Geopolitics in Asia Essay

The study of the relationship among politics and geography, demography, and economics especially with respect to the foreign policy of a nation. The study of geographic influences on power relationships in international politics. Geopolitical theorists have sought to demonstrate the importance in the determination of foreign policies of considerations such as the acquisition of natural boundaries, access to important sea routes, and the control of strategically important land areas. The term was first employed in the early 20th century by the Swedish political scientist Rudolph Kjellen (1864 – 1922). Geopolitical factors have become less significant in the foreign policies of states because of improvements in communications and transportation. Geopolitics in Asia: Russia, India and Pakistan-China Cooperation With Russian President Vladimir Putin planning to visit Pakistan, some of my Indian friendsjournalists believe that the proposed trip is a kind of punishment for India because of Delhi’s ‘proAmerican’ foreign policy. I think that such a simplistic explanation underestimates the complexity of the situation in the southern part of central Eurasia, which will experience new changes after foreign troops withdraw from Afghanistan. And then a new geopolitical equation will emerge, where Pakistan and its geopolitical alliance with China will surely be the central element due to historical reasons and geographical circumstances. In 1950, Pakistan was one of the first countries to recognize the People’s Republic of China, while in the 1960s to early 1970s it remained Beijing’s most steadfast ally during a period of a relative international isolation of the latter. China appreciates this support by providing Pakistan with both military, and technical and economic assistance, including the transfer of nuclear technology. Some experts believe that strengthening multilateral connections between India and the U. S. will make strategic alliance relations between Islamabad and Beijing even closer, even more so, because the Pakistani elite considers the partnership with China to be a security guarantee. Military-technical cooperation (MTC) of Islamabad and Beijing is carried out in three main areas: Rockets: Pakistani armed forces have short range and medium range missiles that experts regard as a ‘modification of Chinese allistic missiles’; Combat aircraft: the Pakistani Air Force has aircraft of Chinese design – JF-17 Thunder and K-8 Karakorum, as well as the co-produced interceptor aircraft. In addition, the Pakistani Air Force uses the early warning radar system made in China (U. S. experts believe that the delay in the transfer of the remains of the stealth helicopter that took part in the elimination of Osama bin Laden on May 2, 2011, was associated with its preliminary study by t he Chinese military); Nuclear program: it is believed that China could have transferred to Pakistan the technologies that are critical to the production of nuclear weapons. In addition to MTC, Pakistan and China are actively developing economic relations; their development acceleration was caused by a Comprehensive Free Trade Agreement of 2008. By some estimates, the bilateral trade is approaching $15 billion. With China’s help, long-term infrastructure projects are being implemented in Pakistan, covering road construction, minerals development (including copper and gold), the classical energy manufacturing as well as several projects in the nuclear / non-classical energy field. An important object of the joint activity was the construction of the deepwater port of Gwadar in Baluchistan Province (the port complex operation was started in December 2008. ). This port, located at 180 nautical miles from the entrance to the Strait of Hormuz, through which about 40% of the world’s supply of oil by water is accomplished, is of strategic importance to Beijing as well. First, it provides diversification and hydrocarbons-supply protection and, secondly, it is possible to access the Arabian Sea through Xinjiang Uygur Autonomous Region (XUAR), which is important for the overall economic security of China. Formally, Pakistan has two main strategic allies – China and the United States. However, in the light of the events in 2011 the country’s ruling circles have lost confidence in America and increasingly rely on China, referred to, at an informal level, as the ‘all-weather ally’. (An important factor in the growth of Islamabad’s distrust to Washington was the US-Indian ‘nuclear deal’ that has in fact excluded India, according to Pakistani officials, from the nuclear non-proliferation regime. ) The decision by China to build two nuclear reactors in Pakistan, in addition to the existing ones, was a vivid demonstration of mutual trust. However, there are still some problems in the ‘all-weather allies’ relationship. China’s elite is concerned with the high level of political extremism in Pakistan. Beijing is worried about the growing militancy of the Uighurs operating from the tribal area of Pakistan. According to experts, a significant number of Uighurs who attended madrassas in Pakistan in the 1980s have been subsequently mobilized to units operating on the territory of Afghanistan – first against the Soviet troops and later against the combined forces of the U. S. and its allies in their fight against the Taliban. A certain faction of the Uighurs – ‘Mujahideen’ – apparently returned to China. Another cause of concern in Beijing is the frequent attacks of political radicals against Chinese nationals working in Pakistan on contract (more than 10,000 people). The situation is particularly difficult in the province of Baluchistan, in the western part of the country. Therefore, Beijing, preoccupied as it is with the safety of its citizens as well as the country’s prestige in the Muslim world, does not put a special emphasis on combating terrorism in Pakistan, in fact, entrusting a major role in this campaign to the United States. In its turn, Washington takes into account China’s growing concern over proactive forces of political Islam in Pakistan, seeing the coincidence of the United States’ and China’s long-term strategic interests in combating radicalism. China seeks to maintain a strategic policy toward Pakistan that blends the two contradictory principles: 1) restriction of the geopolitical influence of the U. S. and India in South Asia, and 2) protection of the Celestial Empire against political extremism emanating from the Pakistani territory. This task is solved both by the balanced development of relations with Islamabad and Delhi, and through the promotion of good neighbourly relations between the two ‘historic rivals’. This, among other things, is due to the relatively ‘impartial’ policy of the Middle Kingdom, in particular regarding the ‘Kashmir problem’. Such a compromise position of Beijing is apparently connected with the fears of a possible impact of the ‘demonstration effect’ of fermentation in the ‘big’, i. e. historical, Kashmir on tentative ethnic and religious turmoil in Xinjiang and Tibet. PT-2 A point of view has long been firmly established among Indian political analysts that the only function of relations between China and Pakistan is that of ‘containment’ of India in South Asia. It is difficult to deny the logic of such geopolitical constructions, but this position underestimates the importance of trends that cause a significant external impact on the internal political situation in China during the last decade. The permanent destabilising impact of events in the Xinjiang Uighur Autonomous Region (XUAR) on the overall development of China is a recognized fact. Moreover, political circles in Beijing do not rule out the possibility that supporters of the ‘independent Uighur state’ operating from the KhyberPakhtunkhwa or North-West Frontier Province (NWFP) territory of Pakistan are supported by the USA and some Muslim states. Therefore, Beijing endeavours to use various options to neutralise the forces of political Islam in Xinjiang, including those at the state level (Xinjiang is a home to over eight million Uighurs, the most radical of them are seeking to establish an independent state – ‘East Turkistan’). In this direction the China’s policy towards Pakistan has adopted new important points. On the one hand, Beijing was satisfied with a full support of action to eliminate disturbances in Urumqi in July 2009 by the President of Pakistan Asif Ali Zardari, the leader of a ‘core’ Muslim state that has formally dissociated itself from the ‘International Islamic Resistance Movement’ in Xinjiang. On the other hand, China has doubts about the Pakistan authorities’ ability to exercise effective control over all its territory. Beijing is not fully convinced in the effectiveness of such controls and some of Islamabad’s steps taken against extremists, in particular the stringent restrictive measures against the Uighur settlements and their religious schools in Pakistan that have become ‘nurseries’ for the future separatists. The doubts took the form of a direct agreement on multilateral cooperation between the PRC Xinjiang Uygur Autonomous Region and the North-West Frontier Province of Pakistan. The goal of the agreement is establishing direct contacts with the NWFP leaders in order to suppress the activities of Islamists carried out from the territory of the province. The agreement, however, has a significant socio-economic content. Its ‘supporting structure’ seems to be the broadening (with China’s help) of the Karakorum Highway, which is strategic for both countries and (through the Khunjerab pass located at an altitude of 4,693 metres above the sea level) connects Xinjiang and NWFP. The Pakistani authorities seek to persuade China about the appropriateness of using the Karakorum Highway as a main international communication link for the delivery of imports to China from Pakistan’s ports, particularly from Gwadar in the Arabian Sea that has been modernised with the Beijing’s help. The agreement also provides for cooperation in the field of interregional trade, science and technology, culture, education, health, agriculture, sports and tourism. It can be noted: filling the NWFP agreement with specific content, China will seek to engage as much of economically active population as possible in the bilateral interregional ties cycle, and thus bind their potentially destructive to China activities in Xinjiang. Interregional relations are only a part of the Beijing’s general course for stabilising the situation in Pakistan. The PRC leadership is aware that Pakistan’s problems are of structural and systemic origin, and that they are generated by the state’s government course that is constantly and on an extended basis reproducing the contradictions that threaten the unity and territorial integrity of the country. Beijing wants to diversify its geopolitical strategy towards Pakistan and the South Asia as a whole. First, Beijing seems to be confident that because of its involvement in military activities in Afghanistan, the U. S. positions in Pakistan have been subtly but irreversibly weakening. The new ‘equation’ of geopolitical power in Central Asia is indicative of China emerging as a dominant economic â€Å"actor† in the area. Beijing carries out the tactics of gently pushing the U. S. out of Pakistan through the time tested and proven practice of foreign economic relations expansion. In addition, Pakistan is counting on China’s substantial financial assistance, as well as cooperation in the ‘classical’ energy field, primarily the construction of hydropower stations along the lines of tested Chinese projects (based on the experience of the ‘Three Gorges’ project on Yangtze River) in the mountains. Second, true to its strategic principle of ‘economy defines geopolitics,’ China actively participates in the modernisation of transport infrastructure in Pakistan. In fact, the implementation of projects in this area is subject to reaching a two-in one objective: to ensure safe transportation of energy carriers on the Persian Gulf – South China Sea route and limit the U. S. influence in the regions of the Middle East, South and Central Asia that are a ‘sensitive’ spot for China. The above-mentioned project – the Gwadar port in the north-western part of the Arabian Sea – is an ideal place for observing the movement of vehicles and naval vessels coming from the Persian Gulf towards the East, and – if necessary – can be used to protect the vehicles delivering energy resources to the Far East. In particular, the active participation of experts from China in modernising bases and stations of Pakistan Navy submarines, which can also be used by Chinese submarines, speaks in favour of this assumption. Third, according to media reports, China intends to seek permission to open a military base in Pakistan. Military experts believe that there are at least three strategic objectives pursued: providing a ‘soft’ military-political pressure on India; limiting U. S. influence in Pakistan and Afghanistan; direct supervising over the activities of the ‘Uighur separatists’ in the NWFP of Pakistan. Fourth, according to Indian press, China has become a major supplier of military equipment to Pakistan. Currently, the Pakistani army is allegedly armed with Chinese military equipment to the tune of 70 percent. Moreover, citing some military sources in Delhi, the Indian press says: If the prospect of receiving the Russian fifth generation fighter by the Indian Air Force is materialised, Pakistan will turn for help to China also carrying research in this area of military construction. And finally, for Pakistan, China remains an indispensable ally and partner in the improvement of nuclear weapons and their delivery systems since 1976. And there is no evidence of terminating that assistance in the foreseeable future.

Agency Costs and Corporate Governance Mechanisms

Agency costs and corporate governance mechanisms: Evidence for UK firms Chrisostomos Florackis and Aydin Ozkan* University of York, UK Abstract In this paper, we aim to extend the empirical literature on the determinants of agency costs by using a large sample of UK listed firms. To do so, we employ two alternative proxies for agency costs: the ratio of total sales to total assets (asset turnover) and the ratio of selling, general and administrative expenses (SG&A) to total sales. In our analysis, we control for the influence of several internal governance mechanisms or devices that were ignored by previous studies.Also, we examine the potential interactions between these mechanisms and firm growth opportunities in determining agency costs. Our results reveal that the capital structure characteristics of firms, namely bank debt and debt maturity, constitute two of the most important corporate governance devices for UK companies. Also, managerial ownership, managerial compensation and ownership concentration seem to play an important role in mitigating agency costs. Finally, our results suggest that the impact exerted by internal governance mechanisms on agency costs varies with firms’ growth opportunities.JEL classification: G3; G32 Keywords: Agency costs; Growth opportunities; Internal Corporate Governance Mechanisms. * Corresponding author. Department of Economics and Related Studies, University of York, Heslington, York, YO10 5DD, UK. Tel. : + 44 (1904) 434672. Fax: + 44 (1904) 433759. E-mail: [email  protected] ac. uk. We thank seminar participants at University of York, and the 2004 European Finance Association Meetings for helpful comments and suggestions. 1 1. Introduction Following Jensen and Meckling (1976), agency relations within the firm and costs associated with them have been extensively investigated in the corporate finance literature.There is a great deal of empirical work providing evidence that financial decisions, investment decision s and, hence, firm value are significantly affected by the presence of agency conflicts and the extent of agency costs. The focus of these studies has been the impact of the expected agency costs on the performance of firms. 1 Moreover, the implicit assumption is that, in imperfect capital markets, agency costs arising from conflicts between firms’ claimholders exist and the value of firms decreases if the market expects that these costs are likely to be realised.It is also assumed that there are internal and external corporate governance mechanisms that can help reduce the expected costs and their negative impact on firm value. For example, much of prior work on the ownership and performance relationship relies on the view that managerial ownership can align the interests of managers and shareholders and hence one would observe a positive impact exerted by managerial shareholdings on the performance of firms. The positive impact is argued to be due to the decrease in the exp ected costs of the agency conflict between managers and shareholders.Despite much valuable insights provided by this strand of literature, however, only very few studies directly tackle the measurement issue of the principal variable of interest, namely agency costs. Notable exceptions are Ang et al. (2000) and Sign and Davidson (2003), which investigate the empirical determinants of agency costs and focus on the role of debt and ownership structure in mitigating agency problems for the US firms. In doing so, they use two alternative proxies for agency costs: the ratio of total sales to total assets (asset turnover) and the ratio of selling, general and administrative expenses (SG&A) to total sales.In line with the findings of prior research they provide evidence for the view that managerial ownership aligns the interests of managers and shareholders and, hence, reduces agency costs in general. However, there is no consensus on the role of debt in mitigating such problems and associ ated costs. Ang et al. (2000) point out that debt has an alleviating role whereas Sign and Davidson (2003) an aggravating one. The objective of this paper is to extend the investigation of these studies by analysing empirically the determinants of agency costs in the UK for a large sample of 1See, for example, Morck et al. (1988); McConnell and Servaes (1990); and Agrawal and Knoeber (1996) among others. 2 listed firms. Following the works of Ang et al. (2000) and, Sign and Davidson (2003), we model both proxies of agency costs: asset turnover and the (SG&A) ratio. More specifically, we empirically examine the impact of capital structure, ownership, board composition and managerial compensation on the costs likely to arise from agency conflicts between managers and shareholders. In doing so, we also pay particular attention to the role of growth opportunities in influencing the effectiveness of internal governance mechanisms in reducing agency costs. In carrying out the analysis in this paper, we aim to provide insights at least in three important areas of the empirical research on agency costs. First, in investigating the determinants of agency costs, the analysis of this paper incorporates important firmspecific characteristics (internal corporate governance devices) that possibly affect agency costs but were ignored by previous studies.For example, we explore the role the debt maturity structure of firms can play in controlling agency costs. It is widely acknowledged that short-term debt may be more effective than long-term debt in reducing the expected costs of the underinvestment problem of Myers (1977). 3 Accordingly, in our analysis, we consider the maturity structure of debt as a potential governance device that is effective in reducing the expected costs of the agency conflict between shareholders and debtholders. Similar to Ang et al. 2000) that investigate if bank debt creates a positive externality in the form of lower agency costs, we also check i f the source of debt financing matters in mitigating agency problems. Another potentially effective corporate governance mechanism we consider relates to managerial compensation. Recent studies suggest that compensation contracts can motivate managers to take actions that maximize shareholders’ wealth (see, e. g. , Core et al. , 2001; Murphy, 1999 among others). This is based on the view that financial â€Å"carrots† motivate managers to maximize firm value.That is, a manager will presumably be less likely, ceteris paribus, to exert insufficient effort and risk the loss of his job the greater the level of his compensation. Several empirical studies provide evidence for the effectiveness of managerial compensation as a corporate governance mechanism. For instance, 2 As explained later in the paper, the two proxies for agency costs that are used in our analysis are more likely to capture the agency problems between managers and shareholders. However, we do not rule out t he possibility that they may also capture the agency problems between shareholders and debtholders. It is argued that firm with greater growth opportunities should have more short-term debt because shortening debt maturity would make it more likely that debt will mature before any opportunity to exercise the growth options. Consistent with this prediction, there are several empirical debt maturity studies that find a negative relation between maturity and growth opportunities (see, e. g. , Barclay and Smith, 1995; Guedes and Opler, 1996; and Ozkan, 2000 among others). 3 Hutchinson and Gul (2004) find that managers’ compensation can moderate the negative association between growth opportunities and firm value.In this paper, we examine the effectiveness of managerial compensation as a corporate governance mechanism by including the salary of managers in our empirical model. We also acknowledge that there have been concerns about excessive compensation packages and their negativ e impact on corporate performance. Accordingly, we investigate the possibility of a non-monotonic impact the managerial compensation may exert on agency costs. Second, our empirical model captures potential interactions between corporate governance mechanisms and growth opportunities.Following McConnell and Servaes (1995) and Lasfer (2002), we expect the effectiveness of governance mechanisms in reducing agency problems to be dependent on firm’s growth opportunities. In particular, if agency problems are associated with greater information asymmetry (a common problem in high-growth firms), we expect the effectiveness of corporate governance mechanisms in mitigating asymmetric information problems to increase in high-growth firms (Smith and Watts, 1992 and Gaver and Gaver, 1993).However, if, as argued by Jensen (1986), agency problems are associated with conflicts over the use of free cash flow (a common problem in low-growth firms), we expect governance mechanisms that are li kely to mitigate such problems to play a more important role in low-growth firms (Jensen, 1986). Last but not least, in contrast to previous studies that focus on the US market, we provide evidence for UK firms. Although the UK and the US are usually characterized as having a similar â€Å"common law† regulatory system (see, e. g. , La Porta et al. 1998), the UK market bears significant distinguishing characteristics. 4 It is argued that several of these characteristics may contribute to a more significant degree of managerial discretion and, hence, higher level of managerial agency costs. For example, despite the relatively high proportion of shares held by financial institutions, there is a great deal of evidence that financial investors do not take an active role in corporate governance. Similarly, UK boards are usually characterized as corporate devices that provide weak disciplinary function.More specifically, weak fiduciary obligations on directors have resulted in none xecutives playing more an advisory than a monitoring role. 5 Consequently, the investigation of agency issues and the effectiveness of the alternative governance 4 For a more detailed discussion about the characteristics of the prevailing UK corporate governance system see Short and Keasey (1999); Faccio and Lasfer (2000); Franks et al. (2001); and Ozkan and Ozkan (2004). 5 Empirical studies by Faccio and Lasfer (2000), Goergen and Rennebog (2001), Franks et al. 2001) and Short and Keasey (1999) provide evidence on the weak role of institutions and board of directors in reducing agency problems in the UK. 4 mechanisms in the UK, in a period that witnesses an intensive discussion of corporate governance issues, would be of significant importance. Our results strongly suggest that managerial ownership constitutes a strong corporate governance mechanism for the UK firms. This result is consistent with the findings provided by Ang et al. (2000) and Sign and Davidson (2003) for the US fi rms.Ownership concentration and salary also seem to play a significant role in mitigating agency related problems. The results concerning the role of capital structure variables on agency costs are striking. It seems that both the source and the maturity structure of corporate debt have a significant effect on agency costs. Finally, there is strong evidence that specific governance mechanisms are not homogeneous but vary with growth opportunities. For instance, we find that executive ownership is more effective as a governance mechanism for high-growth firms.This result is complementary to the results obtained by Smith and Watts (1992), Gaver and Gaver (1993) and Lasfer (2002), which support the view that high-growth firms are likely to prefer incentive mechanisms (e. g. managerial ownership) whereas low-growth firms focus more on monitoring mechanisms (e. g. short-term debt). The remainder of the paper is organized as follows. In section 2 we discuss the related theory and formulat e our empirical hypotheses. Section 3 describes the way in which we have constructed our sample and presents several descriptive statistics of that.Section 4 presents the results of our univariate, multivariate and sensitivity analysis. Finally, section 5 concludes. 2. Agency costs and Governance Mechanisms In what follows, we will discuss the potential interactions between agency costs and internal corporate governance mechanisms available to firms. Also, we will analyze how firm growth opportunities affect agency costs and the relationship between governance mechanism and agency costs. 2. 1 Debt Financing Agency problems within a firm are usually related to free cash-flow and asymmetric information problems (see, for example, Jensen, 1986 and Myers and Majluf, 1984).It is widely acknowledged that debt servicing obligations help reduce of agency problems of this sort. This is particularly true for the case of privately held debt. For example, bank 5 debt incorporates significant si gnalling characteristics that can mitigate informational asymmetry conflicts between managers and outside investors (Jensen, 1986; Stulz, 1990; and Ross, 1977). In particular, the announcement of a bank credit agreement conveys positive news to the stock market about creditor’s worthiness.Bank debt also bears important renegotiation characteristics. As Berlin and Mester (1992) argue, because banks are well informed and typically small in number, renegotiation of a loan is easier. A bank’s willingness to renegotiate and renew a loan indicates the existence of a good relationship between the borrower and the creditor and that is a further good signal about the quality of the firm. Moreover, it is argued that bank debt has an advantage in comparison to publicly traded debt in monitoring firm’s activities and in collecting and processing information.For example, Fama (1985) argues that bank lenders have a comparative advantage in minimizing information costs and get ting access to information not otherwise publicly available. Therefore, banks can be viewed as performing a screening role employing private information that allows them to evaluate and monitor borrowers more effectively than other lenders. In addition to debt source, the maturity structure of debt may matter. For example, short-term debt may be more useful than long-term debt in reducing free cash flow problems and in signalling high quality to outsiders.For example, as Myers (1977) suggests, agency conflicts between managers and shareholders such as the underinvestment problem can be curtailed with short-term debt. Flannery (1986) argues that firms with large potential information asymmetries are likely to issue short-term debt because of the larger information costs associated with long-term debt. Also, short-term debt can be advantageous especially for high-quality companies due to its low refinancing risk (Diamond, 1991). Finally, if yield curve is downward sloping, issuing sho rt-term debt increases firm value (Brick and Ravid, 1985).Consequently, bank debt and short-term debt are expected to constitute two important corporate governance devices. We include the ratio of bank debt to total debt and the ratio of short-term debt to total debt to our empirical model so as to approximate the lender’s ability to mitigate agency problems. Also, we include the ratio of total debt to total assets (leverage) to approximate lender’s incentive to monitor. In general, as leverage increases, so does the risk of default by the firm, hence the incentive for the lender to monitor the firm6. 6 Ang et al. 2000) focus on sample of small firms, which have do not have easy access to public debt, and examine the impact of bank debt on agency costs. On the contrary, Sign and Davidson (2003) focus on a sample of large firms, which have easy access to public debt, and examine the impact of public debt on 6 2. 2 Managerial Ownership The conflicts of interest between m anagers and shareholders arise mainly from the separation between ownership and control. Corporate governance deals with finding ways to reduce the magnitude of these conflicts and their adverse effects on firm value.For instance, Jensen and Meckling (1976) suggest that managerial ownership can align the interest between these two different groups of claimholders and, therefore, reduce the total agency costs within the firm. According to their model, the relationship between managerial ownership and agency costs is linear and the optimal point for the firm is achieved when the managers acquires all of the shares of the firm. However, the relationship between managerial ownership and agency costs can be non-monotonic (see, for example, Morck et al. , 1988; McConnel and Servaes, 1990,1995 and, Short and Keasey, 1999).It has been shown that, at low levels of managerial ownership, managerial ownership aligns managers’ and outside shareholders’ interests by reducing manager ial incentives for perk consumption, utilization of insufficient effort and engagement in nonmaximizing projects (alignment effect). After some level of managerial ownership, though, managers exert insufficient effort (e. g focus on external activities), collect private benefits (e. g. build empires or enjoy perks) and entrench themselves (e. g. undertake high risk projects or bend over backwards to resist a takeover) at the expense of other investors (entrenchment effect).Therefore the relationship between the two is non-linear. The ultimate effect of managerial ownership on agency costs depends upon the trade-off between the alignment and entrenchment effects. In the context of our analysis we propose a non-linear relationship between managerial ownership and managerial agency costs. However, theory does not shed much light on the exact nature of the relationship between the two and, hence, we do not know which of the effects will dominate the other and at what levels of manageria l ownership.We, therefore, carry out a preliminary investigation about the pattern of the relationship between managerial ownership and agency costs. Figure 1 presents the way in which the two variables are associated. [Insert Figure 1 here] agency costs. Our study is more similar to that of Ang et al (2000) given that UK firms use significant amounts of bank debt financing (see Corbett and Jenkinson, 1997). 7 Clearly, at low levels of managerial ownership, asset turnover and managerial ownership are positively related. However, after managerial ownership exceeds the 10 per cent level, the relationship turns from positive to negative.A third turning point is that of 30 percent after which the relationship seems to turn to positive again. Consequently, there is evidence both for the alignment and the entrenchment effects in the case of our sample. In order to capture both of them in our empirical specification, we include the level, the square and the square of managerial ownership i n our model as predictors of agency costs. 2. 3 Ownership Concentration A third alternative for alleviating agency problems is through concentrated ownership.Theoretically, shareholders could take themselves an active role in monitoring management. However, given that the monitoring benefits for shareholders are proportionate to their equity stakes (see, for example, Grossman and Hart, 1988), a small or average shareholder has little or no incentives to exert monitoring behaviour. In contrast, shareholders with substantial stakes have more incentives to supervise management and can do so more effectively (see Shleifer and Vishny, 1986; Shleifer and Vishny, 1997 and Friend and Lang, 1988).In general, the higher the amount of shares that investors hold, the stronger their incentives to monitor and, hence, protect their investment. Although large shareholders may help in the reduction of agency problems associated with managers, they may also harm the firm by causing conflicts between large and minority shareholders. The problem usually arises when large shareholders gain nearly full control of a corporation and engage themselves in self-dealing expropriation procedures at the expense of minority shareholders (Shleifer and Vishny, 1997).Also, as Gomez (2000) points out, these expropriation incentives are stronger when corporate governance of public companies insulates large shareholders from takeover threats or monitoring and the legal system does not protect minority shareholders because either of poor laws or poor enforcement of laws. Furthermore, the existence of concentrated holdings may decrease diversification, market liquidation and stock’s ability to grow and, therefore, increase the incentives of large shareholders to expropriate firm’s resources.Several empirical studies provide evidence consistent with that view (see, for example, Beiner et al, 2003). In order to test the impact of ownership concentration on agency costs, we include a var iable that refers to the sum of stakes of shareholders with equity stake greater than 3 8 per cent in our regression equation. The results remain robust when the threshold value changes from 3 per cent to 5 per cent or 10 per cent. 2. 4 Board of Directors Corporate governance research recognizes the essential role performed by the board of directors in monitoring management (Fama and Jensen, 1983; Weisbach, 1988 and Jensen, 1993).The effectiveness of a board as a corporate governance mechanism depends on its size and composition. Large boards are usually more powerful than small boards and, hence, considered necessary for organizational effectiveness. For instance, as Pearce and Zahra (1991) point out, large powerful boards help in strengthening the link between corporations and their environments, provide counsel and advice regarding strategic options for the firm and play crucial role in creating corporate identity. Other studies, though, suggest that large boards are less effecti ve than large boards.The underlying notion is that large boards make coordination, communication and decision-making more cumbersome than it is in smaller groups. Recent studies by Yermack, 1996; Eisenberg et al. , 1998 and Beiner et al, 2004 support such a view empirically. The composition of a board is also important. There are two components that characterize the independence of a board, the proportion of non-executive directors and the separated or not roles of chief executive officer (CEO) and chairman of the board (COB).Boards with a significant proportion of non-executive directors can limit the exercise of managerial discretion by exploiting their monitoring ability and protecting their reputations as effective and independent decision makers. Consistent with that view, Byrd and Hickman (1992) and Rosenstein and Wyatt (1990) propose a positive relationship between the percentage of non-executive directors on the board and corporate performance. Lin et al. (2003) also propose a positive share price reaction to the appointment of outside directors, especially when board ownership is low and the appointee possesses strong ex ante monitoring incentives.Along a slightly different dimension, Dahya et al. (2002) find that top-manager turnover increases as the fraction of outside directors increases. Other studies find exactly the opposite results. They argue that non-executive directors are usually characterized by lack of information about the firm, do not bring the requisite skills to the job and, hence, prefer to play a less confrontational role rather than a more critical monitoring one (see, for example, Agrawal and Knoeker, 1996; Hermalin 9 nd Weisbach, 1991, and Franks et al. , 2001)7. As far as the separation between the role of CEO and COB is concerned, it is believed that separated roles can lead to better board performance and, hence, less agency conflicts. The Cadbury (1992) report on corporate governance stretches that issue and recommends that C EO and COB should be two distinct jobs. Firms should comply with the recommendation of the report for their own benefit. A decision not to combine these roles should be publicly explained.Empirical studies by Vafeas and Theodorou (1998), and Weir et al. (2002), though, which study that issue for the case of the UK market, provide results that do not support Cadbury’s stance that the CEO – COB duality is undesirable. In the context of the UK market, UK boards are believed to be less effective than the US ones. For instance,. To test the effectiveness of the board of directors in mitigating agency problems we include three variables in our empirical model: a) the ratio of the number of non-executive directors to he number of total directors, b) the total number of directors (board size) and c) a dummy variable which takes the value of 1 when the roles of CEO and COB are not separated and 0 otherwise. 2. 5 Managerial Compensation Another important component of corporate g overnance is the compensation package that is provided to firm management. Recent studies by Core et al. (2001) and Murphy (1999) suggest, among others, that compensation contracts, whose use has been increased dramatically during the 90’s, can motivate managers to take actions that maximize shareholders’ wealth.In particular, as Core et al. (2001) point out, if shareholders could directly observe the firm’s growth opportunities and executives’ actions no incentives would be necessary. However, due to asymmetric information between managers and shareholders, both equity and compensation related incentives are required. For example, an increase in managerial compensation may reduce managerial agency costs in the sense that satisfied managers will be less likely, ceteris paribus, to utilize insufficient effort, perform expropriation behaviour and, hence, risk the loss of their job.Despite the central importance of the issue, only a few empirical studies exa mine the impact of managerial compensation components on corporate performance. For example, Jensen and Murthy 7 Such a result may be consistent with the governance system prevailing in the UK market given the fact that UK legislation encourages non-executive directors to be inactive since it does not impose fiduciary obligations on them. Also, UK boards are dominated by executive directors, which have less monitoring power.Franks et al. (2001) confirm this view by providing evidence on a non-disciplinary role of nonexecutive directors in the UK. 10 (1990) find a statistically significant relationship between the level of pay and performance. Murphy (1995), finds that the form, rather than the level, of compensation is what motivates managers to increase firm value. In particulars, he argues that firm performance is positively related to the percentage of executive compensation that is equity based.More recently, Hutchinson and Gul (2004) analyze whether or not managers’ comp ensation can moderate the negative association between growth opportunities and firm value8. The results of this study indicate that corporate governance mechanisms such as managerial remuneration, managerial ownership and non-executive directors possibly affect the linkages between organizational environmental factors (e. g. growth opportunities) and firm performance.Finally, Chen (2003) analyzes the relationship between equity value and employees’ bonus. He finds that the annual stock bonus is strongly associated with the firm’s contemporaneous but not future performance. Managerial compensation, though, is considered to be a debated component of corporate governance. Despite its potentially positive impact on firm value, compensation may also work as an â€Å"infectious greed† which creates an environment ripe for abuse, especially at significantly high levels.For instance, remuneration packages usually include extreme benefits for managers such as the use of private jet, golf club membership, entertainment and other expenses, apartment purchase etc. Benefits of this sort usually cause severe agency conflicts between managers and shareholders. 9 Therefore, it is possible that the relationship between compensation and agency costs is non-monotonic. Similar to the case of managerial ownership, we carry out a preliminary investigation about the pattern of the relationship between salary and agency costs.As shown in figure 2, the relationship between salary and agency costs is likely to be non-linear10. In our empirical model, we include the ratio of the total salary paid to executive directors to total assets as a determinant of agency costs. Also, in order to capture potential 8 Rather, the majority of the studies in that strand of literature reverse the causation and examine the impact of performance changes on executive or CEO compensation (see, for example, Rayton, 2003 among others). Concerns about excessive compensation packages and their negative impact on corporate performance have lead to the establishment of basic recommendations in the form of â€Å"best practises† in which firms should comply so as the problem with excessive compensation to be diminished. In the case of the UK market, for example, one of the basic recommendations of the Cadbury (1992) report was the establishment of an independent compensation committee. Also, in a posterior report, the Greenbury (1995) report, specific propositions about remuneration issues were made.For example, an issue that was stretched was the rate of increase in managerial compensation. In the case of the US market, the set of â€Å"best practises† includes, among others, the establishment of a compensation committee so as transparency and disclosure to be guaranteed (same practise an in the UK) and the substitution of stock options as compensation components with other tools that promote the long-term value of the company 10 A similar preliminary ana lysis is carried out so as to check potential non-linearities concerning the relationship between the rest of internal governance mechanisms and agency costs.Our results (not reported) indicate that none of them is related to agency costs in a non-linear way. 11 non-linearities, we include higher ordered salary terms in the regression equation. Finally, we include a dummy variable, which takes the value of 1 when a firm pays options or bonuses to managers and 0 otherwise. Including that dummy variable in our analysis enables us to test whether or not options and bonuses themselves provide incentives to managers.As Zhou (2001) points out, ignoring options is likely to incur serious problems unless managerial options are either negligible compared to ownership or almost perfectly correlated with ownership. [Insert Figure 2 here] 2. 6 Growth Opportunities The magnitude of agency costs related to underinvestment, asset substitution and free cash flow differ significantly across high-gro wth and low-growth firms. In the underinvestment problem, managers may decide to pass up positive net present value projects since the benefits would mainly accrue to debt-holders.This is more severe for firms with more growth-options (Myers, 1977). Asset substitution problems, which occur when managers opportunistically substitute higher variance assets for low variance assets, are also more prevalent in high-growth firms due to information asymmetry between investors and borrowers (Jensen and Meckling, 1976). High-growth firms, though, face lower free cashlow problems, which occur when firms have substantial cash reserves and a tendency to undertake risky and usually negative NPV investment projects (Jensen, 1986).Given the different magnitude and types of agency costs between high-growth and low-growth firms, we expect the effectiveness of corporate governance mechanisms to vary with growth opportunities. In particular, if agency problems are associated with greater underinvestme nt or information asymmetry (a common problem in high-growth firms), we expect corporate governance mechanisms that mitigate these kinds of problems to be more effective in high-growth firms (Smith and Watts, 1992 and Gaver and Gaver, 1993).However, if, as argued by Jensen (1986), agency problems are associated with conflicts over the use of free cash flow (a common problem in low-growth firms), we expect governance mechanisms that mitigate such problems to play a more important role in low-growth firms (Jensen, 1986). Several empirical studies that model company performance confirm the existence of potential interactions between internal governance mechanism and growth opportunities. For example, McConnell and Servaes (1995) find that the relationship between firm value and leverage is negative for high-growth firms and positive for low12 growth firms.Their results also indicate that equity ownership matters, and the way in which it matters depends upon investment opportunities. Sp ecifically, they provide weak evidence that on the view that the allocation of equity ownership between corporate insiders and other types of investors is more important in low-growth firms. Also, Lasfer (2002) points out that high-growth firm (low-growth firms) rely more on managerial ownership (board structure) to mitigate agency problems. Finally, Chen (2003) finds that the positive relationship between annual stock bonus and equity value is stronger for firms with greater growth opportunities.In order to capture potential interaction effects, we include interaction terms between proxies for growth opportunities and governance mechanisms in our empirical model and, also, employ sample-splitting methods (see, for example, McConnell and Servaes, 1995 and Lasfer, 2002). Based on previous empirical evidence the prediction we make is that mechanisms that are used to mitigate asymmetric information problems (free cash flow problems) are stronger in high-growth firms (low-growth firms). 3. Data and Methodology 3. 1 Data For our empirical analysis of agency costs we use a large sample of ublicly traded UK firms over the period 1999-2003. We use two data sources for the compilation of our sample. Accounting data and data on the market value of equity are collected from Datastream database. Specifically, we use Datastream to collect information for firm size, market value of equity, annual sales, selling general and administrative expenses, level of bank debt, short-term debt and total debt. Information on firm’s ownership, board and managerial compensation structure is derived from the Hemscott Guru Academic Database.This database provides financial data for the UK’s top 300,000 companies, detailed data on all directors of UK listed companies, live regulatory and AFX News feeds and share price charts and trades. Specifically, we get detailed information on the level of managerial ownership, ownership concentration, size and composition of the board, ma nagerial salary, bonus, options and other benefits. Despite the fact that data on directors are provided in a spreadsheet format, information for each item is given in a separate file. This makes data collection for the required variables fairly complicated.For example, in order to get information about the amount of shares held by executive directors we have to combine two different files: a) the 13 file that contains data on the amount of shares held by each director and b) the file that provides information about the type of each directorship (e. g. executive director vs. nonexecutive director). Also, we have to take into account the fact that several directors in the UK hold positions in more than one company. Complications also arise when we attempt to collect information about the composition of the board and the remuneration package that is provided to executive directors.The way in which our final sample is compiled is the following: we start with a total of 1672 UK listed f irms derived from Datastream. This number reduces to 1450 firms after excluding financial firms from the sample. After matching Datastream data with the data provided by Hemscott, the number of firms further decreases to 1150. Missing firmyear observations for any variable in the model during the sample period are also dropped. Finally, we exclude outliers so as to avoid the problem with extreme values. We end up with 897 firms for our empirical analysis. 3. Dependent Variable In our analysis we use two alternative proxies to measure agency costs. Firstly, we use the ratio of annual sales to total assets (Asset Turnover) as an inverse proxy for agency costs. This ratio can be interpreted as an asset utilization ratio that shows how effectively management deploys the firm’s assets. For instance, a low asset turnover ratio may indicate poor investment decisions, insufficient effort, consumption of perquisites and purchase of unproductive products (e. g. office space). Firms wit h low asset turnover ratios are expected to experience high agency costs between managers and shareholders11.A similar proxy for agency costs is also used in the studies of Ang et al. (2000) and Sign and Davidson (2003). However, Ang et al. (2000), instead of using the ratio directly, they use the difference in the ratios of the firm with a certain ownership and management structure and the no-agency-cost base case firm. Secondly, following Sign and Davidson (2003), we use the ratio of selling, general and administrative (SG&A) expenses to sales (expense ratio). In contrast to asset turnover, expense ratio is a direct proxy of agency costs.SG&A expenses include salaries, commissions charged by agents to facilitate transactions, travel expenses for executives, advertising and marketing costs, rents and other utilities. Therefore, expense ratio should 11 The asset turnover ratio may also capture (to some extent) agency costs of debt. For instance, the sales ratio provides a good signa l for the lender about how effectively the borrower (firm) employs its assets and, therefore, affects the cost of capital 14 reflect to a significant extent managerial discretion in spending company resources.For example, as Sign and Davidson (2003) point out, â€Å"management may use advertising and selling expenses to camouflage expenditures on perquisites† p. 7. Firms with high expense ratios are expected to experience high agency costs between managers and shareholders12. 3. 3 Independent Variables Our empirical model includes a set of corporate governance variables related to firm’s ownership, board, compensation and capital structure. Several control variables are also incorporated. For example, we use the logarithm of total assets in 1999 prices as a proxy for firm size (SIZE).Also, we include the market-to-book value (MKTBOOK) as a proxy for growth opportunities. Finally, we divide firms into 15 sectors and include 14 dummy variables accordingly so as to contro l for sector specific effects. Analytical definitions for all these variables are given in Table 1. [Insert Table 1 here] 3. 4 Methodology We examine the determinants of agency costs by employing a cross sectional regression approach. Following Rajan and Zingales (1995) and Ozkan and Ozkan (2004), the dependent variable is measured at some time t, while for the independent variables we use average-past values.Using averages in the way we construct our explanatory variables helps in mitigating potential problems that may arise due to short-term fluctuations and extreme values in our data. Also, using past values reduces the likelihood of observed relations reflecting the effects of asset turnover on firm specific factors. Specifically, the dependent variable is measured in year 2003. For accounting variables and the market-tobook ratio we use average values for the period 1999-2002. Ownership, board and compensation structure variables are measured in year 2002.Given that equity owne rship characteristics in a country are relatively stable over a certain period of time, we do not expect that measuring them in a single year would yield a significant bias in our results (see also La Porta et al. , 2002, among others). 12 An alternative proxy for agency costs between managers and shareholders, which is not used in our paper though, is the interaction of company’s growth opportunities with its free cash flow (see Doukas et al. , 2002). 15 Our approach captures potential interaction effects that may be present.For example, as explained analytically in section 2. 6, the nature of the relationship between the alternative governance mechanisms or devices and agency costs may vary with firm’s growth opportunities. To explore that possibility, we firstly interact our proxy for growth opportunities (MKTBOOK) with the alternative corporate governance mechanisms. In this way, we test for the existence of both main effects (the impact governance variables on age ncy costs) and conditional effects (the impact of growth opportunities on the relationship between governance variables and agency costs).Additionally, we split the sample into high-growth and low-growth firms and estimate our empirical models for each sample separately. Then we check whether the coefficients of governance variables retain their sign and their significance across the two sub-samples. 3. 5 Sample Characteristics Table 2 presents descriptive statistics for the main variables used in our analysis. It reveals that the average values of asset turnover ratio and SG&A ratio are 1. 24 and 0. 45 respectively. The mean value for managerial ownership is 14. 4 per cent of which the average proportion of stakes held by executive (non-executive) directors is 10. 68 per cent (4. 06 per cent). The ownership concentration reaches the level of 37. 19 per cent, on average, in the UK firms. Also, the average proportion of non-executive directors is 49. 5 per cent and the average board size consists of 6. 97 directors. Finally, we were able to identify only 73 firms out of the final 897 (8. 1 per cent) in which the same person held the positions of CEO and COB. As far as the capital structure variables are concerned, the average proportion of bank debt on firm’s capital structure is 55. 5 per cent and that of short-term debt is 49. 53 per cent. Finally, the average market-to-book value is 2. 09. In general, these values are in line with those reported in other studies for UK firms (see, for example, Ozkan and Ozkan, 2004 and Short and Keasey, 1999). [Insert Table 2 here] The results of the Pearson’s Correlation of our variables are reported in Table 3. Our inverse proxy for agency costs, asset turnover, is clearly positively correlated to managerial ownership, executive ownership, salary, bank debt and short-term debt.Ownership concentration is also positively related to asset turnover but the correlation coefficient is not statistically significant. On the contrary, board size and non-executive 16 directors are found to be negatively correlated with asset turnover. Finally, as expected, asset turnover is found to be negatively correlated with both growth opportunities and firm size. The results for our second proxy for agency costs, SG&A, are qualitatively similar with a few exceptions (e. g. short-term debt) but with opposite signs given that SG&A is a direct and not an inverse proxy for agency costs. Insert Table 3 here] 4. Empirical Results 4. 1 Univariate analysis In Table 4 we report univariate mean-comparison test results of the sample firm subgroups categorized on the basis of above and below median values for managerial ownership, ownership concentration, board size, proportion of non-executives, bank debt, short-term debt, total debt, salary, firm size and growth opportunities. Firms with above median managerial ownership (ownership concentration) have asset turnover of 1. 34 (1. 31) whereas those with below median ma nagerial ownership (ownership concentration) have asset turnover of 1. 5 (1. 17). These differences are statistically significant at the 1 per cent (5 per cent) level. The results for executive ownership, salary, bank debt and short-term debt are also found to be statistically significant and are in the hypothesized direction. Specifically, we find that firms with above median values for all the above mentioned variables have relatively higher asset utilization ratios. On the contrary, there is evidence that firms with larger board sizes indicate significantly lower asset utilization ratios. Insert Table 4 here] In panel B of the same table we report the results using SG&A expense ratio as a proxy for agency costs. Results are in general not in line with the hypothesized signs with notable exceptions those of ownership concentration and growth opportunities. For example, firms with above median ownership concentration (MKTBOOK) have an SG&A expense ratio of 0. 41 (0. 55) whereas fir ms with below median ownership concentration (MKTBOOK) have an SG&A expense ratio of 0. 49 (0. 36).However, the results for managerial ownership, salary and short-term debt suggest that these governance mechanisms or devices are not effective in protecting firms from excessive SG&A 17 expenses. Sign and Davidson (2003) obtains a set of similar results, for the case when agency costs are approximated with the SG&A ratio. Overall, the univariate analysis indicates several corporate governance mechanisms or devices, such as managerial ownership, ownership concentration, salary, bank debt and short-term debt, which can help mitigate agency problems between managers and shareholders.Also, consistent with previous studies, we find that the relation between governance variables and agency costs is stronger for the asset turnover ratio than the SG&A expense ratio. The analysis that follows allows us to test the validity of these results in a multivariate framework. 4. 2 Multivariate analysi s In this section we present our results that are based on a cross sectional regression approach. We start with a linear specification model, where we include only total debt from our set of capital structure variables (model 1).In general, the estimated coefficients are in line with the hypothesized signs. Specifically, consistent with the results of Ang et al. (2000) and Sign and Davidson (2003), we find both managerial ownership and ownership concentration to be positively related to asset-turnover. The coefficients are statistically significant at the 5 per cent and 1 per cent significance level respectively. On the contrary, the coefficient for board size is negative, which probably indicates that firms with larger board size are less efficient in their asset utilization.Also, the results for our proxy for growth opportunities (MKTBOOK) support the view that high-growth firms suffer from higher agency costs than low-growth firms. Finally, there is strong evidence that manageria l salary can work as an effective incentive mechanism that helps aligning the interests of managers with those of shareholders. Specifically, the coefficient for salary is positive and statistically significant to the 1 per cent level. Therefore, compared to previous studies, our empirical model provides evidence on the existence of an additional potential corporate governance mechanism available to firms. Insert Table 5 here] In model 2 we incorporate two additional capital structure variables, the ratio of bank debt to total debt and the ratio of short-term debt to total debt, in order to test whether debtsource and debt-maturity impacts agency costs. Also, we split managerial ownership into executive ownership (the amount of shares held by executive directors) and non-executive 18 ownership (the amount of shares held by non-executive directors). We do this because we expect that equity ownership works as a better incentive mechanism in the hands of executive directors rather in t he hands of non-executive directors.According to our results, bank debt is positively related to asset turnover. Also, in addition to debt source, the maturity structure of debt seems to have a significant effect on agency costs. The coefficient of short-term debt is positive and statistically significant at the 1 per cent significance level. Furthermore, there is evidence that from total managerial ownership, only the amount of shares held by executive directors can enhance asset utilization and, hence, align the interest of managers with those of shareholders.In model 3 we estimate a non-linear model by adding the square of salary. As explained earlier in the paper, a priori expectations, which are supported by preliminary graphical investigation, suggest that the relationship between asset turnover and salary can be non-monotonic. Our results provide strong evidence that the relationship between salary and asset turnover is non-linear. In particular, at low levels of salary, the relationship between salary and asset turnover is positive. However, at higher levels of salary, the relationship becomes negative.This result is consistent with studies that suggest that extremely high levels of salary usually work as an â€Å"infectious greed† and create agency conflicts between managers and shareholders. The coefficients of the remaining variables are similar to those reported in models 1 and 2. Finally, in model 4 we allow for a non-linear relationship between executive ownership and agency costs. However, our results do not support such a relationship and, therefore, the square term in our following models13.To sum up, the results of Table 5 indicate that managerial ownership (executive ownership), ownership concentration, salary (when it is at low levels), bank debt and short-term debt can help in mitigating agency problems by enhancing asset utilization. Also, the coefficients for the control variables market to book and firm size, negative and positiv e respectively, suggest that smaller and non- growth firms are associated with reduced asset utilization ratio and, hence, more severe agency problems between managers and shareholders.As discussed earlier in the paper, there is a possibility that the nature of the relationship between the alternative governance mechanisms or devices and agency costs varies with firm’s growth opportunities. In Panel A of Table 6, we explore such a In trial regressions, which are not reported, the cubic term of executive ownership is also included in our model. Once more, the results do not support the existence of a non-monotonic relationship. 13 19 possibility by interacting those governance mechanisms found significant in models 1-4 with growth opportunities, proxied by market-to-book ratio.Our empirical results support the existence of two interaction effects. We find that executive ownership is an effective governance mechanism especially for high-growth firms (the coefficient EXECOWNER* MKTBOOK is positive and statistically significant). This result is consistent with the study of Lasfer (2002), which suggests that the positive relationship between managerial ownership and firm value is stronger in high-growth firms. On the contrary, the coefficient SHORT_DEBT*MKTBOOK is found to be negative and statistically significant.This means that the efficiency of short-term debt in mitigating agency problems is lower for high-growth firms. A possible explanation may be that short-term debt basically mitigates agency problems related to free cash flow. Given that high-growth firms do not suffer from severe free cash-flow problems (but mainly from asymmetric information problems), the efficiency of short-term debt as governance device decreases for these firms. One could argue, though, that short-term debt should be more important for the case of highgrowth firms since it helps reduce underinvestment problems.However, it seems that this effect is not very strong for the case in our sample. A similar result is obtained in McConnell and Servaes (1995) who find that the relationship between corporate value and leverage is positive (negative) for low-growth (high-growth) firms14. [Insert Table 6 here] Secondly, we use the variable MKTBOOK so as two split the sample into two subsamples. We label the upper 45 per cent in terms of MKTBOOK as â€Å"high-growth firms† and the lower 45 per cent as â€Å"low-growth firms†. Then, we re-estimate our basic model for the two sub-samples separately (Table 6, panel B).The results of this exercise confirm the existence of an interaction effect between executive ownership and asset turnover. In particular, the coefficient of EXECOWNER is positive and statistically significant only in the case of the sample that includes only high-growth firms. As far as short-term debt is concerned, it is found to be positive and statistically significant in both samples. 14 The idea in McConnell and Servaes (1995) is that d ebt has both a positive and a negative impact on the value of the firm because of its influence on corporate investment decisions.What possibly happens is that the negative effect of debt dominates the positive effect in firms with more positive net present value projects (i. e. , high-growth firms) and that the positive effect will dominate the negative effect for firms with fewer positive net present value projects (i. e. , low-growth firms). 20 To summarize, the results of our multivariate analysis suggest, among others, that executive ownership and ownership concentration can work as effective governance mechanisms for the case of the UK market.These results are in line with the ones reported by the studies Ang et al. (2000) and sign and Davidson (2003). Also, we find that, in addition to the source of debt, the maturity structure of debt can help to reduce agency conflicts between managers and shareholders. The fact that previous studies have ignored the maturity structure of d ebt may partly explain their contradicting results concerning the relationship between capital structure and agency costs. Furthermore, we find that salary can work as an additional mechanism that provides incentives to managers to take valuemaximizing actions.However, its impact on asset turnover is not always positive i. e. the relationship between asset turnover and salary is non-monotonic. Finally, there is strong evidence that the relationship between several governance mechanisms and agency costs varies with growth opportunities. Specifically, our results support the view that the positive relationship between executive ownership (short-term debt) is stronger for the case of high growth (low growth) firms. 4. Robustness checks Given the significant impact of growth opportunities on agency costs (main impact) and on the impact of other corporate governance mechanisms (conditional impact), we further investigate the relationship between growth opportunities, governance mechanism s and agency costs. At first, we substitute the variable MKTBOOK with an alternative proxy for growth opportunities. The new proxy is derived after employing common factor analysis, a statistical technique that uses the correlations between observed variables to estimate common factors and the structural relationships linking factors to observed variables.The variables which are used in order to isolate latent factors that account for the patterns of colinearity are following variables: MKTBOOK = Book value of total assets minus the book value of equity plus the market value of equity to book value of assets; MTBE = Market value of equity to book value of equity; METBA = Market value of equity to the book value of assets; METD = Market value of equity plus the book value of debt to the book value of assets. 21 These variables have been extensively used in the literature as alternative proxies for growth opportunities and Tobin’s Q.As shown in Table 7 (panel A) all these varia bles are highly correlated to each other. In order to make sure that principal component analysis can provide valid results for the case of our sample, we perform two tests in our sample, the Barlett’s test and the Kaiser-Meyer-Olkin test. The first test examines whether or not the intercorrelation matrix comes from a population in which the variables are noncollinear (i. e. an identity matrix). The second test is a test for sampling adequacy.The results from these tests, which are reported in panel B, are encouraging and suggest that common factor analysis can be employed in our sample since all the four proxies are likely to measure the same â€Å"thing† i. e. growth opportunities. Panel C presents the eigenvalues of the reduced correlation matrix of our four proxies for growth opportunities. Each factor whose eigenvalue is greater than 1 explains more variance than a single variable. Given that only one eigenvalue is greater than 1, our common factor analysis provid es us with one factor that can explain firm growth opportunities.Clearly, as shown in panel D, the factor is highly correlated with all MKTBOOK, MTBE, METBA and METD. We name the new variable GROWTH and use it as an alternative proxy for growth opportunities. Descriptive statistics for the variable GROWTH are presented in panel D. [Insert Table 7 here] Table 8 presents the results of cross-section analysis after using the variable GROWTH as proxy for agency costs. In general, the results of such a task are similar to the ones reported previously.For instance, there is strong evidence that executive ownership, ownership concentration, salary, short-term debt and, to some extent, bank debt are positively related to asset turnover. Also, there is some evidence supporting a non-linear relationship between salary and asset turnover. Finally, our results clearly indicate that agency costs differ significantly across high-growth and low-growth firms and, most importantly, there is a signif icant interaction effect between growth opportunities and executive ownership.However, we can not provide any evidence on the existence of an interaction between asset turnover and short-term debt. [Insert Table 8 here] 22 In panel B of table 8, we split our sample into high-growth and low-growth firms on the basis of high and low values for the variable GROWTH. Specifically, we label the upper 45 per cent in terms of GROWTH as â€Å"high-growth firms† and the lower 45 per cent as â€Å"low-growth firms†. Then we estimate our basic model for each sub-sample separately. The results are very similar to the ones reported in Table 6 (panel B), where we apply a similar methodology.As an additional robustness check, we use a third proxy for growth opportunities, a dummy variable that takes the value of 1 if the firm is a high-growth firm and 0 otherwise, and re-estimate the models 6 and 7 of Table 8. The definition used in order to distinguish between high-growth and low-gro wth firms is the following: Firms above the 55th percentile in terms of the variable GROWTH are called high-growth firms. Firms below the 45th percentile in terms of the variable GROWTH are called low-growth firms.Finally, firms between the 45th and 55th percentile are excluded from the sample. The results (not reported) are qualitatively similar to the ones reported in Table 8. For example, there is evidence for the existence of an interaction effect between executive ownership and growth opportunities but not for the one between short-term debt and growth opportunities. Also, we re-estimate the models reported in Table 8 after substituting the total salary paid to executive directors for the total remuneration package paid to executive directors.We are doing so given that the total remuneration package that is paid to managers includes several other components. For instance, the components of compensation structure have been increased in number during the last decade and may inclu de annual performance bonus, fringe benefits, stock (e. g. preference shares), stock options, stock appreciation rights, phantom shares and other deferred compensation mechanisms like qualified retirement plans (see Lynch and Perry, 2003 for an analytical discussion). Once more, the results do not change substantially.Finally, in Table 9 we substitute the annual sales to total assets with the ratio of SG&A expenses to total sales. As already mentioned earlier in the paper, this ratio can be used as a direct proxy for agency costs. Our results, as presented in Table 9, indicate that executive ownership, ownership concentration and total debt help reduce discretionary spending and, therefore, the agency conflicts between managers and shareholders. Sign and Davidson (2003) do not find any evidence to support these results. Also, we find that agency costs and growth opportunities are positively related i. . the coefficient of the variable GROWTH is positive and statistically significant to the 5 per cent statistical level. 23 Finally, our results support the existence of an interaction effect between growth opportunities and executive ownership. However, once more, our analysis does not indicate the existence of an interaction effect between short-term debt and growth opportunities. [Insert Table 9 here] 5. Conclusion In this paper we have examined the effectiveness of the alternative corporate governance mechanisms and devices in mitigating managerial agency problems in the UK market.In particular, we have investigated the impact of capital structure, corporate ownership structure, board structure and managerial compensation structure on the costs arising from agency conflicts mainly between managers and shareholders. The interactions among them and growth opportunities in determining the magnitude of these conflicts have also been tested. Our results strongly suggest managerial ownership, ownership concentration, executive compensation, short-term debt and, to s ome extent, bank debt are important governance mechanisms for the UK companies.Moreover, â€Å"growth opportunities† is a significant determinant of the magnitude of agency costs. Our results suggest that highgrowth firms face more serious agency problems than low-growth firms, possibly because of information asymmetries between managers, shareholders and debtholders. Finally, there is strong evidence that some governance mechanisms are not homogeneous but vary with growth oppo

Kalimunda Hakim Internship Report 2012

1 INTERNSHIP REPORT MTN RWANDA PO BOX 264 BY Kalimunda Hakim Student At RTUC Bachelor In Business Information Technologies _____________________ SUPERVISED BY Aymard Mbonabucya Information & Network Security Administrator _____________________ FROM 26 November, 2012 TO 15 January, 2013 INTERNSHIP REPORT 2 ACKNOWLEDGEMENT I am deeply intended to almighty God who has protected me through the whole period of internship.My special thanks are addressed to the MTN RWANDA administration for giving me such opportunity of passing an internship in their company, My sincere acknowledgement go to the Human resource Director Merry Assimwe for their acceptance of my intern . Thank you for all. I am grateful to my Supervisor Aymard MBONABUCYA for being a best man I have ever known and his modesty, encouragement and understanding s on all my daily questions and answer it because of his spiritual and technical support; I used to became free to ask any question regarding network because he is very goo d at networking, may thanks be given to him.I finally thank all MTN staff in technology department for their good collaboration during this very important internship. INTERNSHIP REPORT 3 PREFACE The purpose of this report is to fulfill the internship requirement for the Bachelor degree in Business Information Technology program at Rwanda Tourism University College ; to till 15 January, 2013) with a private organizations in Rwanda called MTN RWANDA. successes and short. explain what I did achieved and learned during my internship period (26 November, 2012 The report focuses primarily on intern’s duties and responsibilities, internship results, its INTERNSHIP REPORT 4 About MTN RwandaMTN is a global communications company and world-class cellular network. empowerment. As a major communications company, MTN is specifically focused on the Africa and the Middle East. We believe that through access to communication comes economic Serving you since 1998, MTN Rwanda continues to expa nd its network, offer new and innovative packages and services and keep up with the latest trends in communications while maintaining affordability. MTN Mobile Money has transacted over US$36 million Bulk Payment Services. MTN Rwanda has over 2. 9 million subscribers and its network coverage extends to over 98% of the population. ince its launch in 2010. The payment platform is now offering Cash Power Top-up and INTERNSHIP REPORT 5 ACKNOWLEDGEMENT PREFACE. †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦. 1 BACKGROUND OF COMPANY. †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦2 CHAPTER I. INTRODUCTION†¦Ã¢â‚¬ ¦ †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ II. 1. OVERVIEW OF SWITCHING†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.. II. II. 1. OVERVIEW OF ROUTING†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ II. II. 2. CONCEPTS OF ROUTING†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦. ?II. 2. CONCEPTS OF SWITCHING†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.. TABLE OF CONTENTS TABLE OF CONTENTS†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦. †¦.. †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦3 CHAPTER II. PRESENATION ON SWITCHING AND ROUTING CONCEPTS AND CONFIGURATION†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚ ¬ ¦II. 3. SOME CONFIGURATION OF SWITCHING†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦. II. II. 3. SOME CONFIGURATION OF ROUTING†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.. II. III. NETWORK LAYER†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ II. III. 2. CISCO HIERARCHIAL LAYER†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ II. III. 3. CORE LAYER†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ II. III. 4. DISTRIBUTION LAYER†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.. II. III. 5. ACCESS LAYER†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.. II. III. 1. OVERVIEW OF NETWORK LAYER†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.. II. IV. NETWORK DESIGN CONCEPT †¦. II. IV. 1. THEORIES ON NETWORK DESIGN†¦Ã¢â‚¬ ¦ II. IV. 4 SWITCH PASSWORD RECOVERY II. IV. 2. OVERVIEW ON VIRTUAL LOCAL AREA NETWORK (VLAN) II. IV. 5. FIREWALL PASSWORD RECOVERY II. IV. 3. ROUTER PASSWORD RECOVERY†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â ‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦..INTERNSHIP REPORT 6 INTERNSHIP REPORT 7 Chapter 2. Presentation on switching, routing concepts and configuration II. 1. OVERVIEW OF SWITCH What is switching? Networking concept has two basic concepts and they are Switching and Routing . They using one of these methods. are fundamental concepts in Networking ,other topics like network security are based on these concept. Routing and Switching are the base packet or data delivering methods in When we are talking about the switching ,the protocols and concepts are related to the layer 2 and data packets with in this layer that are called frame . re bigger and bigger and also more expensive. 10base5, 10base-T for cabling were used . . Better switches have more choices than 2 condition and because of this capacity, they In Networking there is a long history for switches. At first time the direct connection network and each device like router , switch , hub , firewall , proxy , cash server, modem are As you know the switch refers to the device that can select one condition from 2 or more conditions .For example an electrical switch can select 0 as turn off and select 1 for turn on between to or more computer used to make a network and such technology like 10base2, In those technologies , the base topology was BUS Technology and the most advanced of more devices for sending and receiving data , and when a device wants to send data for figure below we can see a logical view to a hub and the meaning of bus . II. 2. CONCEPTS OF SWITCHING this technology is HUB. A bus or data bus refers to the one link(shared link) between 2 or another device ,this bus should be empty and none of devices should not use the bus . In INTERNSHIP REPORT FIGURE 1: SWITCH II. 3. SOME CONFIGURATION OF SWITCHING Command switch>? switch>enable switch# switch#disable switch>exit switch#show version switch#show flash: switch#show mac-addresstable switch#show running-config switch# show startup-config switch#show vlan switch#show interfaces switch#show interface vlan1 descriptions The ? works here the same as in a router Used to get the list of all available commands User mode, same as a router Privileged mode Leaves privileged mode Leaves user mode Displays information about software and hardware. Displays information about flash memory (will work only for the 2900/2950 series).Displays the current MAC address forwarding table . Displays the current configuration in DRAM. Displays the current configuration in NVRAM. Displays the current VLAN configuration. Displays the interface configuration and status of line: up/up, up/down, admin down. Displays setting of virtual interface VLAN 1, the default VLAN on the switch. INTERNSHIP REPORT 9 II. II. 1. OVERVIEW OF ROUTING is the process of selecting paths in a network along which to send network traffic. Routing is performed for many kinds of networks, including the telephone network (circuit switching technology.R outers switching), electronic data networks (such as the Internet), and transportation networks. This article is concerned primarily with routing in electronic data networks using packet II. II. 2. CONCEPTS OF ROUTING Whereas switches and bridges operate at OSI Layer 2 (the data link layer), routers primarily operate at OSI Layer 3 (the network layer). Like bridging, make the forwarding decisions. Routers make decisions based on network layer protocols such as Internet Protocol (IP) and Novell NetWare Internetwork Packet Exchange (IPX). growing beyond the capability of bridges. Before this popularity, networ he primary act of routing involves moving packets across a network from a source to a destination. The difference involves the information that is used to Routing gained popularity in the mid- to late 1980s as a result of internetworks Figure 2: Image of Router II. II. 3. SOME CONFIGURATION OF ROUTING modes, and the resulting prompts. The prompt helps you identify which mode you are in and, therefore, which commands are available to you: Mode of Operation Usage Mode How to Enter the Prompt The following table describes some of the most commonly used modes, how to enter the INTERNSHIP REPORT 10User EXEC Change terminal settings on a temporary basis, perform basic tests, and list system information. First level accessed. Router> Privileged EXEC Global Config System administration, set operating parameters. Modify configuration that affect the system as a whole. Modify the operation of an interface. Create the initial configuration. From user EXEC mode, enter enable password command Interface Config Setup From privileged EXEC, enter configure terminal. From global mode, enter interface type number. Router# Router(config)# Router(config-if)# Prompted dialog From privileged EXEC mode, enter command setup. User EXEC Mode:When you are connected to the router, you are started in user EXEC mode. The user EXEC commands are a subset of the privileged EXEC commands. P rivileged EXEC Mode: Privileged commands include the following: †¢ Configure – Changes the software configuration. Enter the command disable to exit from the privileged EXEC mode and return to user EXEC mode. †¢ Debug – Display process and hardware event messages. †¢ Setup – Enter configuration information at the prompts. INTERNSHIP REPORT 11 Configuration Mode Configuration mode has a set of submodes that you use for modifying interface settings, routing protocol settings, line settings, and so forth.Use caution with configuration mode because all changes you enter take effect immediately. Note: To enter configuration mode, enter the command configure terminal and exit by pressing Ctrl-Z. Almost every configuration command also has a no form. In general, use the no form to disable a feature or function. Use the command without the keyword no to re-enable a disabled feature or to enable a feature that is disabled by default. For example, IP routin g is enabled by default. To disable IP routing, enter the no ip routing command and enter ip routing to re-enable it.INTERNSHIP REPORT 12 Getting Help In any command mode, you can get a list of available commands by entering a question mark (? ). To obtain a list of commands that begin with a particular character sequence, type in those characters followed immediately by the question mark (? ). Router#co? configure connect copy Router>? To list keywords or arguments, enter a question mark in place of a keyword or argument. Include a space before the question mark. Router#configure ? memory Configure from NV memory network Configure from a TFTP network host terminal Configure from the terminalYou can also abbreviate commands and keywords by entering just enough characters to make the command unique from other commands. For example, you can abbreviate the show command to sh. INTERNSHIP REPORT 13 Configuration Files Any time you make changes to the router configuration, you must save t he changes to memory because if you do not they will be lost if there is a system reload or power outage. There are two types of configuration files: the running (current operating) configuration and the startup configuration. Use the following privileged mode commands to work with configuration files. show running-config – display the running configuration. †¢ show startup-config – display the startup configuration. †¢ configure terminal – modify the running configuration manually from the terminal. †¢ copy running-config startup-config – copy the running configuration to the startup configuration. †¢ copy startup-config running-config – copy the startup configuration to the running configuration. †¢ erase startup-config – erase the startup-configuration in NVRAM. †¢ copy tftp running-config – load a configuration file stored on a Trivial File Transfer Protocol (TFTP) server into the running configuratio n. copy running-config tftp – store the running configuration on a TFTP server. INTERNSHIP REPORT 14 IP Address Configuration Take the following steps to configure the IP address of an interface. Step 1: Enter privileged EXEC mode: Router>enable password Router#config terminal Example: Example, Step 2: Enter the configure terminal command to enter global configuration mode. Step 3: Enter the interface type slot/port (for Cisco 7000 series) or interface type port (for Cisco 2500 series) to enter the interface configuration mode. Step 4: Enter the IP address and subnet mask of the interface using the ip address ipaddress subnetmask command.Step 5: Exit the configuration mode by pressing Ctrl-Z Router(config-if)#[Ctrl-Z Router (config-if)#ip address 192. 168. 10. 1 255. 255. 255. 0 Router (config)#interface ethernet 0/1 II. III. NETWORK LAYER II. III. 1. OVERVIEW OF NETWORK LAYER INTERNSHIP REPORT II. III. 2. CISCO HIERARCHIAL LAYER 15 Hierarchy has many of the same benefits in network design that it does in other areas of life. When used properly, it makes networks more predictable. It helps us define at which levels of hierarchy we should perform certain functions.Likewise, you can use tools such as access lists at certain levels in hierarchical networks and avoid them at others. large networks can be extremely complicated, with multiple protocols, detailed configurations, and diverse technologies. Hierarchy helps us summarize a complex collection of details into an understandable model. Then, as specific configurations are needed, the model dictates the appropriate manner to apply them. The Cisco hierarchical model can help you design, implement, and maintain a scalable, reliable, cost-effective hierarchical internetwork.The following are the three layers: ? ? ? FIGURE 3 : CISCONHIERARCHIAL Each layer has specific responsibilities. However, that the three layers are logical and are not necessarily physical devices. Consider the OSI model, another logica l hierarchy. The seven layers describe functions but not necessarily protocols. Now, let's take a closer look at each of the layers. II. III. 3. CORE LAYER the core layer is responsible for transporting large amounts of data quickly The Core layer or Backbone The Distribution layer The Access layer and reliably.The designer must ensure that the core layer is designed with fault tolerance, especially because all users in the network can be affected by a failure. The ability to avoid unnecessary delays INTERNSHIP REPORT in network traffic quickly becomes a top priority for the network designer. What Happens at the Core Layer? 16 The core layer is sometimes called the network backbone. Routers and switches at the core layer provide high-speed connectivity. In an enterprise LAN, the core layer, shown in Figure 1-7, may connect multiple buildings or multiple sites, and may provide connectivity to the server farm.Goals of the Core Layer The core layer design enables the efficient, high-sp eed transfer of data between one section of the network and another. The primary design goals at the core layer are as follows: – Provide 100% uptime. -Maximize throughput. -Facilitate network growth. Core Layer Technologies Technologies used at the core layer include the following: – Routers or multilayer switches that combine routing and switching in the same device -Redundancy and load balancing – High-speed and aggregate links II. III. 4. DISTRIBUTION LAYERThe distribution layer is sometimes referred to as the workgroup layer and is the major communication point between the access layer and the core. The primary function of the distribution layer is to provide routing, filtering, and WAN access and to determine how packets can access the core, if needed. The distribution layer must determine the fastest way that network service requests are handled; for example, how a file request is forwarded to a server. After the distribution layer determines the best pat h, it forwards the request to the core layer. The core layer then quickly transports the request to the correct service.II. III. 5. ACCESS LAYER The access layer controls user and workgroup access to internetwork resources. The access layer is sometimes referred to as the desktop layer. The network resources most users need will be available locally. The distribution layer handles any traffic for remote services. INTERNSHIP REPORT The following are some of the functions to be included at the access layer: ? ? ? 17 Technologies such as DDR and Ethernet switching are frequently seen in the access layer. Static routing is seen here as well. As already noted, three separate levels does not imply three separate routers.It could be fewer, or it could be more. Remember, this is a layered approach. II. IV. NETWORK DESIGN CONCEPT My second part of my internship dealt with network design concept. In this I have been able to read different theories of network design from eBooks downloaded from the internet, doing exercises on subnetting, VLSM and VLANs and finally I had opportunity to do some practices on network documentation and laboratories on virtual LAN. II. IV. 1. THEORIES ON NETWORK DESIGN Designing a network for a better performance of data access and resource sharing of any institution is an extremely important thing to consider.I learned different concept of designing a network whether by reading eBooks or discussing it with my supervisor. A good network design is composed of four parts in general: Continued access control and policies Creation of separate collision domains Workgroup connectivity into the distribution layer through layer 2 switching Identification of customer’s needs and goals: In this part you deal with identifying business goals and technical requirements which include the task of characterizing the existing network, analysis of the network traffic. Logical network design: Here, it’s all about developing a network topology.Durin g this phase, you devise a network layer addressing model, and selects switching and routing protocols. It also includes security planning, network management design. Finally you make a study of the service provider on how he can meet your WAN and remote access requirements Physical network design: The physical design phase deals with specific technologies and products to realize the logical design. It starts with the selection of technologies and devices for campus networks that includes cabling, Ethernet switches, wireless access points, wireless bridges, and routers.There is also a selection of technologies and devices for remote-access and WAN needs. INTERNSHIP REPORT Testing, Optimizing and Documentation: The final step is to write and implement a test plan, build a prototype or pilot, optimize the network design, and document your work with a network design proposal. If your test results indicate any performance problems, then during this phase you have to update your design t o include such optimization features. 18 In all this different network design steps, I have been able to do some practices on logical network design where I did exercises on subnetting, VLAN as network management requires it.II. IV. 2. OVERVIEW VIRTUAL LOCAL AREA NETWORK (VLAN) Definition A VLAN (Virtual Local Network) is a logically separate IP subnetwork. VLANs allow multiple IP networks and subnets to exist on the same-switched network. A VLAN is a logical broadcast domain that can span multiple physical LAN segments. It allows an administrator to group together stations by logical function. A VLAN has three major functions: i. Limits the size of broadcast domains ii. Improves network performance ii. Provides a level of securitySecurity – Security of sensitive data are separated from the rest of the network, decreasing the chances of confidential information breaches. Advantages of VLAN: Higher performance – Division of Layer 2 networks into multiple logical workgro ups (broadcast domains) reduces unnecessary traffic on the network and boosts performance. Cost reduction – Cost savings result from less need for expensive network upgrades and more on this network. Types of VLAN There are different types of VLANs. The type of network traffic they carry defines a particular type of VLAN and others INTERNSHIP REPORT 9 names due to the type or a specific function the VLAN performs. The following describes common VLAN: Default VLAN At the initial boot up of the switch, All switch ports become a member of the default VLAN, which makes them all part of the same broadcast domain. This allows any network device connected to any of the switch port to communicate with other devices on other switch ports. On Cisco switches the default VLAN is VLAN 1. VLAN 1 has all the features of any VLAN, except that you cannot rename or delete it. Data VLAN A data VLAN that can also be referred to as user VLAN.This is configured to carry only usergenerated traffic. The importance of separating user data from other type of VLAN is proper switch management and control. Native VLAN A native VLAN is assigned to trunk port. An trunk port supports traffic coming from many VLANs as well as traffic that do not come from a VLAN. The trunk port places untagged traffic (traffic that does not come from a VLAN) on the native VLAN. In summary, the native VLAN observes and identifies traffic coming from each end of a trunk link. Management VLAN A management VLAN is any VLAN you configure to access the management capabilities of a switch.Your configured management VLAN is to be assign with an IP address and subnet mask. Any of a switch VLAN could be configured as the management VLAN if you has not configured or define a unique VLAN to serve as the management VLAN. In some cases, a network administrator proactively defines VLAN 1 as the management VLAN; this enables a loophole for an unauthorized connection to a switch. Voice VLAN Voice VLAN is configured to carry voice traffic. Voice VLANs are mostly given transmission priority over other types of network traffic. Communication over the network is not complete without phone calls.More calls are made over the network than other forms of a message transmission. Sending emails and text messages are also forms of inter-relations but listening to a real voice provides legitimacy and assurance. SOME EXAMPLE OF VLAN INTERNSHIP REPORT There I was design a network that are composed with 1 router ,2 switch ,6machine. 20 And each switch have 3 computer . one switch to three machine . on the network we have default vlan ,native vlan ,management vlan. Management vlan can control other machine on network. this network have the vlan and trunk . e have design it by using a outils that called packet tracer FIGURE 4: DESIGN OF A NETWORK Example of same machine i ping Machine ip 196. 168. 40. 105 are pinging a switch3 ip address 196. 168. 40. 106 INTERNSHIP REPORT 21 FIGURE 5 : Command Prompt INTERNSHIP REPORT 22 II. IV. 3. ROUTER PASSWORD RECOVERY 1. Connect the router to the PC using a console cable/port. 2. Open an emulation software (Hyper Terminal or Terra Term or Secure CRT, Putty) + setup (Com port and bits=9600, etc. ) 3. Switch on the router HOLDING DOWN CTRL + BREAK (keys) a. The router will boot and display the ROMMON prompt (Rommon;) 4.Type the CONFREG command to view current status 5. Change the configuration register (this is a hexadecimal number that tells the IOS where to fetch the configuration file. 0x142 bypasses the NVRAM contents, 0x2102 gets the configuration file from the NVRAM) a. Rommon;confreg 0x142 b. Reset (reboot i. e. power-cycle the router) The router will boot in normal but asking for a new configuration. 6. Router; (after saying NO to the configuration wizard) 7. Go to privilege mode (enable) and copy the startup-config to the running-config (Router#copy startup-config running-config).This will load the configuration with an unkown password back to RAM). 8. As you are already in privilege, the unkown password won’t prevent you from changing the configuration. You can now change the privilege password (LAB#config t ; LAB(config)#enable secret cisco). Also change the console and vty passwords. 9. Change the configuration register back to 0x2102 (LAB(config)# config-register 0x2102) then reload (in privilege mode). 10. Save your configuration. (LAB#copy running-config startup-config or write memory ~ wr) INTERNSHIP REPORT