Governance Mechanisms and Firm Value: The Impact of Ownership Concentration and Dividends

Abstract

ABSTRACTManuscript Type: EmpiricalResearch Question/Issue: This study examines whether ownership concentration affects board and audit committee independence, and whether the impact of board and audit committee independence on firm value is moderated by ownership concentration and dividend payouts.Research Findings/Insights: Using panel data on a sample of Australian publicly listed firms over the period 2000–2005 (1,530 firm‐year observations), the study finds that ownership concentration has a negative impact on board independence, but no impact on audit committee independence. Results also suggest that board independence enhances firm value and that performance impact of board independence is stronger in closely‐held firms and/or firms having low dividend payouts. A marginally positive impact of audit committee independence, especially among closely‐held firms, is also found.Theoretical/Academic Implications: This study suggests that the impact of governance mechanisms is moderated by companies' ownership structure and dividend policies. It extends research on the effectiveness of governance mechanisms by distinguishing two types of agency problems and using a simultaneous equations model. The findings underline the important governance role that independent boards and audit committee can play in a country that has high ownership concentration and high levels of private benefits of control.Practitioner/Policy Implications: The results of this study strengthen the idea that independent directors can also play a key role in the governance of closely‐held firms. As such, for investors, as far as agency costs are concerned, investments in closely‐held firms that have a higher proportion of independent directors on the board and audit committee are sensible. Closely‐held firms should be aware of the investor's need for more independent directors, especially when dividends are low.