force managers to pursue value maximisation. However, there is also the suggestion that some of the owners of a company may have objectives other than maximum value.

In terms of empirical work there have been a number of studies which have attempted to look at the impact which ownership concentration (percentage shares of the largest owner) has on performance. Various measures of company performance have been used including accounting profit, market to book value and return on capital employed. In addition, some studies have looked at whether the identity of the largest owner (bank, institutional investor, etc.) has an effect on these performance measures. All such studies also contain ‘control variables’ which are likely to impact on company performance. The most frequently used of these is firm size. In addition, some studies have attempted to control for the industry in which the firms are located.

From the material you have identified you draw up a list of variables which can be used to identify the impact, if any, of ownership and control on performance. You then collect numerical data on each of these variables (details of the data can be found in Appendix I).

You now need to consider how you will analyse this information. In addition you need to consider how you will explain the approach(es) you have adopted and the implication of your analysis given that the Directors of USS are not experts in quantitative or statistical methods.

Appendix I

The data for to this assignment can be found in CG1.xls. This information relates to a large sample of medium and large sized firms. In total there are 400 observations. Variable definitions are given below.

MBV: Market to book value.

Identity: Identity of the largest owner:

3 if bank,

4 if institutional investor,

5 if non-financial company,

6 if family or single person.

Con: Ownership concentration, percentage shares of the largest owner.

Size: Total assets of company, £ million.

ROCE: Return on capital employed, percent.

Industry: Sector in which company operates:

1 if manufacturing,

2 if services,

3 if primary.


In structuring your report you may wish to consider the following framework. This does not mean that you simply respond to (a) to (d) below, but rather that you formulate headings and sub-headings for your report using the framework as a starting point.

(a) A graphical representation of the data and a discussion of any issues or patterns which arise from this exercise. It would be for you to decide upon the exact data to use and the appropriate graph(s).

(b) Univariate and bivariate analysis and discussion which considers the effects of ownership and control on company performance.

(c) Multivariate analysis and associated discussion which makes use of the data given in CG1.xls.

(d) Any other issues, problems or additional complications which you feel should be conveyed to the Directors of USS with respect to your analysis.

Remember, the Directors of USS are not experts in statistical analysis. Hence you will need to explain what you are doing and why, as well as the meaning of your results.

Important points to note:

· You are required to provide explanation and discussion. Hence explain what you are doing, why, and the meaning of your results.

· Do not produce graphs if you cannot provide related discussion.

· Do not produce tables if you cannot provide related discussion.

· Do not cut and paste Excel, SPSS, etc. tables. Produce your own summary tables. If you think appropriate you can provide an appendix with the Excel, SPSS, etc. information.

An example of ‘what you are doing, why, and the meaning of results’:

“The analysis consists of cross-tabulations and a logistic regression. The cross-tabulations, which make up the brunt of the report, allow one to see the interrelationship between two or more variables. For example, what percentage of whites and African-Americans play lottery games? Or, who spends more per month on lotteries, those younger than fifty or those older than fifty? The investigators use cross-tabulations to illustrate the relationship among demographic characteristics (e.g., age, education, income), attitudes toward lotteries, how frequently residents play lottery games, and how much they spend on them.” (Piliavin and Entner Wright, 1992: 2)

“As shown in column four, several demographic characteristics of the 1991 respondents significantly predict lottery play. These include gender, age, marital status, and education. First, men are more likely to play the lottery than women, with an estimated regression coefficient of .3242 (top of column four). Being positive, this coefficient indicates that male respondents (coded as 1) have higher probabilities of lottery play than female respondents (coded as 0).” (Piliavin and Entner Wright, 1992: 58)


Two more example reports:


A literature search/review is not a requirement because the main objective of this assignment is for you to think through the issues that can be addressed using the data provided. However, good use of secondary material in introduction or conclusion will be rewarded. If you use such material it should be referenced in your report and the full citation must be provided in a bibliography.

Criteria for a good assignment:

· good understanding of key concepts and ideas

· some imagination and originality

· development of argument so that the whole assignment hangs together.

When you write your assignment, consider the following:

· Before you begin, work out on paper a detailed outline of the structure of your assignment and the arguments you will develop.

· In the introduction, you should set out your main themes and intentions: describe the issue you are addressing, identify its main components, and indicate what you are going to do in the body of your essay.

· Break down your arguments into main parts – use this as a basis of your assignment that will then be divided up into several sections (you may want to have section title for each section).

· Build up your argument point-by-point, section-by-section, so that you develop a picture that slowly develops in the reader’s mind.

· Always try to put yourself in the position of a critical reader, ask yourself how s/he would react to your assignment, how s/he would understand it, be persuaded by it.

· Do not simply describe the ideas you’re dealing with, provide a critical evaluation.

· Summarise your arguments in a conclusion. What is the main significance of what you have been saying?