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The Determinants of Expropriation Minority Shareholders' Interest from Malaysian Ace Market.


Expropriation of minority shareholders interest has been an issue globally since decades ago. In articles of Turner (2015), an associate at Singapore Management University, Professor Wang Jiwei, said that "having a dominant shareholder puts the parent company in a powerful position. The parent can use its voting power to make decisions that benefit the parent but not the minority investors". Protecting minority shareholders has been a challenge for the regulatory body such as The Organisation for Economic Co-operation and Development (OECD) and Malaysian Code on Corporate Governance (MCCG) relating corporate governance. This study mainly attempts to further investigate the relationship of several factors relating to expropriation of minority shareholder in narrower scope. There are few topic of corporate governance in Malaysian context that relate to expropriation issue. Such researches mainly focus on the MAIN Market public listed company in Bursa Malaysia (Masdiah, Irene & Qian, 2016; Ying & Wang, 2013; Nurul Huda, Rohaida & Siti 2011). However, there is lack of research on these topics to view the relationship in the ACE Market. ACE Market is viewed as the second board that are crucial for newcomers companies that want to increase their capital by going public. This shows that there is a gap in empirical study on viewing ACE Market on the importance of having corporate governance mechanism such as independent of board's directors and audit committee. Chen, Wang and Lin (2014) stated that the roles independent directors are preventing and deterring the expropriation by controlling shareholders. The independent director is not tied in any way or form to the business entity and generally seen as a good thing as they will not be prone to bowing to the top management demands. While, for audit committee independence, Cai, Hillier, Tian and Wu (2015) state that strong competency and independence of audit committee will reduce fraud and error in financial statements and can avoid major shareholder involved in expropriate wealth from the company. Thus, this study will examines the significant of relationship between corporate governance mechanisms namely boards independence and audit committee independence with expropriation of minority shareholder interest regard to related party transaction done in ACE Market listed companies.

Sherman (2015) stated that ACE Market main objectives were to encourage companies to push for development and growth. Growth is subcategory of firm financial performance that is viewed by most shareholders before investing their capital in the companies. The firm financial performance is part of the reason for shareholders to stay in the companies. As ACE Market is a board that mainly consist of listed companies with lower and smaller capital than the MAIN Market, they will push for more capital for their company growth and profitability before able to be listed in MAIN Market. Hence, such encouragement may lead to expropriation if the listed companies involved in activities that will promote the firm financial performance. Thus, this research will attempt to find the relationship between firm financial performances on expropriation of minority shareholders to relate that financial performance which viewed important by shareholder.

Therefore this study is to investigate the extent level of expropriation in ACE Market and to investigate the relationship of firm financial performance and board's independence towards expropriation of minority shareholders' interest in ACE Market. This research is to provide a new insight on the issue relating expropriation of minority shareholder on ACE market in Malaysia. A new insight in terms of literature and empirical of this study may apprehend the regulator such as Minority Shareholder Watchdog Group (MSWG) in protecting the interest of minority shareholders.

Literature Review

Expropriation of Minority Shareholder

Controlling shareholders' incentives to expropriate minority shareholders are a key factor that implies a link between corporate governance and firm value during the crisis period (Bae, Baek, Kang and Liu, 2012). As above mentioned, these transactions may occur to an organisation that is lack of corporate governance mechanism. Expropriation of minority shareholders' interest is linked in terms of related party transaction. Related party transaction defined as a transaction takes place when a deal is entered into by at least two entities where one has control over the other or where the parties come under the same control of another (CFA Institute, 2009). Normally, related party transaction that usually happen in business transaction are those transfer of property, assets, or in terms of financial on behalf of the related entity regarding settlement of liability. Those related party are known to be the director, major shareholder or person connected with director or major shareholder (Bursa Malaysia, 2016).

Although the expropriation that happen in certain companies are not necessarily abusive to the minority shareholders. It could negatively affect the shareholder value of being related. Chapter 10 of Bursa Malaysia Listing Requirement was issued for public listed company mainly consist of MAIN Market and ACE Market about guide relating to "Transaction". The chapter set out the requirements that must be complying by the firm in respect of transactions that relate to their related parties. Recently, the listing requirement set out a provision regarding related party transaction whereby the transaction, either substantial or not, that requires the shareholder approval must include such statement from director, major shareholder or any person connected, which have direct or indirect interest.

Board of Director Independence

The board of directors is seen as a vital mechanism of corporate governance within any company or entity (McNulty and Stewart, 2014). Based on Urtiaga and Saez (2012), if expropriation of minority shareholders is the problem then independent directors must be its cure. Individuals that have power such as executive directors and officers, use their positions to gain access to expropriate wealth from one party to another (Nurul Huda et al., 2011). This is where independence is important because personal values for minority shareholder's rights outweigh performing unconstitutional actions. According to Malaysia's code of corporate governance (MCCG) 2012, a majority of the board should be made of independent directors. In the most recent update, MCCG (2017), the rule became more specific with at least half of the board should be independent.

Audit Committee Independence

The audit committee must be consist of not less than three members, thus all the audit committee members must be from non-executive directors and mostly are independent directors (Bursa Malaysia, 2016). Lary and Taylor (2012) research indicates the strong competency of audit committee will reduce fraud and error in financial statement of company. Furthermore, the increasing transparency and accountability of audit committee can avoid major shareholder involved in expropriate wealth from the company (Cai, Hillier, Tian and Wu, 2015). The study done by Cheung, Rau and Stouraitis (2006), discovered that the audit committee seem to have a small mitigation effect towards expropriation minority shareholder's interest. Mustafa and Youssef (2010) investigated the relationship between qualified audit committee members (with expertise) and the level expropriation of assets in companies. Therefore, this shows that the audit committee independence somewhat involved in expropriation activities.

Firm Performance

Firm performance is one of the most important factors in a company that may affect several factors. In Santos and Brito (2012) study, the context of firm performance was classified in the second model of their study indicate that the performance to be divided into two parts; financial performance and strategic performance. In this study, we would focus mainly on the financial performance in a company that are viewed as crucial part in the business. However, expropriation of shareholder interest mainly scope on the financial performance consists of (a) profitability and (b) growth. Measuring the profitability itself may not able to view the empirical result of research as the factors itself is inadequate to present the financial performance dimension. Thus, measuring growth and profitability simultaneously seems conceptually justified (Santos and Brito, 2012).


Profitability is the ability of an organisation to strive for maximisation in return of business activities throughout the year. Horton (2015) describe the ability business can give a return on investment based on funds is profitability. As the shareholders invest their capital in an organisation which they hope in return of increasing value in wealth. Bae et al. (2012) assume that the independent level of managerial expropriation is the firm profitability but it depends on the firm crisis period or recovery period. Qian, Pan and Yeung (2011) conducted the study to identify the effect political connection on tunnelling and self-dealing behaviour. Thus, they describe that the controlling shareholders can do expropriation when the company are in profitability because political connection can improve firm performance that can leads to profit being expropriated.


Growth is the process to improve some measure of an enterprise's success. Firm growth can be achieved when increase revenue of the business with higher product sales or service income, or by increasing profitability of the operation by minimising costs. The increase of growth opportunity can give benefit to companies because it can reduce the potential of expropriation minority shareholders interest (Nurul et al., 2011).


Agency Theory

According to Jensen and Meckling (1976), agency theory identifies the relationship between agent and principal, whereby the principal engages the agent to perform service on their behalf and the principal normally delegate some decision-making authority to the agent. In this study, an organisation is seen as the agent and the shareholder are viewed as the principal where the management team in the organisation responsibility was to control and monitor the organisation on behalf of the principal therefore increasing the wealth of the shareholder.

The board of director are one of the component exist in organisation as the agent that act on behalf of the shareholder. However, in some circumstances, problem may occur in agency relationship due to conflict of interest between parties. The first conflict which is referred as the agency problem Type I, where the agent itself has their own interest and duty to maximise their own utility which differ to the principal that aim for more return on their investment. Whereas the Type II, principal-principal agency problem defines that the conflict arises when the majority shareholder that act as controlling shareholder in an organisation tend to expropriate the interest of minority shareholder. Corporate governance regulation is one of the ways to control the conflict of interest for agency problem Type I and Type II. However, in companies with a severe principal-principal conflict, the costs of installing good governance are likely to outweigh the benefits for majority shareholders (Gaeremynck and Renders, 2012). Thus, the theory aims to overlook the responsibility of the firm governance in dealing with conflict of interest that may arise.

Board of Director Independence and Expropriation of Minority Interest

Santiago-Castro and Brown (2007) measures the board of independence and found it to be negatively correlated to expropriation of minority shareholders' interest. On the other hand, Nurul Huda et al. (2011) show a positive relationship between the boards of director's independence and expropriation of minority shareholders' interest. Thus, they rule the possibility that the independent board of directors may have approved through the transaction that detrimental to minority shareholders interest. The study by Cheung et al., (2006) revealed that board of director independence appear to have small mitigation impact towards expropriations activities. Based on the empirical findings from previous researchers, we argue the board independence will be able to reduce expropriation of minority shareholders' interest in the company. Therefore:

H1: There is a negative relationship between board of director independence and expropriation of minority shareholders' interest.

Audit Committee Independence and Expropriation of Minority Interest

Cheung et al., (2006) research indicate that there is a positive significant relationship between the audit committee and expropriation activities. Hence, they conclude that audit committee on the board have a small mitigation effect towards expropriation minority shareholder's interest. Mustafa and Youssef (2010) study show that there is a negative significant relationship between audit committee and expropriation of assets. Thus, if the audit committee with independent members are qualified they can influence over the expropriation of assets. Furthermore, Masdiah et al. (2016) study shows that there is a negative significant relationship between audit committee and expropriation minority shareholder's interest. Therefore, they conclude that increasing number of independent director on the audit committee will lessen the level of expropriation of minority shareholder's interests. Hence, we develop our second hypothesis as per prior research as follow:

H2: There is a negative relationship between audit committee independence and expropriation of minority shareholders' interest.

Profitability and Expropriation of Minority Interest

Berkman, Cole and Fu (2009) expected that there is negative relationship between profitability and probability of expropriation. Based on Qian et al. (2011) research, they investigate the relationship between political connection and firm performance. Therefore, they find that political connection and firm performance were not clearly related since the firm profitability were reduce by expropriation of minority shareholder. Furthermore, Nurul Huda et al. (2011) research indicates that profitability was to be viewed as the factor that may reduce expropriation minority shareholder. This shows that the increasing value of profit in the company will lower the expropriation activities. Therefore, our hypothesis developed based on prior research to support the view that profitability is negatively related to expropriation.

H3: There is a negative relationship between profitability and expropriation of minority shareholders' interest.

Growth and Expropriation of Minority Interest

Growth is the capability to increase annual revenues over the numbers of years in the industry and depend on their environment. While, firm growth is to achieve their objective, including maximising profit or increasing market shares. A study by Akhtaruddin and Hossain (2008) indicates growth can reduce expropriation activities. The result was that there is a negative relationships between growth opportunities and expropriation because the high growth opportunities can avoid expropriation activities towards minority shareholders' rights compares the low growth. Thus, high growth opportunities can give benefit to reduce potential expropriation of minority shareholders' rights (Nurul Huda et al., 2011). Therefore, it shows that expropriation activities are based on firm with growth opportunities. Thus, we develop a hypothesis that:

H4: There is a negative relationship between growth and expropriation of minority shareholders' interest.


This study consists of 115 companies listed in ACE Market Bursa Malaysia as in 2016. However, the final sample companies are made up of only 60 companies. The reasons are as follow; (a) although Bursa Malaysia ACE Market population total up to 115, we were unable to extract some of the required information from the companies' annual reports over the sample from period ranging 2015-2016. (b) Due to different nature of business and different regulatory regime, we exclude finance and banking industries within the sample to avoid bias in their characteristic.

Thus, we conduct our study by collecting data from annual report from Bursa Malaysia Secondary Board while taking required ratios from Thomson Reuter's software where information of the company's financial data for growth and profitability are stored.


As per table 2, BOIN shows that the average number of company which consist of independent director in board of director is at 0.487. Thus, it can be concluded that by average, a company are likely to have more than 1/3 of independent director in their board members. Therefore, it indicates that most of them followed the corporate governance requirement. For the independent audit committee, it shows that the mean is at 0.897. This shows that a company is more likely to have all independent directors assigned in audit committee. For the profitability shows the mean of 0.075. Therefore, it indicate that by average, the company in our samples are having positive earnings at 7.5% and are likely able to gain profit throughout the financial year. While the mean for growth are at 1.593. In the valuation of growth, ratio scale of market to book value is used to evaluate the capability of a company to grow their investor shares. Thus, it shows that a company averagely earned a good return on equity for their investor. The average expropriation of minority shareholders' interest is at 1.269. Therefore, it shows that a company may likely to have an average related party transaction above the amount of total asset of the company. For the first research objectives, we are able to show the extent level of expropriation of minority shareholders' interest in ACE Market through descriptive statistics view on the EMSI variables above. Therefore, it answers the questions for our research objectives which is; (1) to what extent level is the expropriation of minority shareholders' interest in the ACE Market.

From Table 3, the result shows that of all four independent variables, only two are significantly correlated to the dependent variable. They are audit committee independence and profitability. The p-value of audit committee is 0.008. This indicate the audit committee independence is significant in predicting the expropriation of minority shareholders interest as p-value is less than 0.05. The correlation coefficient shows at -0.220 means that there is negative relationship between the audit committee independence and expropriation of minority shareholders' interest. Thus, the H2 is supported. Other than that, profitability shows to have a significant positive relationship with the expropriation activities in a company. The result indicates that profitability is correlated at 0.255 with p-value of 0.002 less than 0.01. Therefore, the H3 is not supported since the direction is contradict with the hypothesis. For board of director independence and growth, there is no significant relationship towards expropriation of minority shareholders interest since the p-value is more than 0.05 and 0.01. Hence, H1 and H4 are rejected.

Discussion and Conclusion

The finding given fact that only audit committee independence and profitability has significant impact towards expropriation of minority shareholders interest. This is consistent with Masdiah et al. (2016). It shows that the higher number of independent directors on the audit committee will reduce the level of expropriation of minority shareholders' interest. Audit committee play an active role in reviewing any related party transaction to make sure it benefit to all parties in accordance to Bursa Malaysia requirement. Therefore, an independent audit committee will be able to give a true and fair view decision since they are independent and not closely related to the company.While for profitable indicates that higher profitability will result in higher level of expropriation of minority shareholders interest. Profitability shows the company's ability to strive for maximum profit throughout the year, yet it shows that increasing profit will result in higher expropriation that can be made in a company. It is contradict with past research by Berkman et al. (2009) and Nurul Huda et al. (2011). In their research, the result shows that profitability is negatively related to expropriation of minority shareholders' right. However, they also said that since more value can be expropriated in profitable firms, one might expect a positive relation between profitability and expropriation.

There are several limitation of this study. First, only two corporate governance determinants are tested in this study namely board of director independence and audit committee independence. Therefore, we cannot rule the possibility that our results might be influenced by those excluded variables. Second, our sample of study only include clustered group of samples which is small in a total population. Hence generalization from the findings cannot be made. Therefore, a number of suggestions for possible further research are highlighted by the results of this study. First, further study needs to be extended by taking newly updated list of ACE market in Malaysia. Next, future research should be carried out with additional variables such as CEO duality, board size, board gender diversity and audit committee expertise, purposely to get better understanding of the research issue.


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Nur Shuhada Ya'acob (*)

Accounting Department, College of Business Management and Accounting, Universiti Tenaga Nasional, Malaysia


Azwan Md Faril Universiti Tenaga Nasional, Malaysia

Darryl Gerard Dias Universiti Tenaga Nasional, Malaysia

Nur Ilham Athirah Jamaludin Universiti Tenaga Nasional, Malaysia

Nur Ashikin Mohd Idrus Universiti Tenaga Nasional, Malaysia

Nur Nadia Che Mat Salwi Universiti Tenaga Nasional, Malaysia

(*) Corresponding Author
Table 1: Measurement for Each Variable

Variables                Measurement
Dependent Variables      Summation of Herfindahl Index measuring top
Expropriation of         shareholders proxies to related party
Minority Shareholder     (Masdiah et al., 2016)
Interest (EMSI)
Independent Variables    Ratio of total independent directors to total
                         number of
1. Board of Director     director (Nurul Huda et al., 2011; Liang et.
                         al., 2013;
Independence (BOIN)      Masdiah et al., 2016).
2. Audit Committee       Ratio of total independent directors to all
                         directors in
Independence (AUCI)      the audit committee (Abernathy et al., 2013;
                         et al., 2016)
3. Profitability (PROF)  Ratio of operating profit (EBITDA) to total
                         (Nurul Huda et al., 2011; Ebrahim et al., 2014)
4. Growth (GRTH)         Ratio of market price per share to value of
                         equity per
                         share at financial year end. (Nurul Huda et
                         al., 2011).

Table 2: Descriptive Analysis

         N    Min.    Max.   Mean   Std. Deviation

BOIN     120   0.250  0.750  0.487  0.107
AUCI     120   0.667  1.000  0.897  0.150
PROF     120  -0.318  0.303  0.075  0.104
GRTH     120   0.140  5.650  1.593  0.902
EMSI     120   0.818  2.447  1.269  0.218
Valid N  120

Table 3: Correlation Analysis

                       BOIN      AUCI           PROF         GRTH

EMSI  Correlation       -0.074   -0.220 (**)    0.255 (**)   -0.010
      Sig. (2-tailed)    0.210    0.008         0.002         0.458
      N                120      120           120           120


EMSI  Correlation        1.000
      Sig. (2-tailed)
      N                120

(**) Correlation is significant at the 0.01 level (1-tailed).
(*) Correlation is significant at the 0.05 level (1-tailed).
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Author:Ya'acob, Nur Shuhada; Faril, Azwan Md; Dias, Darryl Gerard; Jamaludin, Nur Ilham Athirah; Idrus, Nur
Publication:Global Business and Management Research: An International Journal
Date:Apr 1, 2018
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