Ownership structure, independent directors and firm performance

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.