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The Effect of Board Composition and Direct Incentives on Firm Performance
Abstract
This paper examines the relationship between top management compensation and corporate performance in public utilities. Previous researchers have argued that incentives for profitability are not needed in public utilities, since regulation provides assured profits. Earlier empirical work supports this claim. We reexamine this issue and provide several methodological improvements over prior studies. Our findings are consistent with the hypothesis that compensation packages for senior managers in public utilities are constructed to provide them with incentives to maximize stockholders' wealth.
... The bankyear observations in the sample are for all public and private listed banks on the National Stock Exchange in India. The variables for this study are constructed from the existing works in the literature (Hermalin & Weisbach, 1991;Yermack, 1996;Fernandez & Weinberg, 1997;Vafeas, 1999;Bhagat & Black, 2002;DeZoort et al., 2002;Anderson, 2004;Adams & Mehran, 2005;Caprio et al., 2007;Andres, 2008;Andres & Vallelado, 2008;Adams & Ferreira, 2008;Tarchouna et al., 2017;Ciftci et al., 2019). ...
... It is computed as the sum of market capitalisation and book value of debt over total assets. Previous studies (Adams & Mehran, 2005;Andres & Vallelado, 2008;Bhagat & Black, 2002;Caprio et al., 2007;Fernandez & Weinberg, 1997;Hermalin & Weisbach, 1991;Yermack, 1996) have used TBQ. ...
... This finding indicates that a high proportion of independent directors may not increase bank performance. A negative relationship between PERIND and bank performance has been reported by several researchers (Beasley, 1996;Fosberg, 1989;Grace et al., 1995;Hermalin & Weisbach, 1991;Molz, 1988;Vafeas, 2000) (see Figure 4). These empirical findings support our hypothesis that board meetings play a vital role that is more proactive than reactive. ...
The purpose of this study is to examine the effect of corporate governance mechanisms on bank performance in general and the effect of board-constituted committees on bank performance in particular. Primarily, two questions are addressed in the context of the banking sector of India. First, does corporate governance mechanisms reduce the quantum of non-performing assets (NPAs)? Second, does the internal committee affect bank performance? Hence, this paper determines whether independent directors strengthen corporate boards and whether committees affect bank performance. The panel data ordinary least square regression analysis is used for this study. We also use logistic regression models for various committees to find their relationship with bank performance and NPAs. Tobin’s Q is used as proxy for bank performance. Independent variables are board size (BSIZE), proportion of independent directors on the board (PERIND), number of board meetings per year (BMEET), size of the audit committee (AUC), and two measures of the bank business (asset size and loan), and one control variable is time. We use financial and corporate governance data from 2005 to 2018, the study finds that independent directors play a major role on the board. It finds a positive and significant relationship between board independence and bank performance. The performance also increases with the increase in board size but after a point, the curve declines forming and an inverted U-shaped curve is formed. The mandatory internal committees have a crucial role to play, which is demonstrated by their effect on the reduction of NPAs. The significance of a well-functioning board and internal committees in discharging their fiduciary duties is highlighted in this study. An internal committee comprising a majority of independent directors is found to positively affect the performance of banks. They can help managers disburse good-quality loans and keep a check on risk-laden ventures.
... Board skills include essential competencies for directors to effectively manage and steer organizations, mirroring strategic needs and challenges (Hermalin & Weisbach, 1991). These skills encompass financial acumen for overseeing fiscal health (Hermalin & Weisbach, 1991), industry knowledge for grasping market dynamics (Johnson et al., 1996), strategic thinking for long-term planning (Zahra & Pearce, 1989), leadership for decision-making (Finkelstein & Mooney, 2003), risk management in complex environments (Tihanyi et al., 2014), legal compliance to uphold ethical standards, embracing diversity for broader perspectives (Adams & Ferreira, 2009), and technological insight for fostering innovation (Huse, 2007). ...
... Board skills include essential competencies for directors to effectively manage and steer organizations, mirroring strategic needs and challenges (Hermalin & Weisbach, 1991). These skills encompass financial acumen for overseeing fiscal health (Hermalin & Weisbach, 1991), industry knowledge for grasping market dynamics (Johnson et al., 1996), strategic thinking for long-term planning (Zahra & Pearce, 1989), leadership for decision-making (Finkelstein & Mooney, 2003), risk management in complex environments (Tihanyi et al., 2014), legal compliance to uphold ethical standards, embracing diversity for broader perspectives (Adams & Ferreira, 2009), and technological insight for fostering innovation (Huse, 2007). These skills are fundamental to effective governance, strategy, and organizational success. ...
This study examined the impact of slack financial resources, board characteristics (such as gender diversity, tenure, and skill/expertise), and energy efficiency policies on firms' consumption of renewable energy. Using a dataset of 17,753 observations from 2002 to 2019, we primarily utilized fixed-effects regression, among other methods, for robustness analysis. We find that while slack financial resources, board gender diversity, and energy efficiency policies are positively associated with more renewable energy consumption, board skill is negatively associated with it. Interaction effects showed that firms with more female and tenured directors effectively utilize slack financial resources for increased renewable energy consumption , unlike firms with more expert directors. Energy efficiency policies enhanced the positive impact of female directors on renewable energy consumption but mitigated the influence of expert directors, weakening their association. K E Y W O R D S board attributes, energy efficiency policy, renewable energy, slack financial resources
... Further, De Andres et al. observation in 2005(cited in O'Connell & Crammer 2010 asserts no statistical relationship. In the US context, Hermalin and Weisbach (1991) theorize no relationship as well. Thus, there are ambiguous results about the relationship between board composition and firm performance. ...
... It is an indication regarding a higher number of non-executive directors make a positive impact on firm performance. However, the observation of Hermalin andWeisbach in 1991 (cited in O' Connell andCrammer, 2010) states that there is no association between board composition and firm performance in the US context. Board size (BRDSZE) is positively impacted on ROE (p<0.05) ...
The purpose of this study is to examine the relationship between selected board characteristics and firm performance on listed companies on the Colombo Stock Exchange (CSE) in Sri Lanka. The study is performed on 41 non-financial and financial year’s ended on 31st March listed companies of CSE according to the highest market capitalization as of 20th January 2020. Descriptive statistics, correlation analysis and multivariate regression analysis are used to analyze the relationship between selected board characteristics and firm performance. As per the findings of this study, board composition is positively associated with Return on Asset (ROA) and Return on Equity (ROE). However, the gender diversity of the board shows a negative relationship between ROA and ROE. Other selected board characteristics of this study (Board size, CEO duality, frequency of board meetings, directors’ shareholding, presence of nomination committee) demonstrate ambiguous results with ROA and ROE. The findings of the study are supportive for policymakers, especially the top-level management, and decision-makers in respect of obtaining strategic decisions about the firm to establish an effective board and evaluate the effectiveness of the board inside the firm. Moreover, it will be useful for regulators to strengthen prevailing governance mechanisms attributed to the board of directors (BOD). Additionally, the finding will contribute to narrowing the existing indefinite results regarding the relationship between board characteristics and firm performance.
... In the context of REITs, these agency issues can become particularly pronounced due to the nature of real estate investments, which often involve large, illiquid assets and long-term financing (Brick and Chidambaran, 2010). As a result, the capital structure decisions of REITs could be heavily influenced by managerial incentives, possibly leading to suboptimal levels of financial leverage (Hermalin and Weisbach, 1991). ...
... H3: Agency Cost Theory: The level of financial leverage in REITs is influenced by agency conflicts, and these conflicts may hurt equity returns (Jensen and Meckling, 1976;Hermalin and Weisbach, 1991). ...
Real Estate Investment Trusts (REITs) utilize significant financial leverage, with a typical REIT employing around 40 percent of debt financing. For non-taxable entities like REITs, the absence of tax benefits raises questions about the optimal level of financial leverage. This study explores the effects of leverage on shareholder returns in REITs and provides empirical evidence supporting the trade-off theory of capital structure. Our findings indicate that some REITs may have reached their optimal level of financial leverage, beyond which the marginal benefit diminishes. Additionally, the study reveals that high leverage can create agency conflicts between managers and shareholders, leading to a market penalty on REITs with excessive financial leverage. Importantly, we also find that the impact of financial leverage on REIT performance varies depending on the economic context, showing divergent trends pre- and post-financial crisis and during the COVID-19 pandemic recovery phase. The implications of these findings are critical for understanding REITs’ governance and financial management.
... This result is also significant but contradictory to hypothesis (H2), suggesting that we should accept the alternative hypothesis that a greater proportion of nonexecutive directors might lead to a lower return on equity. This result also resonates with findings in previous studies (Azeez, 2015;Guo & Kga, 2012;Hermalin & Weisbach, 1991;Mura, 2007). The coefficient of ESGS reveals a positive relationship, with a one-unit increase in ESG score associated with a 0.1187-unit increase in ROEQ (p<0.01) in both tables. ...
This study delves into the intricate relationship between corporate governance factors, including board size and the proportion of non-executive directors, and firm performance, with a specialized focus on environmental, social, and governance (ESG) considerations. Employing a secondary data analysis methodology, the research draws insights from a comprehensive dataset comprising 100 companies listed on the Pakistan Stock Exchange over a period spanning from 2018 to 2022. The study investigates these relationships using rigorous regression analysis to uncover significant findings. The analysis reveals a robust positive correlation between larger board sizes and firm performance, indicating that companies with expanded boards tend to exhibit improved financial performance within the Pakistani market landscape. Conversely, a higher proportion of non-executive directors is associated with decreased performance, highlighting potential challenges stemming from board composition. Furthermore, the research unveils the pivotal role of ESG practices in augmenting the positive relationship between board size and firm performance. However, it notes that this enhancement weakens as the proportion of non-executive director’s increases, suggesting a nuanced interplay between corporate governance structures and ESG considerations. Practically, the study underscores the critical importance of fostering diverse and well-structured boards while integrating ESG principles into corporate governance frameworks. By carefully considering board composition and embracing ESG practices, organizations can not only enhance their financial performance but also promote sustainability and long-term value creation, aligning with evolving stakeholder expectations and regulatory requirements in the Pakistani business landscape.
... In Indonesia, the independent commissioner's variable does not affect Tobins Q. The insignificant results of research on Indonesian TBQ are supported by (Hermalin & Weisbach, 1991). According to Nguyen et al. (2014), independent commissioners in the company are merely a formality to follow the code of ethics, and the quality of independent commissioners provides no value to the company. ...
Good corporate governance is critical in reducing conflict between agencies in the workplace. Corporate governance is crucial in developing nations with lax law enforcement. The impact of governance on corporate performance is investigated in this article. This study uses quantitative data from manufacturing companies registered on the Indonesian and Philippine stock exchanges. This study relied on 655 observations from Indonesia and 220 from the Philippines. Corporate governance is measured using independent commissioners, the number of board members, shareholder ownership, and the use of Big Four auditors. This study discovered that independent commissioners, the board size, and block-holders ownership significantly affected the return on assets. Tobin's Q analysis revealed that only Board Size had a significant effect. Unlike Indonesia, the results of this study in the Philippines showed that independent commissioners and block holder ownership significantly impacted the return on assets. On the other hand, this study using Tobin’s Q showed that all independent variables, such as independent commissioners, the board size, block-holders ownership, and big four accounting firms, had a significant effect. The practical implication of the study's findings is that management monitoring by independent commissioners and all commissioners is beneficial in avoiding managers' acts that harm the organization. On the one hand, the number of commissioners sends an excellent signal to the market. Block holder ownership and the usage of big four accounting firms can also strengthen monitoring, improving corporate performance. Companies should have a high proportion of independent commissioners, a modest board size, and use big four accounting firms. Companies can increase their performance and investor trust by applying the above governance components.
... So, shareholders and managers' agency problem shall be reduced (Fama & Jensen, 1983). In addition, independent directors enjoy fair advantage when representing the interests of minority shareholders, as they are the only ones who can hear their voices in the boardroom (Hermalin & Weisbach, 1991). ...
The corporate governance lays the groundwork for the sustainability of business operations and ethical behaviour in the global market environment. This piece reviews the significance of corporate governance and ethics as the backbone of responsible business practices through the prism of the alignment of governance standards amongst different jurisdictions. Through the examination of this paper, the challenges and opportunities associated with the achievement of harmonization are highlighted. This shows the importance of a framework that brings transparency, accountability, and trust to the global business environment. There are alternative ways of achieving harmonization such as comparison studies, international initiatives, and voluntary implementation of corporate governance codes. The article reiterates the centrality of consistent cooperation and collaboration among governments, regulators, and businesses towards the furtherance of corporate governance harmonization and a more informed, ethical, and sustainable global business environment.
... Conversely, extended service periods may also increase the possibility of groupthink and stagnant viewpoints, potentially resulting in suboptimal decision-making. Previous research has shown that directors' effectiveness improves with their length of service on the board (Hermalin & Weisbach, 1991). Furthermore, Alodat et al., (2023) found a favourable link between the duration of the period an AC chair serves and the company's performance. ...
This research examined the effect of audit committee attributes on the performance of Nigerian-listed firms.
... 2014). Traditionally, research has focused on the proportion of insiders on boards (Agrawal & Knoeber, 1996), the tenure of directors and managers (Hermalin & Weisbach, 1991), the stock ownership of board members (Weisbach, 1988), and board size (Kini et al., 1995), and the type of reward system used (Rose, 2007). However, in recent years, studies such as Campbell & Mínguez-Vera (2008), Mensi-Klarbach, 2014;& Ntim, (2015) have initiated to discover whether board diversity improves board competence and subsequently firm market value and financial performance. ...
The purpose of this paper is to provide empirical evidence on the relationship of board diversity of corporate board with the value of financial institutions in Nepal. The sample comprises 38 financial institutions listed in NEPSE with 380 firm-years observation for the period 2011/12 to 2020/21. Balance panel datasets were employed to investigate using multiple regression models to examine the relationship between board diversity (female and minority directors) and firm value measured by Tobin's Q and MBR. The result shows a significant positive relationship between firm value and the presence of both female and minority directors. Moreover, the evidence supports that the presence of female directors in the boardroom effect more in the firm market value than as compare to the minority directors. Furthermore, the study concludes that control variables like board size, presence of independent director and firm size have positive significant effect on firm value, but leverage has significant but negative relation with the firm market value of financial intuitions in Nepal. The study result has the practical implication for government, policy makers and regulating authorities in formation of diverse board that can increase the firm value and performance. It also provides additional insight to the corporate governance literature and helps to fill the gap on board diversity and firm value in Nepalese financial institutions.
... Regarding the diversity of board features, empirical literature provides mixed findings on the relationship between board size and governance. One group of researchers expected a positive correlation with corporate governance (Zahra & Pearce, 1989;Grayson & Nelson, 2017), while another group showed a negative correlation (Zoran, 2016;Hermalin & Weisbach, 1991). Meanwhile, nonlinear or altered "U"-shaped relationships have been proposed. ...
This study aimed to analyze the ownership structures and corporate governance. Good corporate governance helps companies become more efficient, improve access to finance, reduce risk, and avoid substandard governance (Kontogeorga et al., 2022; Mustafa & Morina, 2022; Prasad et al., 2022; Lapina et al., 2016; Raja & Kostyuk, 2015). The study has followed a qualitative research paradigm and systematic review protocol, specifically the PRISMA technique, and included 65 papers published in journals with impact factors during the timeline of 2010–2022, focusing on Europe, the Middle East, Asia, and the US by taking topics like time, article type, regions, topics, theory breakdown for ownership structure, theory breakdown for corporate governance, and research methods. It was found that most of the papers were published in 2022. The majority of the articles were empirical, and most were published in Europe. The mainstream papers were related to corporate governance. The theory used in the breakdown of ownership structure was the firm theory, while for corporate governance, the theory was the agency theory, and most of the articles utilized the analysis method. The study recommended that, despite significant research in this area, further research is still needed, especially in developed countries. Most research work is experimental and, and therefore, requires a substantial amount of conceptual work.
... Pearce and Zahra (1991) find that the proportion of independent directors is significantly and positively correlated with corporate R&D investment, but Xiao's (2016) study shows no correlation between the two, He and Chen (2009) even conclude a negative correlation. In this regard, some studies have argued that the lack of independence is the key reason why the current system of independent directors in China has failed to play a substantial role in corporate governance (Ye et al., 2011), while others have fundamentally questioned whether independent directors are "rubber stamp" and "vase director" (Hermalin & Weisbach, 1991). ...
Purpose
Independent directors are important corporate decision participants and makers. Based on the Chinese cultural background, this paper interprets the listing order of independent directors as independent directors’ status, exploring their influence on the corporate research and development (R&D) behavior.
Design/methodology/approach
This paper studies A-share listed firms in China from 2008 to 2018 as the sample. The main method is ordinary least square (OLS) regression. We also use other methods to deal with endogenous problems, such as the firm fixed effect method, change model method, two-stage instrumental variable method, and Heckman two-stage method.
Findings
(1) Higher independent directors’ status attribute to more effective exertion of supervision and consultation function, and positively enhance the corporate R&D investment. The increase of the independent director’ status by one standard deviation will increase the R&D investment by 4.6%. (2) The above effect is more influential in firms with stronger traditional culture atmosphere, higher information opacity and higher performance volatility. (3) High-status independent directors promote R&D investment by improving the scientificity of R&D evaluation and reducing information asymmetry. (4) The enhancing effect of independent director’ status on R&D investment is positively associated with the firm’s patent output and market value.
Originality/value
This paper contributes to understanding the relationship between the independent directors’ status and their duty execution from an embedded cultural background perspective. The findings of the study enlighten the improvement of corporate governance efficiency and the healthy development of the capital market.
... On the other hand, most of their studies argue that independent boards do not have a significant impact on improving company performance (Baysinger & Butler, 1985;Dalton et al., 1999;Hermalin & Weisbach, 1991;Rechner & Dalton, 1991). They have several reasons, including outside directors still have limited in-depth business information in the company compared to inside directors. ...
The agent is granted decision-making authority over the company’s operations to achieve the principal’s objectives (Jensen & Meckling, 1976). However, the existence of the COVID-19 pandemic makes companies get higher risks that have an impact on company performance. The board consisting of board size, board independence, women on board, and chief executive officer (CEO) try to maintain the company’s performance during COVID-19. The purpose of this study is to analyze the role of corporate governance which consists of board size, board independence, women on board, and CEO duality on company performance during the COVID-19 period. The sample of this study is 538 companies listed on the Indonesia Stock Exchange (IDX). The results of this study indicate that COVID-19 has had an impact on decreasing the company’s performance. Then, we also found that board size has a significant positive effect on company performance during the COVID-19 pandemic, while board independence, women on board, and CEO duality do not have a significant effect. Then, we interacted with COVID-19 on the company’s performance. The results of our research showed that board size, women on board, and CEO duality have a significant positive effect on company performance. These results have implications that corporate governance has a very important role in boosting the performance of companies that are under pressure due to the COVID-19 pandemic.
... Naturally, insiders who also own shares in a company are better able to entrench their position. Morck et al. (1988) find that director ownership increases company value at lower levels, while Hermalin and Weisbach (1991) find that the CEO's ownership stake has the same effect. I expect an insider's ownership stake will boost the insider's power in the director selection process. ...
Is the low percentage of women on boards due to discrimination? Discrimination has a time dimension; it is repeated period after period and is thus highly persistent. This persistence is tested with data from Norway before quota regulations were instituted in 2003. The data consist of an unbalanced panel sample of all non-financial listed companies from 1989 to 2002. Persistence implies a serial correlation close to one. The main finding is low persistence, implying no discrimination in the sample period. The lack of significant estimates for managerial power supports the persistence result. The main result is also robust to varying the definition of female representation.
... Further Harris and Raviv (1991) found leverage brings a higher level of agency cost while Fama (1980) explained that debt serves to reduce the agency cost of firms. Some studies have supported the view that the presence of non-executive directors on the boards reduces agency costs (Hermalin & Weisbach, 1991;Byrd & Hickman, 1992), while other studies however find agency costs to increase with the presence of outside directors (Agrawal & Knoeber, 1996). Therefore, it is better to understand the relationship between corporate governance and agency cost. ...
Corporate governance deals with determining ways to make effective strategic decisions and develop added value to the stakeholders. This study aims to examine the influence of corporate governance practices on agency cost of listed firms in Sri Lanka. Secondary data covering seven year period from 2013 to 2019 was obtained from manufacturing firms listed in Colombo Stock Exchange (CSE). The study applies the governance practices such as board size, board independence, board meetings, and director ownership as a tool in monitoring agency costs based on asset utilization ratio as proxy for agency costs. The techniques of Pearson's Correlation and Multiple regressions were employed in estimating the association between the corporate governance practices and agency cost. The empirical findings reveal that board independent directors statistically significant influence the agency cost of listed manufacturing firms in Sri Lanka whereas board size, board meetings and managerial ownership are not found to have a significant impact on agency cost. Therefore, there is strong evidence that board independent directors have a major effect as a device in mitigating agency costs. The results will support stakeholders, including corporate management, regulators, and investors to improve corporate governance mechanisms and make effective decisions.
... In their review of corporate governance literature, Weisbach (1988), Hermalin and Weisbach (1991) and Sanda, Garba and Mika'ilu (2011) posit that the first element of board characteristics is its composition. They are also of the view that it is one of the means designed to mitigate the agency problem and thus enhance firm performance. ...
The capacity of non-executive directors to monitor the behaviours of managers and protect and promote the interests of investors and other stakeholders has been questioned by the dozens of financial and economic crises cum failures of firms that were leaders in their own industries. In a bid to address this concern, this study empirically examined the impact of the most prominent corporate governance mechanism (board composition) on firm performance (return on equity, net profit margin and Tobin's Q) in Nigeria. The effects of institutional factors such as board size, debt and size on firm performance were also investigated. The study employed Generalised Least Squares (GLS) regression analysis comprising fixed and random effects estimators on a panel sample of 95 firms listed on the Nigerian Stock Exchange (NSE) for the period 2004 through 2016. The most commonly used technique of Hausman specification test was conducted on the random estimator to determine the most optimal model. Although, the study did not provide any empirical evidence to support the hypothesis that outside directors significantly influence ROE and Q, it suggests that they play prominent role in determining return on shareholders' equity. The results also indicate that whilst board size impacts positively on Q, Debt influences ROE negatively, firm size plays positive role on NPM and a negative one on Q. Accordingly, the study recommends the need for Nigerian listed firms to strive to maintain the appointment of non-executive directors at the minimum.
... One of such mechanisms designed to help reduce the agency problem is by monitoring the activities of corporate managers and directors through formation of efficient board of directors (Donaldson & Davis, 1991). Weisbach (1988) and Hermalin and Weisbach (1991) contended that board composition and board size are also some of the means designed to help mitigate the agency problem. ...
The need for good corporate governance derives from expectation gap when the behaviours and goals of managers and other employees fall short of those of their principals and other stakeholders. In view of this, several theories and models have been put forward to explain the relationship among the parties and how their conflicting views, goals, behaviours and actions should be aligned to achieve the ultimate goal of the owners of the firm-value maximisation. This study provides elaborate perceptions into the most prominent theories and models that underpin studies relating governance mechanisms and corporate performance. Thus, academic researchers as well as students can, depending on their research objectives, use, build up or develop their theoretical underpinning(s) from these thorough frameworks.
... Previous research on the impact of board composition and size on organizational performance has produced mixed results. For example, Bhagat and Black (1999) found that board composition affects firm performance somewhat, while Hermalin and Weisbach (1991) found no relationship between board composition and firm performance. The study by Andres et al. (2005) of four hundred and fifty non-financial companies in ten Western European and North American countries found an insignificant relationship between board composition and company value. ...
Board structure is considered one of the most important determinants of board effectiveness. This study examines the personal motives of individuals seeking board membership in Publicly-Owned Enterprises (POEs). Using the sequential mixed methods approach, thirteen in-depth interviews were conducted with current and former board members, and one hundred and thirty-seven (137) questionnaires were administered to key representatives and beneficiaries of POEs. The results indicate several factors that motivate board membership. We find that intrinsic motives, which we refer to as ‘personal benefits,’ and extrinsic motives, which we refer to as ‘social recognition,’ are the most important factors for joining POE board membership. The findings could be helpful in redesigning strategies and policies for appointing professional board members whose primary incentives for board membership are related to POE development rather than personal benefits and self-recognition.
... This study provides further evidence of the advantages associated with diverse boards. Contrastingly, Hermalin and Weisbach (1991) reach the conclusion in their work that the composition of a board of directors does not significantly influence financial performance, challenging the notion of a direct relationship between board composition and financial outcomes. Another study conducted by Jo and Harjoto (2011) suggests a relatively weaker impact of governance indicators in enhancing firm value, indicating that the connection between governance practices and financial performance may not always be straightforward. ...
Using a unique sample of 13,412 firm-year observations from 19 countries of the emerging economies for the period of 2011 to 2019, we investigate the association between the firms’ environmental, social, and governance (ESG) performance and their value creation in the product market. Specifically, we first used the pooled OLS regression model for panel data as our baseline model and found that ESG performance (as well as its pillars) has a strong positive effect on the future value creation of the firms in the product market. We also conducted some additional analyses using various regression models, as well as adopting multiple tests for endogeneity, and the additional analyses revealed that the results are robust under different scenarios. Overall, the findings of this study highlight the importance of firm-level ESG performance for the value creation of firms in the product market in emerging economies and have theoretical and practical implications for academic researchers, market participants, and government entities in studying, evaluating, and governing firms’ ESG performance and reporting.
... Whereas the studies by Baysinger and Butler (1985), Brickley and James (1987), Weisbach (1988), Forsberg (1989), Rosenstein and Wyatt (1990), Byrd and Hickman (1992), Brickley, Coles and Terry (1994), Mehran (1995), Cotter, Shivdasani and Zenner (1997), Pinteris (2002), Kyereboah-Coleman and Biekpe (2005), Abubakar, Garba, Sokoto and Maishanu (2014), Kudal & Dawar (2020), Goel, Dhiman, Rana & Srivastava (2021), among several others found significant positive relationships, Agrawal and Knoeber (1996), ] Weir and Laing (2001), Maxwell and Kehinde (2012), Shukeri, Shin and Shaari (2012), Al-Saidi and Al-Shammari (2013), Moscu (2013), Garba and Abubakar (2014), Shaba (2016) and Shaba, Ahmad and Abubakar (2018) found that the more outsiders on corporate boards, the worse the performance. Other scholars such as Hermalin and Weisbach (1991), Yermack (1996), Bhagat and Black (1999, 2002, Metrick and Ishii (2002), Brown and Caylor (2004), Kajola (2008), Sanda et al. (2010), Hassan (2010), Thuraisingam (2013) and Velnampy (2013) did not find sufficient empirical evidence to prove that board composition influences performance of the firm. ...
Corporate governance codes are largely created as response to corporate failures. Fundamentally, policy makers, market analysts, academics and industry players posit that governance codes can reduce the age-long principal-agent problems that trigger substantial cases of exploration of investors, free-riding, moral hazards, inter alia. However, the Global Financial Crisis (GFC) of 2007/08 and other corporate fiascos question the efficacy of governance-performance mechanisms. Thus, a renewed effort at studying the empirical connection between these mechanisms and firm performance as well as evolve new strategies that will further strengthen them has become more critical. This study is an effort in this direction. It adopted a Generalized Method of Moment (GMM) approach based on a system of simultaneous equations on annual data of 93 Nigerian listed firms spanning 2007 through 2021. Against the agency theory hypothesis that higher proportion of outside directors' help mitigate agency related problems, this study provides sufficient reasons to argue that it is detrimental to corporate Nigeria when Tobin's Q is used as a proxy for firm performance. In tandem with earlier studies, the findings also provide evidence to prove that firms with larger boards with sufficient gender and foreign diversities, outperform their peers in the overall, during and after the GFC. The study therefore recommends the need for firms to opt for largest board size possible consisting of higher female and foreign directors as this will, to a larger extent, enable firms draw from a range of expertise that will help make informed decisions; reduce agency related problems and thus maximize the wellbeing of shareholders and other stakeholders.
... Following previous studies (e.g. Guest 2008;Hermalin and Weisbach 1991;Linck et al. 2008), the models are re-run by treating board diversity and profitability of firm as endogenous variables while treating their lagged values as instruments. Because the dependent variable is the fractional variable, the study uses the fractional instrumental variable probit (Fracivp) recommended by Williams (2018) to estimate the models. ...
This study examines the relationship between board diversity and corporate governance compliance in the firms listed in stock exchanges of the selected Sub-Saharan Africa countries. This study uses data collected manually from the annual reports of the publicly listed non-financial firms from eleven Sub-Saharan Africa countries. The dependent variable of this study is corporate governance compliance index which is measured by the level of compliance with corporate governance practices. To obtain the index, the study constructed an unweighted corporate governance index based on various dimensions of good corporate governance practices existing in the literature and recommended by different corporate governance codes. The independent variable of this study is board diversity which is proxied by nationality and gender of the board members and represented by foreign directors and female directors in the boards, respectively. The data are analysed using descriptive statistics and multivariate regression methods. More specifically, the Fractional Probit Regression method is utilised to analyse a 5-year unbalanced panel data set of 531 firm‐year observations to examine the effect of board diversity on corporate governance compliance. The findings indicate that both the percentage and inclusion of foreign directors on the boards improve corporate governance compliance. However, a relatively high percentage of foreign directors on the boards may be detrimental to corporate governance compliance. Moreover, the findings indicate that the percentage of female directors on the board is positive but not significantly related to corporate governance compliance. Similarly, the inclusion of female directors on the board has a positive but marginal significant relationship with corporate governance compliance only if the analysis model includes foreign directors as a control variable. These findings are especially useful for policy on the composition of the boards in Sub-Saharan Africa countries and other developing countries, mainly because the results suggest that foreign directors can help firms to enhance corporate governance compliance. However, there is a critical threshold of the number of foreign directors to include on the board, beyond which any additional increase of foreign directors may negatively affect corporate governance compliance. The findings emphasise the importance of board diversity, that is, an effective board should comprise foreign and domestic directors in a certain optimal proportion.
... Therefore, instead of relying on pooled regressions, we estimated the parameters of our model using fixed and random effects models to control for unobserved omitted variables. Furthermore, we recognize the endogeneity problem often noted in previous research that the ownership variables may introduce (see, for example, Hermalin and Weisbach, 1991;Himmelberg et al., 1999;Weir et al., 2002;Coles et al., 2012, among others). This problem arises because of the simultaneity between ownership variables and agency cost measures, which renders the estimates of the static model inconsistent and biased. ...
Purpose
This study investigated the impact of corporate ownership structure on agency costs in the insurance industry.
Design/methodology/approach
The study sample included 23 insurance companies listed on the Amman Stock Exchange (ASE) from 2010 to 2019. Panel regression was used to account for the firm- and time-specific unobservable variables and system-GMM estimation was used to address endogeneity concerns.
Findings
The results show that managerial ownership positively (negatively) affects selling, general and administrative (SG&A) expenses (assets turnover), implying that unmonitored managers engage in activities that serve their own interests rather than those of shareholders. The largest shareholder's ownership has no impact on agency costs, implying that the ownership of the largest shareholder is irrelevant. However, as the wedge between the percentage of capital owned by the largest shareholders and managers increases, SG&A expenses (efficiency ratio) decrease (increases), indicating that the existence of large non-management shareholders reduces agency costs. After accounting for the endogeneity problem, the impact of ownership structure on agency costs measured by asset turnover remains robust.
Originality/value
To the best of the authors' knowledge, this study is the first to provide unique evidence and useful insights into the determinants of agency costs from a frontier market in the Middle East and North Africa (MENA), with a focus on the insurance sector. Additionally, this study uses a new measure of separation between ownership and control by calculating the wedge between managers' and large shareholders' ownership.
... It is also possible that insider CEOs have accumulated an ownership stake in their firms and, during a crisis period, firm-specific human capital and longer tenure, along with individuals' knowledge of the firm, become more valuable for the firm's survival. The positive impact of extended tenure on firm performance has also been documented in the existing literature (Hermalin & Weisbach, 1991;Vafeas & Theodorou, 1998). More recently, report for a sample S&P1500 firms that insider CEOs are more likely to issue accurate voluntary earnings forecasts, and investors react more strongly to forecasts issued by such CEOs. ...
This study uses agency theory as a framework to examine how board size, compensation committee, and CEO duality align the relationship between CEO compensation and firm sustainability performance. We examined 100 non-financial Asian companies with highest sustainability scores between 2010 and 2019. The findings support the pay-performance relationship proposed by agency theory by demonstrating a positive association between CEO compensation and firm sustainability performance. Our study claimed that, the compensation committee has a major impact on how closely CEO compensation is correlated with company sustainability performance, but board size has no discernible impact. This alignment is negatively impacted by CEO duality since improved performance offers a more realistic picture of the company. Furthermore, CEO compensation is significantly impacted by firm size which is justified by the complexity and the increased responsibilities associated with managing larger firms. Conclusively this investigation suggest that CEO compensation can be utilized effectively in the presence of effective governance practices. This study advances knowledge of agency theory and the connection between sustainability performance and compensation.
Saudi Arabian firms are evolving from government or family-run businesses to larger corporations due to foreign investments. However, the role of a chief executive officer (CEO) is retained by family members. This study investigates the factors responsible for CEO turnover in Saudi Arabia in relationship to firm performance and compares them against those in other countries. This study is the first to look at CEO turnover in the Saudi context. Using panel data from 169 Saudi firms listed between 2007 and 2014, average marginal effects from a binary probit model, and differences-in-differences analysis, the effects of the following independent variables were assessed: CEO age, retirement age, tenure, pay, shareholdings, duality, board size and composition, firm ownership, and firm performance, with CEO turnover as the binary dependent variable. Results indicated that CEO turnover negatively relates to firm performance, irrespective of whether the dismissal is voluntary or forced, reaffirming a negative turnover—performance sensitivity. Further, CEOs with less than 5% shareholding face a greater likelihood of dismissal by the board, whereas larger shareholders are more entrenched. CEOs in government-owned firms show higher performance-related turnover, while those in family or foreign firms show no such relationship.
ABSTRACT
This study investigates the impact of board competency and ownership
structure on firm performance, using data from 80 (800 firms-year) non-financial
firms listed in Muscat Securities Market of Oman between 2003 and 2012. Oman
business environment is surrounded by issues like incompetent board members, poor
internal controls, ownership concentration and several incidences of fraud that lead
to corporate failures. Furthermore, since the issuance of corporate governance code
in 2002, there has not been any rigorous study that evaluates the impact of code
adoption on firm perormance. In this study, board competency has been assessed
using two approaches, a composite-index approach and an individual variable
approach where the impact of each of the components of the index on firm
performance is examined. This study uses seven performance metrics covering firm
profitability, firm short-term liquidity, firm market value and firm risk of failure.
Descriptive statistics reveal that since the issuance of corporate governance code in
2003, the board competency has been enhanced. The multivariate regression results
of board competency index (BCI) confirm the hypothesis that there is a positive and
significant relationship between BCI and firm performance. Findings of the
individual variable model reveal several novel results; firms with board comprises of
8 to 10 directors is more profitable, they enjoy better short-term liquidity and are in a
secure zone from corporate failure. Findings also indicate a negative and significant
impact of directors' absence and having more than 4 multiple directorships
concurrently on firm performance. This study also discovers that firms having 33%
or more independent members perform better. With regard to ownership structure,
the study shows that institutional investors have a positive impact on firm
profitability and firm‘s short term liquidity, whereas firms with government
ownership display more resilience to corporate failure. Surprisingly, firms that
receive more soft government funds are found to be less profitable and more
susceptible to corporate failure. The outcomes of various tests for robustness and
sensitivity propose that empirical results are vigorous. This study has important
implications to corporations in strengthening their corporate govenance and attaining
cost reduction by eliminating unnecessary corporate governance mechanisms. Policy
makers and regulators can use these findings to issue regulations that may have a
positive impact on firm‘s performance. Results gained also provide more avenues for
further research.
Board interlocks are formed between two company boards when these companies share at least one common director, resulting in a reciprocal relationship from which both partners expect to benefit. Such conditions imply that directors in these interlocks will be less likely to provide strict monitoring oversight (Beckman, Haunschild, Phillips, 2004). This case examines the ethical and governance issues arising from board interlocks. The analysis examines further how board interlocks are less likely to provide strict monitoring functions on firm operations and financial reporting. Participants noted that since board interlocks imply that companies co-share members on their boards in a reciprocal relationship from which both partners expect to benefit, such conditions lead to less rigorous monitoring oversight. Participants also noted that board interlocks may create openings for operational practices with adverse firm outcomes, such as ineffective internal controls over financial reporting.
The study of corporate governance and banking system stability in Nigeria became necessary as banks are failing, acquired and/or merged from time to time. The reason behind the failure or merger/acquisition may not be far from mismanagement and abuse of trust which lead to erosion of asset values of the banks involved as a result of non-performing loans. The study adopted ex post facto research design and used annual time series for the period ranging between 2001 and 2022. Growth rate of banks' total assets (GTA) was used as dependent variable and proxy for corporate governance while loans-to-deposit ratio (LDR), non-performing loan ratio (NPLR), loans loss provision (LLP) and liquidity ratio (LIQR) were used as bank stability variables. Results show that LDR and LIQR have positive relationship with corporate governance whereas LLP and NPLR exhibit negative relationship with corporate governance. It is recommended that Banks management should be transparent and ethical in all their dealings in order to attain increase in value and wealth maximization for the owners of the banks. Besides, banks should work in consonant with policies and directives of the regulators from time to time to enhance the health of the banks and continuous stakeholders' welfare.
O presente artigo objetiva verificar se o índice Governança Corporativa, até então utilizado em pesquisas no Brasil, apresentam classificação compatível com aquela apresentada na Bovespa, classificação esta compreendida semelhantemente como métrica de governança, bem como identificar suas relações com algumas variáveis de desempenho. A amostra inicial do estudo foi composta por 373 empresas classificadas pela Bovespa como Novo Mercado, Bovespa Nível 2, Bovespa Nível 1, Bovespa Mais, Bolsa ou Mercado Balcão. As proxies de Governança Corporativa foram retiradas de estudos quantitativos e qualitativos que apresentam suas características e construção teórica. Para atender aos objetivos da pesquisa utilizou-se de técnicas estatísticas paramétricas (regressão linear multivariada) e não paramétricas (teste U de Mann-Whitney e Kruskal-Wallis). Os resultados dos testes realizados evidenciaram diferenças na separação e classificação das empresas pelos índices governança corporativa com a classificação da Bovespa, bem como as relações de cada um deles com variáveis de desempenho consideradas dependentes. Conclui-se, a partir dos resultados da pesquisa, que a utilização de proxies de Governança Corporativa deve ser precedida de testes de validade destas variáveis e que, havendo disponibilidade de dados e informações, as análises devem ser realizadas utilizando-se diferentes proxies para confirmação dos resultados devido a possibilidade de diferenciação na classificação das empresas por essas proxies.
This study examines how short selling influences board composition following a tradition in the strategy literature emphasizing the role of the external environment on firms’ strategies. We predict that a short-selling-friendly environment has a negative effect on the number of outside directors, which is supported by our firm and year fixed effect difference-in-differences analysis. We find that the negative effect of a short-selling-friendly environment becomes stronger when outside directors have a larger network and are busy. Furthermore, we investigate the moderating effect of chief executive officer (CEO) influence on the board and find that the negative effect is more pronounced when the CEO serves as the board chair and when the nominating committee is more nonindependent. Our research identifies a novel determinant of board composition and addresses the endogeneity issue in board composition literature.
Funding: This work was supported by the Sogang University Research Grant of 202210048.01.
Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2022.16506 .
Objectives: The objective of this paper was to find the impact of cash management and corporate governance on firm performance with the moderating role of family ownership in Pakistani listed firms. Methods/Statistical analysis: This study is based on hypothesis testing. 317 firms are listed on a Pakistan stock exchange for the period of 2010-19 used for the data analysis. Findings: In our results, board independence has a positive and significant relationship with the firm performance. Board size has a negative and significant relationship with firm performance. Cash management has a positive and significant relationship with firm performance. Firm size has a positive and significant relationship with firm performance. Institutional ownership has a significant and positive relationship with firm performance. With the moderator of family ownership, the relationship between cash management and firm performance should be stronger as compared to simple regression with a large coefficient. With the addition of family ownership as a moderator, Cash management has a negative and significant relationship with firm performance.
In recent decades, corporate governance has become a central, interesting and controversial topic in most developing countries. Therefore, this study focused on establishing the effect of corporate governance on the performance of SME's in the hardware industry in Lusaka. This study sort to achieve the following objectives: Establish the impact of board independence on the profitability of small and medium-sized companies, to evaluate the effects of separation of powers between the shareholders and management on business performance and develop a framework which could be used in enhancing sustainability of corporate governance in the operations of SME'S in the long-term. This research was both qualitative and quantitative in nature. A cross sectional study design was used. A sample of 80 respondents was used in which 80 questionnaires were developed and administered with a return rate of 93%. The study used purposive sampling. The study found that 87% of the firms did not have a board in existence and firms which had a board in existence disagreed to the assertion that there was efficient use of resources when a board was present. It was also disagreed that firms profit margins and earnings were better off when a board was present to oversee the operations of the firm. Regarding the effect of separation of powers between the shareholders and management on business performance. It was found that (64/75) firms had shareholders who were also managing the business; therefore, there wasn't separation of powers between managers and shareholders. Regarding the effect of board independence and firm profitability, the results show that when the board was in office, the firm had a positive effect on stock returns. The results of this study show that (50/75) disagree and (10/75) strongly disagree. Lastly the last objective found that the corporate governance framework applied to any business has to be fit for purpose, which includes being appropriate for the size and maturity of the business .The study therefore concluded that a majority of SME's have not embraced the idea of corporate governance. Many firm owners have preferred to be their own decision makers as regards to the operations of their business. There is less confidence in engaging external clients in the affairs of their businesses. Based on the findings and engagements with the responses, the researcher suggests conducting a study on enhancing corporate governance in SME's.
Purpose – The purpose of this study is to examine the impact of board characteristics (board size, board
independence and duality) on the performance of takaful insurance providers with distinguishable muamalah
contracts (wakalah and hybrid) moderated by ownership concentration.
Design/methodology/approach – The sample consists of 30 takaful insurances. The authors divided it
into two subsamples: 18 insurance companies using wakalah contracts provided by Southeast Asia and 12
insurance companies using hybrid contracts provided by the Gulf Cooperation Council over the period
2010–2020. For data analysis, the authors used the partial least squares path modeling method.
Findings – The results show that the larger the board of directors and the higher the number of
independent directors, the greater the takaful performance in both the wakalah and hybrid subsamples.
Nondual functions improve the takaful performance in both the wakalah and hybrid subsamples. The results
also reveal that a highly concentrated ownership structure positively (negatively) moderates the relationship
between board size and takaful performance in the wakalah (hybrid) subsamples. Moreover, highly
concentrated ownership insignificantly (negatively) moderates the relationship between independent
directors and takaful’s performance in the hybrid (wakalah) subsample. Furthermore, a highly concentrated
ownership structure insignificantly (negatively) moderates the relationship between the nondual structure
and takaful performance in the wakalah (hybrid) subsample.
Originality/value – This study contributes to the understanding of the moderating role of a highly
concentrated ownership structure between the characteristics of the board of directors and the performance of
takaful insurance, which applies wakalah and hybrid contracts. In addition, this study contributes to takaful
insurance by determining the appropriate board characteristics that must be adopted to achieve oversight and
improve performance. Regulators should appreciate this contribution to the formulation of suitable
approaches for efficiently supervising takaful insurance activities.
Using Chinese listed firms from 2008 to 2018, we find that directors with foreign experience alleviate both overinvestment and underinvestment, hence improve firms’ investment efficiency. The source of efficiency lies in better governance, which arises from the transfer of values and cognition, and advanced management practices across countries as well as greater independence as these directors with foreign experience have fewer local ties. Better governance helps mitigate agency problems and information asymmetry and relax firms’ financial constraints. Supporting this argument, we find that directors with foreign experience are associated with lower controlling shareholders’ tunneling transactions and lower investment—cash flow sensitivity. We further find that the impact of directors’ foreign experience on investment efficiency is more pronounced at firms with weaker corporate governance, less transparent information environment, higher financial constraints, and when foreign experience is gained in countries with better investor protection, superior management practices, better rule of law, and less corruption. Our finding is robust to alternative variable measurements and tests for endogeneity. Overall, this paper highlights the important monitoring role of directors with foreign experience, which promotes firm investment efficiency through various governance channels.
The board diversity of directors is of concern to institutional investors in the Nigerian banking sector and also the regulatory authorities in the financial system. Pool of skill and experience derived from competencies and geographical diversity of the board members and audit committee members diversity enhance financial reporting quality of companies. This study examined how geographical diversity of board members and audit committee members diversity relates with the Financial Reporting Quality (FRQ) of Deposit Money Banks (DMB's) in Nigeria. Both geographical diversity of board members and audit committee members diversity is measured by their location against the head office of the DMB's. The result of this study revealed that geographical spread out of board members and audit committee members have significant positive effect on FRQ. However, this study is specifically conducted in Deposit Money Banks the result may differ non-significantly or significantly in other sectors. The study therefore recommended that being firm-specific result, DMB's should select board members and audit committee members whose location has proximity to the corporate headquarter of the selected DMB's to enhance monitoring activities and gathering firm-specific information to improve financial reporting quality of the banks.
Subject. The article addresses the features of agency relations, i.e. concentration, ownership structure and Board of Directors that act as non-financial factors affecting the performance of companies. Objectives. The study aims to substantiate and empirically establish linkages between the specifics of agency relations, as non-financial drivers, with company’s performance and responsibility, measured through ESG. Methods. The use of methods of econometric analysis and least-squares estimation determine the links and strength of the impact of non-financial factors on return, Tobin’s Q, debt-to-asset ratio, and ESG. Results. For Russian companies, the paper underpins and evaluates the impact of concentration on an increase in return on assets and equity, but a decrease in value. Government ownership decreases performance, but raises financing. The structure of the Board of Directors impacts an increase in ROA, ROE, and Tobin’s Q, and a decrease in debt-to-asset ratio. For some Russian, U.S., European and Japanese companies, the paper empirically proved a stimulating effect of the size and presence of women in the Board of Directors on ESG. Decomposition of ESG refines the results. The size of the Board of Directors to a greater extent improves Environmental for American, European companies, and independent directors – Environmental for Russian companies. The presence of women improves Governance for American and European firms, and Social – for Russian and Japanese companies. Conclusions. The findings enhance understanding of agency relations with company performance, value, and fund raising. Conclusions about ESG dependence on the Board of Directors structure and size are applied in the context of the Sustainable Development Goals.
Many of the largest Indian firms are characterized by promoter ownership, a hybrid form of ownership and governance in which the companies’ founders or their heirs hold controlling stakes, while inviting external minority shareholders to contribute capital, and outside managers to participate in the day-to-day administration of the companies concerned. We analyze a sample of 4056 publicly quoted firms with promoter ownership in India during 2007–2013. We find that in group-affiliated firms, the level of promoter ownership has no effect on performance of firms, as measured by Tobin’s q and return on assets (ROA). However, in stand-alone firms, the level of promoter ownership has a U-shaped relationship with Tobin’s q and no relationship with ROA. Moreover, group-affiliated firms show lower performance than stand-alone firms. This seems to be due to the development of the capital market in post-reform India which has greatly reduced the financing constraints for both group-affiliated and stand-alone firms.
This study empirically examines the effect of corporate governance on the relation between CEO power and firm leverage. Results from OLS and industry fixed effects regressions show that CEO power is positively associated with firm leverage. However, this association is driven by the strength of corporate governance as powerful CEOs tend to choose higher levels of debt only when corporate governance is strong. When corporate governance is weak, CEO power does not seem to have any effect on firm leverage. Overall, results indicate that strong corporate governance mitigates the severity of manager-shareholder conflicts and induces powerful CEOs to choose higher leverage.
Management plays a dominant role in selecting outside directors, inviting skepticism about outsiders' ability to make independent judgments on firm performance. Our examination of wealth effects surrounding outside director appointments finds significantly positive share-price reactions. We find no clear evidence that outside directors of any particular occupation are more or less valuable than others. The results are consistent with the hypothesis that outside directors are chosen in the interest of shareholders.
This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears these costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.Adam Smith, The Wealth of Nations, 1776, Cannan Edition(Modern Library, New York, 1937) p. 700.
We investigate the relation between Tobin's Q and the structure of equity ownership for a sample of 1,173 firms for 1976 and 1,093 firms for 1986. We find a significant curvilinear relation between Q and the fraction of common stock owned by corporate insiders. The curve slopes upward until insider ownership reaches approximately 40% to 50% and then slopes slightly downward. We also find a significant positive relation between Q and the fraction of shares owned by institutional investors. The results are consistent with the hypothesis that corporate value is a function of the structure of equity ownership.
This paper examines the relation between the monitoring of CEOs by inside and outside directors and CEO resignations. CEO resignations are predicted using stock returns and earnings changes as measures of prior performance. There is a stronger association between prior performance and the probability of a resignation for companies with outsider-dominated boards than for companies with insider-dominated boards. This result does not appear to be a function of ownership effects, size effects, or industry effects. Unexpected stock returns on days when resignations are announced are consistent with the view that directors increase firm value by removing bad management.
We investigate the relationship between management ownership and market valuation of the firm, as measured by Tobin's Q. In a 1980 cross-section of 371 Fortune 500 firms, we find evidence of a significant nonmonotonic relationship. Tobin's Q first increases, then declines, and finally rises slightly as ownership by the board of directors rises. For older firms, there is evidence that Q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder.
Economists have long been concerned with the incentive problems that arise when decision making in a firm is the province of managers who are not the firm's security holders. One outcome has been the development of “behavioral” and “managerial” theories of the firm which reject the classical model of an entrepreneur, or owner-manager, who single-mindedly operates the firm to maximize profits, in favor of theories that focus more on the motivations of a manager who controls but does not own and who has little resemblance to the classical “economic man.” Examples of this approach are Baumol (1959), Simon (1959), Cyert and March (1963), and Williamson (1964b). More recently the literature has moved toward theories that reject the classical model of the firm but assume classical forms of economic behavior on the part of agents within the firm. The firm is viewed as a set of contracts among factors of production, with each factor motivated by its self-interest. Because of its emphasis on the importance of rights in the organization established by contracts, this literature is characterized under the rubric “property rights.” Alchian and Demsetz (1972) and Jensen and Meckling (1976b) are the best examples. The antecedents of their work are in Coase (1937, 1960). The striking insight of Alchian and Demsetz (1972) and Jensen and Meckling (1976b) is in viewing the firm as a set of contracts among factors of production.
Provides a model that explains forms of business organizations in terms of ownership structure, on-the-job consumption preferences, and monitoring costs. The thesis of Berle and Means that the separation of ownership and control, or specialized ownership, which characterizes the modern corporation impairs the ability of the profit motive to encourage the most efficient use of resources is critiqued. The idealized owner-managed firm in economic theory operates as a profit-maximizing entity; nevertheless, this idealization rarely holds true for firms generally, even owner-managed ones. Real world businesses often permit on-the-job consumption by managers and employees. In competitive markets, this permitted consumption is traded for reduced monetary compensation. Because on-the-job consumption will take place only when off-the-job consumption would cost more, on-the-job consumption may not represent the dissipation of resources that critics of specialized ownership have contended. The problem of shirking is then taken up and it is shown that specialized ownership puts pressure on non-owner managers to reduce on-the-job consumption to levels even lower than in owner-managed firms. Value-maximizing ownership structure depends on ease of monitoring, desired scale of operations, and the managerial abilities of the potential firm owners. Finally, empirical data is presented against the alleged vacuum in control by owners and it is shown that due to management shareholdings, stock-based managerial income, and sizeable minority shareholdings in modern corporations, a strong linkage continues to exist between management and owner interests. (CAR)
The role of imperfect information in a principal-agent relationship subject to moral hazard is considered. A necessary and sufficient condition for imperfect information to improve on contracts based on the payoff alone is derived, and a characterization of the optimal use of such information is given.
This article studies arrangements concerning the payment of a fee by a principal to his agent. For such an arrangement, or fee schedule, to be Pareto optimal, it must implicitly serve to allocate the risk attaching to the outcome of the agent's activity in a satisfactory way and to create appropriate incentives for the agent in his activity. Pareto-optimal fee schedules are described in two cases: when the principal has knowledge only of the outcome of the agent's activity and when he has as well (possibly imperfect) information about the agent's activity. In each case, characteristics of Pareto-optimal fee schedules are related to the attitudes toward risk of the principal and of the agent.
This paper studies the association between a firm's stock returns and subsequent top management changes. Consistent with internal monitoring of management, there is an inverse relation between the probability of a management change and a firm's share performance. This relation can result from monitoring by the board, other top managers, or blockholders. However, unless share performance is extremely good or bad, logit models have no predictive ability. No average stock reaction is detected at announcement of a top management change.
This paper investigates the impact of international migration on technical efficiency, resource allocation and income from agricultural production of family farming in Albania. The results suggest that migration is used by rural households as a pathway out of agriculture: migration is negatively associated with both labour and non-labour input allocation in agriculture, while no significant differences can be detected in terms of farm technical efficiency or agricultural income. Whether the rapid demographic changes in rural areas triggered by massive migration, possibly combined with propitious land and rural development policies, will ultimately produce the conditions for a more viable, high-return agriculture attracting larger investments remains to be seen.