Management ownership and firm performance: Evidence from an emerging economy

Abstract

Due to the separation of ownership and control in modern corporation, the form of relationship between firm performance and insider ownership has been the subject of empirical investigation for last many decades. It is argued, that as managers’ equity ownership increases, their interests coincide more closely with those of outside shareholders, and hence, the conflicts between managers and shareholders are likely to be resolved. Thus, management’s equity ownership helps resolve the agency problem and improve the firm’s performance (Jensen and Meckling, 1976; Agrawal and Knoeber, 1996; Chen et al., 2003). However, several studies suggest that management’s ownership does not always have a positive effect on corporate performance (Demsetz and Villalonga, 2000; Cheung and Wei, 2006). Most of the empirical studies on this issue have focused on the developed economies and there is little empirical evidence on the emerging economies in general and almost no work has been done on emerging economy of Pakistan in particular. Therefore, present study is an effort to analyze the relationship between insider ownership and firm performance in emerging market of Pakistan while taking a sample of 100 firms listed on Karachi Stock Exchange. In spite of entirely different characteristics of data, it has been observed that there is strong positive relationship between insider ownership and firm performance in Pakistan and the results of cross-sectional regression are consistent with theory of “convergence of interest” of relationship between insider ownership and firm performance. Although these results did not conform with the theory “ownership entrenchment” that have proved true in many developed economies yet the empirical results have provided the Pakistani corporate sector positive indications to solve the agency problem through stock options for their employees.