Managerial ownership, board independence and firm performance

Abstract

PurposeThe extant literature reports mixed and inconclusive findings concerning the relationship between corporate governance mechanisms and firm performance. To provide incremental insight, this paper aims to investigate whether the bi-directional relationships among managerial ownership, board independence and firm performance are determined.Design/methodology/approachThis paper uses a data set consisting of 9,302 firm-year observations of Australian listed companies during 2005-2015 and a three-stage least squares simultaneous equation model to test the bi-directional relationships.FindingsThe results indicate that both managerial ownership and board independence inversely affect firm performance and vice versa. In addition, board independence is negatively correlated with managerial ownership and vice versa.Practical implicationsThe convergence-of-interests hypothesis can be achieved by manipulating managerial ownership through making contingent payments. Board independence, as a voluntary regime in Australia, can provide additional flexibility to corporate decision makers.Originality/valueThis study provides additional evidence by using the convergence-of-interests hypothesisvis-à-visthe entrenchment hypothesis to examine the relationship between managerial ownership and firm performance, and tests the association of board independence and firm performance using the explanation of agency theoryvis-à-visstewardship theory.