A STUDY OF THE RELATIONSHIP BETWEEN BOARD OWNERSHIP AND CORPORATE PERFORMANCE WITH A CONTROL OF SIZE EFFECT

Abstract

The separation of ownership and control in companies often leads to the conflict of interest between management and shareholders. This study will concentrate on the behaviour of directors in reducing the agency problems. The objective of this study is to establish the relationship between the board ownership and the market value of the firs, with a control of firm size effect. Two effects are examined to investigate the relationship stated and they are convergence-of-interest and entrenchment / wealth-transfer effects. Three indicators are used to measure the performance and the risk of the firm and they are: (i) Modified Tobin's Q ratio (ii) Beta of the firm's stock and (iii) Excess returns of the firm's stock These indicators are regressed against the board ownership and other control variables using Simple Multiple Regression analysis. The results show that the relationship between the board ownership and the market value of the firm is non-linear. This could be due to the convergence-of-interest and the entrenchment / wealth transfer effects, depending on the dominant effect of the two. The results also show that the relationship between the board ownership and the market value of the firm does not depend on the size of the firm.