Ownership Structure, independent directors and firm performance

Basiru Salisu KALLAMU


Abstract. The paper examined the moderating role of independent directors in the relationship between ownership structure and firm performance. Using a sample of 37 finance companies listed on the main market of Bursa Malaysia from 2007 to 2011, the result indicates a significant positive moderating effect of independent directors in the relationship between director ownership and ROA but a negative relationship based on Tobin’s Q.  The result means that in a company where directors have controlling shares, having independent directors on the board will enhance performance since there will be alignment of interest of board and shareholders. On the other hand, the independent directors influence firm performance negatively in firms with majority ownership by directors since the directors who are the majority shareholders will promote their interest over the interest of the shareholders. The study has provided evidence on the moderating role of independent directors in the relationship between ownership structure and firm performance. This suggests that independent directors influence the strength and direction of the relationship between ownership structure and firm performance.

Keywords. Ownership structure, board of directors, independent directors, firm performance, moderating variable.

JEL. E62, H54, O40.

Full Text:


Abdul Kadir, A. (1999). The corporate governance trends in Malaysia: February 1999 Finance committee report on corporate governance. Suruhanjaya Sekuriti Commission.

Adnan, M.A., Htay, S.N.N., Ab-Rashid, H.M., & Meera, A.K.M. (2011). A panel Data analysis on the relationship between corporate governance and bank efficiency, Journal of Accounting, Finance and Economics, 1(1), 1-15.

Aguilera, R. V., Desender, K. A., & De Castro, L. R. K (2011). A configurational approach to comparative corporate governance. Sage Handbook of Corporate Governence, New York. doi. 10.2139/ssrn.1797142

Al Mamun, A., Yasser, Q.R.,& Rahman, M.A. (2013). A discussion of the suitability of onlyone vs more than one theory for depicting corporate governance. Modern Economy, 4(1), 37-48. doi. 10.4236/me.2013.41005

Al-Saidi, M., & Al-Shammari, B. (2013). Board composition and bank performance in Kuwait: an empirical study. Managerial Auditing Journal, 28(6); 472-494. doi. 10.1108/02686901311329883

Arellano, M., & Bond, R. (1991). Some test of specification for panel data: Monte Carlo Evidence and an application to employment equations. Review of Economic Studies, 58, 277-297. doi. 10.2307/2297968

Arun, T. G., & Turner, J. D. (2004). Corporate governance of banks in developing economies: Concepts and Issues. Corporate governance, 12(3), 371-377.

Atik, J. (2009). Basel II and extreme risk analysis. Available at http://www.asil.org/files/atik.pdf accessed on 13/03/2012.

Bazdresch, S., & Werner, A.M. (2000). Contagion of international financial crisis: the case ofMexico. Available at http://siteresources.worldbank.org/INTMACRO/Resources/BazdreschWerner.pdf. Accessed on 23/04/2012.

Bozec, R., & Dia, M. (2005). Board structure and firm technical efficiency: Evidence from Canadian state-owned enterprises. European Journal of Operational Research, 177(3), 1734-1750. doi. 10.1016/j.ejor.2005.10.001

Brennan, N.M., & Solomon, J. (2008). Corporate governance, accountability and mechanisms of accountability: an overview. Accounting, Auditing and Accountability Journal, 21(7), 885-906. doi. 10.1108/09513570810907401

Brown, P., Beekes, W., & Verhoeven, P. (2011). Corporate governance, accounting and finance: A review. Journal of Accounting and Finance, 5(1), 96-172. doi. 10.1111/j.1467-629X.2010.00385.x

Cadbury report (1992). Report of the committee on the financial aspects of corporate governance, London.

Carcello, J.V., Hermanson, D.R., & Ye, Z.S. (2011). Corporate governance research ininsights, practice implications, and future research directions. Auditing: A Journal of Practice and Theory, 30(3), 1-31.

Das, A., & Ghosh, S. (2006). Financial deregulation and efficiency: An empirical analysis of Indian banks during the post reform period. Review of Financial Economics, 15(3), 193-221. doi. 10.1016/j.rfe.2005.06.002

Dermine, J. (2011). Bank Corporate governance, beyond the global banking crisis. doi. 10.2139/ssrn.1781976

Donaldson, L., & Davis, J. H. (1991). Stewardship theory or Agency theory: CEO Governance Shareholder Returns. Australian Journal of Management, 16(1), 49-65. doi. 10.1177/031289629101600103

Donaldson, L. (1990). The ethereal hand: organizational economics and management theory. Academy of Management Review, 15(3), 369-381.

Gani, L., & Jermias, J. (2006). Investigating the effect of board independence on performance across different strategies. The International Journal of Accounting, 41(3), 295-314. doi. 10.1016/j.intacc.2006.07.009

Ghazali, N.A.M. (2010). Ownership structure, corporate governance and corporateperformance in Malaysia. International Journal of Commerce and Management, 20(2), 109-119. doi. 10.1108/10569211011057245

Haat, M. H. C., Abdul Rahman, R., & Mahenthiran, S. (2008). Corporate governance, transparency and performance of Malaysian companies. Managerial Auditing Journal, 23(8), 744-778. doi. 10.1108/02686900810899518

Haniffa, R.,& Hudaib, M. (2006). Corporate governance structure and performance of Malaysian Listed companies, Journal of Business Finance and Accounting, 33(7-8), 1034-1062. doi. 10.1111/j.1468-5957.2006.00594.x

Hsu, W-H. L., Wang, G. Y., & Hsu, Y-P. (2012). Testing mediator and moderator effects of Independent director on firm performance. International Journal of Mathematical Models and Methods in Applied Sciences, 5(5), 698-705.

Htay, S. N. N., Ab Rashid, H. M., Adnan, M. A., & Meera, A. K. M. (2011). Corporate governance and risk management information disclosure in Malaysian listed banks: panel data analysis. International Review of Business Research Papers, 7(4), 159-176.

Hutchinson, M., & Gul, F. A. (2004). Investment opportunity set, corporate governance practices and firm performance. Journal of Corporate Finance, 10, 595−614.

Jensen, M.C.,& Meckling, W.H. (1976). Theory of firm: managerial behavior, agency costsand ownership structure. Journal of Financial Economics, 3(4), 305-360. doi. 10.1016/0304-405X(76)90026-X

Kim, P.K., & Rasiah, D. (2010). Relationship between corporate governance and bank performance in Malaysia during the pre and post Asian financial crisis. European Journal of Economics, Finance and Administrative Sciences, 21, 39-63.

Kings report (2002). Report of King committee on corporate governance. Executive Summary of the King Report.

Kline, R. B. (1998). Principles and practice of structural equation modeling. New York, Guilford Press.

Leuz, C.,& Wysocki, P. (2008). Economic consequences of financial reporting and disclosure regulation: A review and suggestions for future research. doi. 10.2139/ssrn.1105398

Malaysian code on corporate governance (2007). Available at http://www.sc.com.my/eng/html/cg/cg2007.pdf accessed 23/07/2011.

Mokhtar, S. M., Sori, Z. M., Abdul Hamid, M. A., Zainal Abidin, Z., Nasir, A. M., Yaacob, A. S., Mustafa, H., Daud., Z. M., & Muhamad, S. (2009). Corporate governance practices and firms performance: The Malaysian case. Journal of Money, Investment and Banking, 11, 45-59.

Ntim, C. G. (2009). Internal corporate governance structures and firm financial performance: evidence from South African listed companies. Unpublished PhD Thesis, University of Glasgow.

Pallant, J. (2005). Spss survival manual: A step by step guide to data analysis using Spss (2nd ed.). Australia: Allen & Unwin.

Pathon, S. (2009). Strong boards, CEO power and bank risk-taking. Journal of Banking andFinance, 33(7), 1340-1350. doi. 10.1016/j.jbankfin.2009.02.001

Pearce, J. A., & Zahra, S. A. (1991). The relative power of CEOs and board of directors: association with corporate performance. Strategic Management Journal, 12(2), 135-153.

Pfeffer, J.,& Salancik, G.R. (1978). The external control of organizations: A resource dependency perspective. New York: Harper and Row.

Ponnu, C. H. (2008). Corporate governance structures and performance of Malaysian public listed companies. International Review of Business Research, 4(2), 217-230.

Praptiningsih, M. (2009). Corporate governance and performance of banking firms: evidence from Indonesia, Thailand, Philippines, and Malaysia. Jurnal Manajemen dan Kewirausahaan, 11(1), 94-108.

Rebeiz, K. & Salameh, Z. (2006). Relationship between governance structure and financial performance in construction. ASCE Journal of Management in Engineering, 22(1), 20-26.

Saleh, M., Zulkifli, N. & Muhamad, R. (2010). Corporate social responsibility disclosure and its relation on institutional ownership: Evidence from public listed companies in Malaysia. Managerial Auditing Journal, 25(6), 591-613.

Shan, Y. G. & Mclver, R. P. (2011). Corporate governance mechanisms and financial performance in China: Panel data evidence on listed non-financial companies. Asia Pacific Business Review, 17(3), 301-324.

Tao, N.B. & Hutchinson, M. (2013). Corporate governance and risk management committee: The role of risk management and compensation committees. Journal of Contemporary Accounting and Economics, 9, 83–99. doi. 10.1016/j.jcae.2013.03.003

Thillainathan, R. (1999). Corporate governance and restructuring in Malaysia: A review of markets, agents and legal infrastructure’, Joint World bank/OECD Paper Available at http://www.oecd.org/dataoecd/7/24/1931380.pdf. Accessed 22/01/2012.

Turlea, E., Mocanu, M. & Radu, C. (2010). Corporate governance in the banking industry Accounting and Management Information Systems, 9(3), 379-402.

Vishny, A. & Shleifer, R. W. (1987). Management buyout as a response to market pressure. In J. Auerbach (Ed), Mergers and acquisitions, (pp.) University of Chicago.

Westman, H. (2009). Corporate governance in European banks: Essays on bank ownership. (Unpublished PhD Thesis) Hanken School of economics, Helsinki, Finland.

Zahra, S. A. & Pearce, J. A. (1990). Determinants of board directors’ strategic involvement. European Management Journal, 8(2), 164-173.

Zahra, S.A.,& Pearce, J.A. (1989). Boards of directors and corporate financial performance: A review and integrative model. Journal of Management, 15(2), 291-334. doi. 10.1177/014920638901500208

Zulkafli, A. & Abdul Samad, F. (2007). Corporate governance and performance of banking firms: Evidence from Asian emerging markets. In M. Hirschey, K. John & A. K. Makhija (Eds.), Issues in Corporate Governance and Finance, Advances in Financial Economics, Vol. 12, (pp. 49-74) Emerald Group Publishing Limited.

DOI: http://dx.doi.org/10.1453/jsas.v3i1.625


  • There are currently no refbacks.

....................................................................................................................................................................................................................................................................................................................................... Journal of Social and Administrative Sciences - J. Adm. Soc. Sci. - JSAS - www.kspjournals.org

ISSN: 2149-0406

Editor: editor-jsas@kspjournals.org   Secretarial: secretarial@kspjournals.org   Istanbul - Turkey.

Copyright © KSP Library