Our study builds on Himmelberg et al. (1999) who use panel data to show that managerial ownership is explained by key variables in the contracting environment. A large fraction of the cross-sectional variation in managerial ownership is explained by unobserved firm heterogeneity. Moreover, after controlling for both observed firm characteristics and firm fixed effects, changes in managerial ownership do not affect firm performance econometrically.
In literature, many other researchers have examined the relationship between variety of governance mechanisms and firm performance. The results, however, are mixed. Some examine only the impact of one governance mechanism on performance as Himmelberg et al. did, while others investigate the influence of several mechanisms together on performance. None of them covers a complete set of governance mechanisms. Below, we will briefly review some of previous studies on the governance-performance relationship.
(1) Board Composition
It is suggested that higher proportion of non-executive directors in the board helps to reduce the agency cost. Kee et al. (2003) and Hutchinson and Gul (2003) support this view by showing that that higher levels of non-executive directors on the board weaken the negative relationship between the firm’s investment opportunities and firm’s performance. However, de Jong et al. (2002), Coles et al. (2001), and Weir et al. (2002) dispute it by stating that there is no significant relationship between non-executive directors’ representation and performance. In contrast, in the U.K., Weir and Laing (2000) find a negative relationship between non-executive director representation and performance. In addition, Yermack (1996) present that small board has a higher market valuation.
Stronger support for the positive impact of non-executive directors comes from event study analysis. The studies by Rosenstei and Wyatt (1990 and 1997) and Shivdasani and Yermack (1999) show that the appointment of non-executive directors increases company value.
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