Calculating a Composite Index for Shareholders Protection

Document Type : Research Paper

Authors

1 Ph.D. Candidate, Department of Accounting, Faculty of Economics and Administrative, University of Mazandaran, Babolsar, Iran.

2 Associate Prof., Department of Accounting, Faculty of Economics and Administrative Sciences, University of Mazandaran, Babolsar, Iran.

Abstract

Objective: Shareholders' protection is an interdisciplinary issue and has become one of the ideals of every legal and economic system, receiving the attention of various regulatory, monitoring, and executive authorities. Considering the separation of ownership and control in companies, shareholder protection seems to be far from such ideals. There are basic concerns and challenges in this regard. One of the controversial issues is developing a composite index that can show the level of shareholder protection. This study aims to formulate a composite index at the level of companies in the emerging market of Iran.
Methods: The statistical technique of discriminant analysis was used to measure the weight of the combined index; 166 listed companies were separated into two groups of companies. Among them, 83 companies had the feature of shareholders protection and the rest did not. The composite index was developed accordingly. The results were strengthened based on year and industry separation. The reliability of the proposed composite index was also tested.
Results: The results proved the proposed composite index of shareholder protection to be highly reliable. The index was able to classify Iranian companies into groups of protection and non-protection of shareholders with considerable accuracy. The criteria of related party transactions had the highest weight and the disclosure rating had the lowest weight in the proposed composite index. In addition, supplementary tests for the composite index were conducted based on the year and industry. Also, due to the use of different criteria, the findings proved the proposed composite index to include the results of individual criteria. The results of the covariance test of the proposed composite index with one-dimensional criteria indicated that the changes in the composite index with individual variables were in the same direction, which increased the reliability.
Conclusion: According to the findings, shareholder protection relies on the opportunistic motives of managers and controlling shareholders. The result is consistent with the Agency Theory. Moreover, changing the measure of shareholder’s protection from individual indicators to composite one leads to improve of theoretical foundations by expanding the scope of analysis. Based on theories and evidence, the agency problem makes it difficult to regulate the behavior of managers (or controlling shareholders) in line with the interests of the company. It seems that the agency problem even leads to the expropriation of minority shareholders. Also, based on information asymmetry, managers prefer to limit the provision of information about their operations to shareholders and secure their interests. The proposed index can be useful for policymakers and investors to classify companies into two groups of protected stocks and non-protected ones. It can help them with decision-making procedures, too.

Keywords

References

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Accounting and Auditing Review
Volume 29, Issue 4
2023
Pages 673-713

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