Abstract
The existing literature documents inconsistent results regarding the effect of managerial ownership on firms’ performance level. This study integrates insights from agency and resource dependency theories and model board independence to account for these indeterminate empirical results that prior research exhibited. Hence, this research aims at investigating the moderating effect of board independence on the relationship between managerial shareholding and financial performance of the Nigerian listed firms. The article analysed the balanced panel data of 71 listed companies covering the period from 2012-2018, by exploiting a generalised method of moments framework. The paper presents evidence of a strong negative relationship between managerial ownership and firm performance level. However, the direct effect of board independence on performance shows a positive but insignificant coefficient. More importantly, evidence from this study suggests that the magnitude and direction of the association between managerial ownership and firm performance depend on the levels of board independence. Thus, revealing that firms with a substantial number of independent directors on their boards are likely to neutralise the entrenchment behaviour that a higher managerial shareholding induces. Consequently, this research recommends that companies should constitute their boards with a considerable number of independent directors to enhance their bottom line.
Highlights
The existing literature extensively investigated the relationship between managerial ownership and firms’ financial performance (Cui & Mak, 2002; Haghighi & Safari Gerayli, 2020; Short & Keasey, 1999)
The paper analysed the balanced panel data of the sampled firms covering the period from 2012-2018 using the generalized method of moments estimator (GMM) estimation techniques
The article provided useful insights into the corporate governance literature as follows: First of all, the use of GMM has permitted us to appropriately control for endogeneity and reverse causality embedded in the relationship between managerial ownership and firms’ performance
Summary
The existing literature extensively investigated the relationship between managerial ownership and firms’ financial performance (Cui & Mak, 2002; Haghighi & Safari Gerayli, 2020; Short & Keasey, 1999). Prior studies suggest that managerial shareholding helps in aligning the divergence interests of managers and shareholders (Jensen & Meckling, 1976; Mustapha & Ahmad, 2011) According to this view, managerial ownership empowers managers to design policies aimed at maximising firms’ value. A stream of the literature contended that managerial ownership promotes information asymmetry, leads to earnings management practices and widens the shareholder-manager agency conflicts (Rashid, 2016; Shan, 2019). This inconsistent result that the prior studies documented pave the way for one to raise further research question on when does managerial ownership impacts significantly in improving firms’ financial performance level. A board of directors occupy the pinnacle position in ensuring the best corporate governance practices (Gillan, 2006; Jensen, 1993)
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