Ownership concentration, board characteristics and firm performance among Shariah-compliant companies

Abstract

This paper aims to enhance the understanding of the relationship between corporate governance mechanism and firm performance among Shariah-compliant firms using an integrated theoretical framework. This study is carried out on the top 200 Shariah-compliant firms listed on the Kuala Lumpur Stock Exchange from 2014 to 2017. Given the longitudinal nature of the data, the researchers employ generalized least squares and random effect with robust and clustering standard error models to estimate the impact of ownership structure, board independence, board competence, firms’ characteristics, and debt structure on firm performance as measured by the firm’s return on assets (ROA) and return on equity (ROE). The findings show that ownership concentration has a statistically positive effect on firm performance. Having an external Chair and independent board members with an educational level beyond a bachelor’s degree also have a positive effect on firm performance while CEO duality has a statistically negative impact instead. Insider representation has a positive impact on firm performance but when these inside board members are also the owners, the impact turns negative. Furthermore, the statistical significance of holding a bachelor’s degree, master’s degree, and other type of qualifications imply the need for board members to have greater knowledge in order to positively influence ROA and ROE. This is the first study to examine the influence of corporate governance mechanism on firm performance using a multi-theoretical approach in the context of Shariah-compliant firms. The interaction terms of elements in agency theory, stakeholder/resource-based theory, and stewardship theory are used as pre-conditions to the direct effect of these regressors on firm performance.