The Ownership Structure and the Performance of the Polish Stock

Anna Blajer-GoáĊbiewska
18
DEVELOPMENTS IN FINANCIAL MARKETS
The Ownership Structure and the Performance
of the Polish Stock Listed Companies
Scientific Papers
Anna Blajer-Goâębiewska “The Ownership Structure and the Performance of the Polish Stock Listed
Companies”, Journal of International Studies, Vol. 3, No 1, 2010, pp. 18-27.
Journal of
International
Studies
© Foundation of
International
Studies, 2010
© CSR, 2010
Dr Anna Blajer-Goâębiewska
Department of Microeconomics
Faculty of Economics
University of Gdaľsk
a.blajer@ug.edu.pl
Abstract. The ownership of a company can be classified into inside
ownership and outside ownership. According to Alignment Theory, there is
a positive relation between the inside ownership and a company
performance. However, there have been some researches that indicate the
opposite relation. This is explained by the Enhancement Theory.
The aim of the research is to indentify of the relationship between
shareholders structure and the company’s performance in case of the Polish
stock listed companies. The research is based on data for companies listed
on the main market of the Warsaw Stock Exchange.
The main thesis is that there is no evident the relation between shareholders
structure and company’s performance as the optimal ownership structure
depends on a wide array of factors such as branch, market concentration,
costs structure etc. As a result, it is also hard to indicate the optimal
percentage of inside ownership, which is needed for profit optimization.
The first stage of task realization was the analysis of various theories on
relationship between ownership structure and the company’s performance.
Then ownership characteristics and financial characteristics were
determined and analysed. The last stage was the analysis of correlation
between ownership structure and the Polish stock listed companies’
performance.
Submitted: May, 2010
1st revision: June, 2010
Accepted: July, 2010
Keywords: Capital and Ownership Structure, Firm Performance, Financial
Market, Corporate Finance and Governance
JEL classification: L25, L33, P2
Introduction
Within the literature there is a wide range of researches conducted on the relation
between the ownership structure and company performance. However, they lead to different
conclusions. The aim of this research is to identify the correlation between shareholders
structure and the company’s performance for the companies listed on the Warsaw Stock
Exchange. The research was conducted for the Polish companies listed on the main market in
years 2008 and 2009.
The first stage of task realization was the analysis of various theories on relation
between ownership structure and the company’s performance. Then ownership characteristics
Journal of International Studies, Vol. 3, No 1, 2010
Anna Blajer-GoáĊbiewska
19
DEVELOPMENTS IN FINANCIAL MARKETS
and financial characteristics were determined and analysed. The last stage encompassed the
analysis of correlation between ownership structure and the Polish stock listed companies’
performance.
The main thesis is that, according to the Trade-off Theory, there is no evident
relationship between shareholders structure and company’s performance as the optimal
ownership structure depends on wide range of factors such as branch, market concentration,
costs structure and other. To conduct a research on the correlation between shareholders
structure and the company’s performance at first various theories should be analyzed.
Theories of relationship between shareholders structure and the company’s
performance
The relationship between inside and outside shareholders is rooted in the Agency
Theory and the Theory of the Firm. When applying the Agency Theory to this problem, the
principals are the outside shareholders and the agents are the managers responsible for
running the firm. The agency problem is that interests of the managers are not aligned with
the interests of the outside shareholders. Their motives can differ, so each of these two groups
can even create information asymmetry to pursue their particular interest. The lower the level
of information asymmetry, the better the cooperation within those two groups and their
performance.
According to the Agency Theory, the higher level of inside shareholders has an
influence on the decrease of information asymmetry, which should lead to higher company
performance. Insiders are interested in higher profits. These individuals belong to the only
group of shareholders who can have direct impact on the way the company is managed.
Furthermore, insiders have access to additional or private information that other shareholders
do not have, so if insiders buy or sell their shares, it can work as a signal of better or worse
condition of the company.
To align the incentives of the managers with those of the shareholders, companies use
various compensation-based incentive arrangements. The level of information asymmetry can
be also lower when the managers themselves become shareholders and take an ownership
interest in the firm. In other words, the performance of the firm will increase as the level of
inside ownership increases. Moreover, researches indicate that inside ownership increases
performance at decreasing rates. Any increase in the number of shares held, according to the
theory of decreasing marginal utility, will produce a smaller increase in employees’
satisfaction from their possession, and hence to a lesser extent will motivate employees to
increase its productivity. This relation is known as the Alignment Theory (Jensen and
Meckling, 1976). According to the Alignment Theory and the Agency Theory, the best
performing firms should have very high levels of inside ownership and this level should be
appropriate proxy for the level of asymmetric information.
One of researches, confirming the Alignment Theory and the Agency Theory, was
conducted by Ø. Bøhren i B. A. Ødegaard (2003). The authors took into consideration the
companies listed on The Oslo Stock Exchange. According to the research, for the companies,
with a high number of inside shareholders, the level Q-Tobin index (as the quotient of the
market value of assets and the replacement value of assets market value of the assets) is
higher. With reference to Stein (1989), the inside ownership has a positive impact on
company performance especially in the case of family-owned companies. As family members
are deeply involved in the company management, they have firm-specific knowledge and
longer investment horizons. As a result, they make better investment decisions.
Demsetz (1983) argues that ownership structure is an endogenous outcome of
decisions that reflect subsequent trading on the market for shares. As the ownership structure
Journal of International Studies, Vol. 3, No 1, 2010
Anna Blajer-GoáĊbiewska
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DEVELOPMENTS IN FINANCIAL MARKETS
ought to be influenced by the aim of profit-maximizing interest of shareholders, there ought to
be relation between variation in ownership structure and company performance.
However, not all researches confirm the Alignment Theory. As evidences suggest that
the opposite relation may actually hold true, the validity of the alignment theory has been
questioned by researchers.
What explains the phenomenon of opposing effects of inside ownership on firm’s
performance, (lower inside ownership – higher company performance) is the Entrenchment
Theory. It maintains that if the manager gets shares in the firm and gains a greater control he
has no incentives to remove from his position (Stulz 1988). The entrenched manager may
pursue only his own interests that do not have to be directly beneficial to the other
shareholders, such as excessive salaries or appointing family members to managerial positions
(Shleifer and Vishny 1986). As a result, inside ownership decreases performance at increasing
rates (picture 1).
Performance
Performance
% Inside ownership
% Inside ownership
Picture 1. Alignment Theory vs. Entrenchment Theory
Source: own compilation based on: Insider Ownership and REIT Performance – Is More
Always Better? (2001).
Higher inside ownership (55% or more) is sometimes considered as the signal of a
higher risk. It is because the insiders may be major investors waiting for the opportune time to
sell their shares. And when large shareholders put millions of shares onto the market, the
price of shares will slump. Moreover, high insider ownership may reflect companies owned
by the founding family who may not see an advantage of higher share prices.
The results of the conducted research often lead to different conclusions. However,
these contradictions are only seeming. The Trade-off Theory links the Alignment Theory and
the Entrenchment Theory.
Performance
X
%
inside
Picture 2. Trade-off Theory
Source: own compilation, on the basis of Insider Ownership…, op. cit.
Journal of International Studies, Vol. 3, No 1, 2010
Anna Blajer-GoáĊbiewska
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DEVELOPMENTS IN FINANCIAL MARKETS
According to Trade-off Theory, at a very low level of inside ownership, its growth
influences the company’s performance, since the Alignment Theory dominates (picture 2).
For a high level of inside shareholders, there is a negative relation between the inside
shareholders and company performance (domination of the Entrenchment Theory). However,
the Trade-off Theory does not give the answer to the problem of the optimal percentage of
inside ownership determination (x). The optimal ownership structure depends on a specific
company. Therefore, it is hard to determine the relation between the structure of ownership
and company performance in certain cases without further research into these issues.
The next effect that can be examined is the relation between the ownership of large
shareholders or even between the number of large shareholders and a company performance.
The relation between ownership structure and company performance has been the subject of
the researches mostly since Berle’s and Means’s “The Modern Corporation and Private
Property” (1932). According to their research there should be an inverse correlation between
the diffuseness of shareholdings and company performance.
Shleifer’s and Vishny’s (1986) research argues that controlling blockholders are more
capable of controlling managers, even if the blockholders are not directly involved in
management. That can lead to profit-maximizing decisions in the interest of shareholders.
However, this problem is also controversial. O’Sullivan and Wong (1998) examined
the relationship between board composition, ownership structure and takeovers in the UK.
The result of the research shows that the ownership of large shareholders is positively
associated with the takeover likelihood, which is coherent with the mentioned theory that
higher inside ownership (55% or more) is the signal of higher risk.
Ownership structure and performance of the Polish stock listed companies
The research on ownership structure and performance of the Polish Stock listed
companies was conducted on the basis of The Warsaw Stock Exchange data and data
available on websites of each company. 289 companies were analysed, each of them listed on
The Warsaw Stock Exchange in the year 2008 and 2009. In order to achieve homogeneous
dataset, only Polish companies quoted on the main market were taken into consideration.
Ownership characteristics
In order to determine inside ownership, the percentage of stock owned by employees,
directors, officers or other key executives in the company was calculated. Moreover, in some
cases, also the shares of primary owners should be taken into consideration, as they have an
important impact on the way the company is managed and they still possess an informal
access to private information about the company.
The indicators for shares of inside and outside shareholders were determined on the
basis of the contents of companies’ websites and the archival data on financial portals such as
bankier.pl and money.pl. Archival data were necessary to indicate the connections between
each shareholder and a company, which allowed to construct the outside shareholders
indicator. It was assumed that shares of each person who had personal connections with a
member of management board, were calculated into inside ownership indicator. Following the
same rule, if there had been any company, subsidiary to the analysed one, its shares were also
calculated into inside ownership indicator.
The set of ownership structure indicators contains:
x number of large shareholders,
x percentage of shares owned by large shareholders,
x percentage of voting rights of the largest shareholders,
Journal of International Studies, Vol. 3, No 1, 2010
Anna Blajer-GoáĊbiewska
DEVELOPMENTS IN FINANCIAL MARKETS
22
x
x
x
x
x
percentage of voting rights of the largest shareholder,
percentage of voting rights of the largest outside shareholders,
percentage of shares owned by the members of management board,
free float,
percentage of shares owned by outside shareholders.
The research was conducted not only for the whole group of stock listed companies,
but also by sector. According to the Warsaw Stock Exchange, the companies were divided
into 21 sectors (Table 1).
Table 1. Industry sectors according to the Warsaw Stock Exchange
No. abbreviation
(PL)
1
ban
2
bud
3
che
4
dew
5
drz
6
ele
7
ene
8
fin
9
had
10 hah
SECTOR
No.
abbreviation
(PL)
11
Banking
Construction
Chemicals
Developers
Wood & Paper
Electroengineering
Energetics
Finance - other
Retail
Wholesale
12
13
14
15
16
17
18
19
20
21
hir
inf
lek
mbu
med
met
pal
pin
spo
tel
uin
SECTOR
Hotels &
Restaurants
IT
Light Industry
Building materials
Media
Metals
Oil & Gas
Other Industries
Food
Telecom
Services - other
Source: own compilation on the basis of Warsaw Stock Exchange’s website (www.gpw.pl)
The analysis of ownership structure by branch (table 2) shows high concentration of
ownership in case of Hotels & Restaurants sector (78.69% of shares was owned by large
shareholders) and Banking sector (77.30% of shares was owned by large shareholders).
Whereas the highest level of free float was noticed in the case of Light Industry sector. What
is interesting is the fact that in banking sector, the percentage of shares owned by the
management board was close to zero. In the following sectors: Banking, Financial – others,
Developers and Hotels & Restaurants, percentage of voting rights of the largest share-holder
is 50% or more.
As a result, due to such indicators as percentage of voting rights or number of shares
owned by large shareholders, percentage of voting rights of the largest shareholder and free
float, the sectors of visibly high concentration of ownership can be determined. These are:
Banking, Finance – other, Hotels & Restaurants, Chemicals, Developers and Services-other.
The lowest concentration of ownership was found in Light Industry.
The highest inside ownership can be found in Banking sector, as only 30.98% of
shares was owned by outside shareholders and only 8.28% of voting rights was in possession
of the largest outside shareholders. There is no other so sector of such high a inside
ownership. However, in Hotels & Restaurants sector, only 44.20% shares were owned by
outside shareholders. For the other companies, analysed the percentage of shares owned by
outside shareholders is 50% or more.
Journal of International Studies, Vol. 3, No 1, 2010
Anna Blajer-GoáĊbiewska
DEVELOPMENTS IN FINANCIAL MARKETS
23
Table 2. Average financial indicators for each branch on the Warsaw Stock Exchange
sector
ban
bud
che
dew
drz
ele
ene
fin
had
hah
hir
inf
lek
mbu
med
met
pal
pin
spo
tel
uin
number
of large
shareholders
1.79
4.04
3.37
2.78
4.00
3.25
5.00
3.00
3.50
3.29
3.00
3.65
2.75
2.71
3.23
2.63
2.80
3.00
2.41
3.50
3.20
percentage
of shares
owned by
large shareholders
77.30%
60.11%
67.38%
65.77%
59.83%
66.77%
58.53%
67.33%
63.97%
63.41%
78.69%
55.54%
45.73%
58.87%
60.15%
65.86%
61.34%
59.05%
58.54%
58.60%
69.80%
percentage
of voting
rights
of the
largest
shareholders
76.95%
61.86%
68.09%
69.16%
59.83%
69.39%
58.53%
74.99%
68.16%
69.28%
81.37%
59.13%
45.82%
61.08%
63.57%
66.72%
61.34%
61.57%
61.58%
60.05%
71.38%
free
float
22.70%
39.89%
32.62%
34.23%
40.17%
33.23%
41.47%
32.67%
36.03%
36.59%
21.31%
44.14%
54.27%
41.13%
39.77%
34.14%
37.08%
40.95%
41.46%
41.40%
30.20%
percentage
of voting
rights of
the largest
shareholder
72.33%
36.28%
45.11%
54.04%
40.03%
46.44%
16.10%
52.33%
40.06%
40.00%
52.02%
29.44%
29.00%
42.92%
38.54%
49.66%
44.63%
36.73%
43.98%
39.69%
48.76%
percentage percentage
percentage
of voting
of shares
of shares
rights of
owned by
owned by
the largest
the
the outside
outside
members
shareshareof manageholders
holders
ment board
8.28%
0.00%
30.98%
36.33%
7.50%
76.22%
52.52%
6.18%
85.15%
26.93%
6.57%
61.16%
32.17%
2.62%
72.34%
27.88%
17.04%
61.12%
58.53%
0.00%
100.00%
23.31%
14.93%
55.98%
20.19%
26.73%
56.23%
23.07%
25.90%
59.66%
22.89%
33.90%
44.20%
24.23%
24.06%
68.37%
31.86%
11.09%
86.13%
27.72%
20.21%
68.85%
34.49%
14.17%
74.26%
49.55%
5.17%
83.69%
49.57%
0.00%
86.66%
17.74%
31.74%
58.70%
18.28%
15.04%
59.74%
28.18%
0.77%
69.58%
26.10%
23.17%
56.29%
Source: own compilation.
The percentage of shares owned by the members of management board was the
highest for Hotels & Restaurants sector and sector of Other Industries. There were almost no
shares owned by members of management board in case of Banking sector, Energetics sector
and Oil & Gas sector.
Financial characteristics
The financial data were based on The Warsaw Stock Exchange data and each
company’s website. The following data were taken into consideration:
x number of outstanding shares,
x capitalization,
x book value (BV),
x dividend yield in percent,
x net profit on continuous activities,
x equity,
x P/BV - price to book value ratio, where the book value is calculated as the company's
total tangible assets minus its total liabilities. In other words, it denotes the portion of the
Journal of International Studies, Vol. 3, No 1, 2010
Anna Blajer-GoáĊbiewska
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DEVELOPMENTS IN FINANCIAL MARKETS
company held by the shareholders. While interpreting this indicator one should remember
that the value of P/BV varies by industry. Capital intensive industries will usually trade at
the lower P/B ratios. However, generally, a higher P/B ratio implies that investors expect
the management to create more value from a given set of assets cp. But the ratio does not
directly provide any information on the ability of the company to generate profits for
shareholders;
x P/E – price to earnings ratio, price multiple; a high value of P/E suggests that investors
are expecting higher earnings growth in the future. As in the case of P/BV, it varies by
industry. As a result, it is more useful to compare the P/E ratios of the company to other
companies in the same industry.
Average financial indicators for each branch are presented in table 3. Most of the
companies analysed did not exceed the level of PLN 500 m in the net profit on continuous
activities in 2008.
Table 3. Average financial indicators for each branch on the Warsaw Stock Exchange [PLN]
net profit
on continuous
activities [K]
sector
number of
outstanding
shares
ban
261 538 128
7821.71
4316.77
2.68
787749.79
4472596.79
bud
52 449 485
464.17
250.00
1.80
34592.91
228155.43
che
263 330 470
366.16
573.06
2.81
16389.11
512928.53
dew
153 020 126
320.67
637.45
1.46
52714.11
659407.44
drz
58 373 076
389.00
355.32
6.03
-17564.43
333573.71
ele
42 256 033
151.54
221.31
2.41
5965.88
213681.33
capitalization
[m]
book value
[m]
dividend yield
[%]
equity [K]
ene
16 829 084
224.80
476.89
1.95
54441.50
495874.50
fin
40 833 746
103.05
132.11
0.60
-19232.75
140273.75
had
181 845 634
399.39
184.66
0.91
23385.78
194507.78
hah
14 702 177
115.17
151.46
2.90
7620.82
144285.22
hir
19 584 644
368.00
406.44
0.24
-6613.00
388910.80
inf
55 679 596
195.03
183.31
1.83
21658.87
209674.16
lek
168 586 719
65.00
95.80
0.00
-26476.13
81701.13
mbu
35 909 256
236.00
226.17
1.69
-1612.29
202514.86
med
81 398 060
821.15
295.82
1.33
58310.54
304429.15
met
639.06
919.22
3.54
194708.06
955399.81
pal
43 330 022
1 293 565
957
6785.00
9810.03
2.32
-298427.80
8873866.80
pin
26 859 646
183.00
115.79
0.00
594.75
109483.25
spo
45 326 295
202.65
222.45
1.08
3522.06
216110.24
tel
323 309 923
4740.67
3361.18
1.83
414147.67
3308584.00
uin
43 162 603
121.90
115.09
2.05
7351.60
113216.40
Source: own compilation.
Journal of International Studies, Vol. 3, No 1, 2010
Anna Blajer-GoáĊbiewska
DEVELOPMENTS IN FINANCIAL MARKETS
25
Only 9 companies listed on the stock exchange, mainly in Banking sector, achieved
higher net profits on continuous activities: BRE, BZWBK, GETIN, HANDLOWY, PEKAO
and PKOBP. There were also 3 other companies with such a high net profit: TP SA (Media
sector), PGNIG (Oil & Gas sector) and KGHM (Metals sector).
In only 36 companies (12.5 % of companies) the capitalization was higher than PLN
1000 mln. In this case, the domination of banking sector was also evident. The highest
capitalization (PLN 35 500 m) was achieved by bank PKO BP. The highest percentage of
companies which achieved the capitalization higher than PLN 1000 m was noticed in Banking
sector, Telecom sector and in Oil & Gas sector.
Similarly to the case of capitalization, in the same three sectors, the highest average
book value and equity was indentified.
To analyse the correlation between ownership structure and performance of the Polish
Stock listed companies Pearson's correlation coefficient was used. It is a common measure of
linear dependence between two variables. Results are presented in table 4.
For 289 companies, the number of degrees of freedom is v 289 2 287 , so the
minimal value of coefficient to get the statistically significant correlation is 0.0969 (the
number is rather low because of the high number of analysed companies). The statistically
significant correlations are marked in the table.
-0.02
0.00
0.03
-0.16
-0.16
-0.05
0.01
-0.02
0.08
0.00
0.18
0.02
-0.01
-0.08
-0.02
-0.05
0.09
-0.02
0.16
0.00
-0.04
0.05
0.13
0.11
0.03
0.00
0.11
0.13
0.12
0.11
0.00
0.03
-0.02
-0.02
0.03
-0.03
0.02
-0.10
-0.11
-0.14
0.06
-0.01
0.06
-0.08
-0.14
0.03
-0.01
0.00
-0.08
0.00
-0.18
-0.02
0.00
0.12
0.00
0.03
-0.07
-0.02
-0.09
-0.05
0.02
Source: own compilation.
Journal of International Studies, Vol. 3, No 1, 2010
equity
-0.16
net profit on
continuous
activities
-0.16
P/BV
P/E
number of large
shareholders
percentage of shares
owned by large
shareholders
percentage of voting
rights of the largest
shareholders
percentage of voting
rights of the largest
shareholder
percentage of voting
rights of the largest
outside shareholders
percentage of shares
owned by the members
of management board
free float
percentage of shares
owned by the outside
shareholders
dividend
yield
(in percent)
book value
-0.13
number of
outstanding
shares
capitalization
Table 4. Correlation indicators for correlations between ownership structure and company
performance
Anna Blajer-GoáĊbiewska
26
DEVELOPMENTS IN FINANCIAL MARKETS
According to the Pearson coefficients (table 4), in companies with higher financial
indicators: net profit on continuous activities, equity, book value and capitalization, the
number of large shareholders is lower. However, there is a positive correlation only between
percentage of shares (or voting rights) owned by large shareholders and P/BV indicator. In
other words, a higher percentage of shares (or voting rights) owned by large shareholders
makes stock investors think that management board is able to create more value from a given
set of assets.
Correlations are more obvious in the case of the percentage of the largest
shareholder’s voting rights. In companies with higher financial indicators, such as net profit
on continuous activities, equity, book value, P/BV and capitalization, the percentage of voting
rights of the one largest shareholder is also higher. The reason why the correlation is not
statistically significant for dividend yield can be the fact that the data relate to the crisis
period, where only 23.4% of companies were paying dividend yield.
As a result, it can be stated that the largest shareholder has stronger impact on
company performance. The reason can be the fact that the first largest shareholder is very
often a mother company for the analysed firm. The larger the mother company, the better
effect it will have on the controlled company.
The similar conclusion can be drawn from the analysis of the negative correlation
between free float and P/BV. It implies that a higher level of ownership concentration (lower
free float) makes investors expect the management to create more value from a given set of
assets (higher is P/BV ratio).
Both situations: of the higher percentage of voting rights of largest outside
shareholders and the one with the lower percentage of shares owned by the members of
management board takes place in case of companies with the higher number of outstanding
shares. Higher outside shareholders ownership or lower management ownership takes place
especially in case of companies listed on the stock market for a long time (subsequent share
issues). It just confirms the fact, that if companies put more shares on the market, it decreases
the participation of inside shareholders in the company’s ownership.
In the light of previous statement, the correlation between the percentage of shares
owned by outside shareholders and the number of outstanding shares is rather obvious. While
it is quite surprising that the percentage of shares owned by the outside shareholders is not
correlated with any financial indicator.
However, it is worth emphasizing that the higher percentage of shares owned by
members of management board can be found in companies with the lower economic
indicators such as equity, book value and capitalization. In conclusion, that statement is
coherent with the Entrenchment Theory.
Conclusion
While conducting the research, the main difficulty was to establish the connections
between the members of management board, companies’ owners and the members of
supervisory board. Although all the connections should be announced, they were not.
Furthermore, share prices could not be taken into consideration. The reason was that
there was a sudden decrease in share prices in the year 2008. Moreover, the share prices tend
to fluctuate. Similarly, dividends are not reliable data because only 23.4% of the analysed
companies were paying dividends.
In conclusion, the most important findings are:
x positive correlation between percentage of voting rights of the largest shareholder and
performance indicators which indicate the crucial role of the largest shareholder;
Journal of International Studies, Vol. 3, No 1, 2010
Anna Blajer-GoáĊbiewska
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DEVELOPMENTS IN FINANCIAL MARKETS
x
negative correlation between the management ownership and economic indicators such as
equity, book value and capitalization, which confirms the Entrenchment Theory.
According to the Trade-off Theory, the optimal level of insider ownership will vary by
company. However, for some sectors the relations are more visible. It can be clearly seen in
the case of Banking sector, for which the higher inside ownership and high percentage of
ownership in possession of large shareholders is correlated with high performance. For further
research it will be necessary to build dynamic model as there are no oblivious correlations
between the ownership structure and company performance.
References
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Journal of International Studies, Vol. 3, No 1, 2010