Proceedings of 9th Annual London Business Research Conference
4 - 5 August 2014, Imperial College, London, UK, ISBN: 978-1-922069-56-6
The Performance Effect of Insider Ownership: A Contingent
Perspective
Te-Kuang Chou
This study examined the empirical relationship between insider ownership and firm
performance in Taiwan, where the agency problem is typically the one of conflict interests
between inside owners (inside directors) and outside shareholders. Based on resource
dependency theory, the convergence-of-interests and the entrenchment hypotheses were
tested in four industrial settings defined along industry-complexity and firm-scale dimensions
via fixed effect panel regression models. The results showed that the convergence-of-interests
hypothesis prevailed in the low-industry-complexity and small-firm-scale setting, while the
entrenchment hypothesis got support in the high-industry-complexity and large-firm-scale
setting. Accordingly, this study inserted a new aspect in the related discussion, arguing that
the positive convergence-of-interests effect and the negative entrenchment effect may
co-exist in different industrial settings. This argument implies contextual-fitness must be taken
into account in searching for effective regulations of corporate governance.
Keywords: insider ownership, agency theory, performance, contingent perspective
1. Introduction
Since Berle and Means (1932) introduced the concern that the separation of ownership and
control could lead to agency problem, the ownership structure of firms has been debated in
the management and finance fields for decades. Insider ownership, one of the critical
dimensions of ownership structure, is among the focal points of this debate and a suggested
way to mitigate agency problem because that a higher insider ownership could help to align
managers’ interest with shareholders’ interest (Jensen and Meckling, 1976; Fama, 1980;
Jensen and Murphy, 1990; Jensen, 2000).
However, the relationship between insider ownership and firm performance was not so clear
in empirical studies. There are still competing theories, the convergence-of-interests
argument and the entrenchment argument, predicting the performance consequence of
insider ownership in opposite directions. More importantly, differences of social-legal context
and its profound impacts on ownership structure must be appropriately considered. As some
researchers correctly noted, the widely held firms described in Berle and Means’ work does
not reflect reality outside the United States and United Kingdom (Faccio and Lang, 2002; La
Porta, Lopez-de-Silanes, and Shleifer, 1999). Even the world’s largest listed companies
_______________________________________________________________________
Dr. Te-Kuang Chou, Department of Finance, Southern Taiwan University of Science and Technology, Tainan
City, Taiwan.
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Proceedings of 9th Annual London Business Research Conference
4 - 5 August 2014, Imperial College, London, UK, ISBN: 978-1-922069-56-6
generally
have a concentrated ownership structure (Claessens, Djankov, and Lang, 2000; Lins, 2003). In
European, Latin American and East Asian countries, founding partners and their families may still in control
of a company even after many years after IPO. They and their intimate followers not just run the business as
high-rank managers but also sit in the board room as directors (Bozec, Rousseau, and Laurin, 2008;
Roosenboom and Schramade, 2006). In this kind of context, the agency problem is subtly changed, from the
one of conflict interests between managers and shareholders to the one of conflict interests between inside
owners (inside directors) and outside shareholders.
This study investigated the relationship between insider ownership and firm performance in Taiwan, where
the above-mentioned context is typical. Based on resource dependence theory (RDT) in organizational theory
(Pfeffer and Salancik, 1978; Hillman, Withers, and Collins, 2009) and resource-based view (RBV) in strategic
management field (Leask and Parnell, 2005; Barney, 2001, 1991; Peteraf, 1993; Wernerfelt, 1984), this study
argued that the relationship in concern may varies among different industrial settings. Accordingly, the
convergence-of-interests argument and the entrenchment argument were tested in industrial settings defined
along industrial complexity and corporate scale dimensions, via fixed effect panel regression models. The
results showed that, the convergence-of-interests argument was supported in three of the four industrial
settings (low complexity-large scale, low complexity-small scale, and high complexity-small scale), while the
entrenchment argument got support in high complexity-large scale setting. Thus, this study inserted a new
aspect in the related discussion, arguing that the positive convergence-of-interests effect and the negative
entrenchment effect may co-exist in different industrial settings.
The remainder of this paper is organized as follows. Section 2 reviews the related literature and develops the
scope of this study. Section 3 describes the methodology, including data, research variables, and panel
regression models. Section 4 presents empirical results and discusses the findings. Section 5 concludes.
2. Literature Review
2.1. Insider ownership and firm performance
In their influential 1932 masterpiece, The Modern Corporation and Private Property, Berle and Means first
discussed the separation of ownership and control (Berle & Means, 1932). Since that time, numerous
theoretical and empirical studies have explored the consequences of ownership structure (e.g. Cullinan et al.,
2012; Taboada, 2011; Delios et al., 2008; Patro, 2008; McConnell et al., 2008; O’Regan et al., 2005; Donnelly
& Kelly, 2005). As an obvious characteristic of ownership structure, insider ownership has been repeatedly
investigated. Nevertheless, no commonly accepted theory regarding the effects of insider ownership has been
reached.
There are two competing hypotheses in relevant literature regarding the effects of insider ownership on firm
performance. The convergence-of-interests hypothesis argues that, an increasing insider ownership aligns
manager’s interests with outside shareholder’s, hence results in a positive effect on firm performance.
According to Jensen and Meckling (1976), managers are more likely to become self-constrained and avoid
consuming perquisites when they hold a higher stake in the firm, because they have to bear the costs of such
activities in proportion to their shareholdings. A higher shareholding of insider may resolve the asymmetric
information problem related to investment opportunities (DeAngelo and DeAngelo, 1985), reduce agency
costs of free cash flow (Jensen, 1986), and mitigate problems of managerial myopia (Palia and Lichtenberg,
1999). Wruck (1988) and Mehran (1995) also provided empirical evidences of positive relationship between
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Proceedings of 9th Annual London Business Research Conference
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insider managerial ownership and firm performance.
On the contrary, the entrenchment hypothesis suggests a negative effect of insider ownership on firm
performance, because higher insider managerial shareholdings will shelter insiders from the influence of
market for corporate control (Fama and Jensen, 1983). Insiders tend to secure their positions, build up a
business empire for their personal interests, and resist supervision (Jensen and Ruback, 1983). When insiders
possess a higher shareholding, which increases their discretion and strengthens their positions, they tend to
inflate their own power and damage internal supervisory rules to pursue their own interests (Morck et al.,
1988; Gugler et al., 2008).
In an attempt to synthesize the two rival arguments, a stream of articles suggested a non-linear relationship
between insider shareholding and firm performance. However, the empirical results are even more diversified
because of the inherent complexity of non-linear model (Chou, 2013). For example, Morck et al. (1988)
presented a N-shaped curve with two turning points to portray the relationship; Hermalin and Weisbach (1991)
depicted the relationship as a M-shaped curve with 3 turning points; Cui and Mak (2002) found a W-shaped
curve with 3 turning points; Davies et al. (2005) specified a fifth-degree function with two maximum turning
points and two minimum turning points; Selarka (2005) found a U-shaped curve with one turning point; Hung
and Chen (2009) obtained a V-shaped curve.
2.2. The effect of industrial settings
Although agency theory, which both of the above-mentioned competiting hypotheses roots on, is widely used
in the research on boards of directors and managers, the studies of resource dependence theory relate external
contex to boards of directors provides a promising perspective to synthesize the competing hypotheses.
Resource dependence theory characterizes the organization as an open system, dependent on contengencies in
its external environment (Pfeffer and Salancik, 1978; Hillman, Withers, and Collins, 2009 for a review).
Under the constrain of its resource conditions, organizations attempt to reduce environmental uncertainty by
increasing its control over vital resources (Ulrich and Barney, 1984). And bringing in resources is exactly the
organizational function served by boards, according to resource dependence theory.
“Resource” is a broad term, including all kind of tangible or intangible items useful for firms. However, the
resources constitute the competitive advantages of a firm are usually heterogeneous in nature, not perfectly
mobile, and not easy to acquire in the market (Wernerfelt, 1984; Barney, 1991; Peteraf, 1993; Crook et al.,
2008). Directors of board not only bring in capital (as a block shareholder) but also many intangibles. Pfeffer
and Salancik (1978) named four types of resource directors could bring in to benefit the firms: (a) information
in the form of advice and counsel, (b) access to channels of information between the firm and environmental
contigencies, (c) preferential access to resources, and (d) legitimacy. Obviously, all those items are
heterogeneous and not available in normal markets.
There has been a huge body of literatures on the relationship between board composition and external contex.
For example: Mizruchi and Stearns (1988, 1994) provieded empirical supports for the relationship between
the firm’s need for financial resources and representation of financial institutions on their boards. Kor and
Misangyi (2008) reported a negative relationship between top management’s and the board’s collective levels
of industry experience, implying the board supplements top management with critical knowledge and skills.
Jones et al (2008) reported that family firms pursuing diversification benefit from specific types of directors
over others. All those research articles suggested that directors with specific type of resources help the firms
facing their specific environmental contex.
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Proceedings of 9th Annual London Business Research Conference
4 - 5 August 2014, Imperial College, London, UK, ISBN: 978-1-922069-56-6
Some articles within this stream of research are particularly revelant to the current study: Pfeffer and Salancik
(1978) found that firms in regulated industries may need more outsiders, particularly those with relevant
experience. Provan (1980) found firms invite outside powerful members of the community join their boards
are more capable of acquiring critical resources from the environment. Luoma and Goodstein (1999) found
that firms in highly regulated industries have a higher proportion of stakeholder directors. Johnson and
Greening (1999) found that stakeholder directors are more likely to improve corporate social performance.
These researches commonly suggest that in some specific contex, having outsiders or stakeholders join the
boards, which implying a lower insider ownership, benefits the firms. Based on these theoretica and empirical
researches, this study argues that the convergence-of-interests hypothesis and the entrenchment hypothesis
may co-exist in different industrial context.
3. Methodology
3.1 Data and Sample
The data used in this study were drawn from the Taiwan Economic Journal (TEJ) database. Annual data were
collected from January 1, 2004 to December 31, 2007 to avoid the effects of legal regulation revision. To
ensure completeness of annual data, sample companies were restricted to those listed before January 1, 2004
and continuously listed through December 31, 2007. Sample companies were listed on the Taiwan Stock
Exchange Corporation (TSEC) or were traded through the Over-the-Counter Securities Exchange (OTC).
Companies listed on TSEC are typically larger in scale, whereas companies traded through OTC are smaller
and typically in their early development stage. The current thresholds of been listed on TSEC are with a
contributed capital at least 600 million TWD (about 20 million USD) and has been established and in
operation for at least 3 years.
To put industrial characteristics in consideration, this study compared technological and traditional industries
to detect the effects from industrial complexity. Companies in the electronics and biotech segments were
labeled “technological” to reflect its high industrial complexity; meanwhile, companies in the textile, steel,
construction, food, chemical, and machinery segments were labeled “traditional” to reflect its low industrial
complexity. The number of effective observations totals 1,156. The breakdown of effective observations are
320 in TSEC-technological, 536 in TSEC-traditional, 168 in OTC-technological, and 132 in OTC-traditional.
3.2 Variable Definition and Measurement
Insider ownership is the independent variable of this study by nature. We defined insider ownership as the
aggregate shareholding of directors and supervisors. This definition is consistent with and comparable to
those of existing studies. However, thanks to Taiwan’s minimum shareholding requirement for insiders, this
study designed two additional measures to provide a richer observation on insider shareholding. Thus, the
three measures of insider ownership used in this study were insider shareholding ratio (ISR), insider
shareholding deviation (ISD), and frequency of insufficient shareholding (FIS). ISR is the aggregate
shareholding of directors and supervisors over the weighted average outstanding common stock in a given
year. This is a fundamental and commonly used measure of insider ownership. ISD refers to the difference
between ISR and the legally required minimum shareholding ratio in a given year. ISD is a positive number
when the aggregate insider shareholding is higher than the legal requirement. Conversely, a negative ISD
shows that the aggregate insider shareholding falls below the legal requirement. FIS is the number of months
a firm was filed as insufficient shareholding in a given year. According to Taiwan’s Security Exchange Act,
all public companies must file their aggregate insider shareholding every month. Companies are fined if their
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Proceedings of 9th Annual London Business Research Conference
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aggregate insider shareholdings are lower than the minimum legal requirements. Thus, the value of this
indicator ranges from 0 to 12, which is the number of times in a given year that a company is fined for
insufficient aggregate insider shareholding.
Earnings per share (EPS) and return on assets (ROA) were adopted as proxies of firm performance
respectively, which is the dependent variable of this study. To identify the specific effect of insider ownership,
two covariates were used to control statistically for confounding influences on firm performance. Leverage
(LEV) denotes the ratio of total debts to total assets, which was included to account for the possibility that
creditors are able to lessen managerial agency problems (McConnell & Servaes, 1995; Harvey et al., 2004).
Duality (DUA) denotes a situation in which the board chair concurrently holds the position of general manger
or CEO. Duality was dummy coded 1 if duality existed in a given year; otherwise, it was coded 0.
3.3 Empirical Models
The data used in this study included cross-sectional and time series longitudinal data of the years observed.
The fixed effect panel data models adopted to examine the relationship between insider ownership and firm
performance was as follows:
𝑬𝑷𝑺𝒊𝒕 = 𝜶𝒊𝒕 + 𝜷𝟏 (𝑰𝑺𝑹𝒊𝒕 ) + 𝜷𝟐 (𝑰𝑺𝑫𝒊𝒕 ) + 𝜷𝟑 (𝑭𝑰𝑺𝒊𝒕 ) + 𝜷𝟒 (𝑫𝑼𝑨𝒊𝒕 ) + 𝜷𝟓 (𝑳𝑬𝑽𝒊𝒕 ) + 𝜺𝒊𝒕
𝑹𝑶𝑨𝒊𝒕 = 𝜶𝒊𝒕 + 𝜷𝟏 (𝑰𝑺𝑹𝒊𝒕 ) + 𝜷𝟐 (𝑰𝑺𝑫𝒊𝒕 ) + 𝜷𝟑 (𝑭𝑰𝑺𝒊𝒕 ) + 𝜷𝟒 (𝑫𝑼𝑨𝒊𝒕 ) + 𝜷𝟓 (𝑳𝑬𝑽𝒊𝒕 ) + 𝜺𝒊𝒕
(1)
(2)
Here, 𝑬𝑷𝑺𝒊𝒕 and 𝑹𝑶𝑨𝒊𝒕 are the regression dependent variables of company i (i = 1…n) at year t (i = 1…n);
𝜷𝟏 through 𝜷𝟓 are the parameters to be estimated; and 𝜺𝒊𝒕 is the random error.
4. Empirical Results
4.1 Descriptive Statistics
Table 1 presents the descriptive statistics. It reveals that insider ownership structures are different among
industrial settings. Companies in traditional industries tend to have higher ISR, higher ISD, and lower FIS,
which implies a high and stable insider shareholding. As presents in the table, the mean of ISR and ISD for
TSEC-technological companies is 0.1563 and 0.1361, respectively. Both are lower than the figures for
TSEC-traditional companies (0.1922 and 0.1815, respectively). Likewise, the mean of ISR and ISD for
OTC-technological companies is 0.2169 and 0.1939, respectively; both are lower than the figures for
OTC-traditional companies (0.2479 and 0.1997, respectively). In addition, the technological industry has
higher FIS. This echoes that Taiwan’s listed companies in traditional industry typically develop from
family-controlled businesses, and insider-owners of such companies tend to have a higher shareholding even
after the IPO process.
Different insider ownership structures can also be found in TSEC companies and OTC companies. OTC
companies have a higher ISR (0.2169 for OTC-technological, 0.1563 for TSEC-technological; 0.2479 for
OTC-traditional, 0.1992 for TSEC-traditional) and a higher ISD (0.1939 for OTC-technological, 0.1361 for
TSEC-technological; 0.1997 for OTC-traditional, 0.1815 for TSEC-traditional). Meanwhile, OTC companies
also have a higher FIS (0.6667 for OTC-technological, 0.2406 for TSEC-technological; 0.3712 for
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Proceedings of 9th Annual London Business Research Conference
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OTC-traditional, 0.1063 for TSEC-traditional). The statistics show that insider-owners of OTC companies
(typically smaller and/or younger) tend to possess higher shareholding and adjust their shareholding more
frequently, which implies a high but unstable insider shareholding.
Table 1: Summary of Descriptive Statistics
TSEC Companies
Mean
OTC Companies
Standard Deviation
Mean
Standard Deviation
Technological
Traditional
Technological
Traditional
Technological
Traditional
Technological
Traditional
ISR
0.1563
0.1922
0.0872
0.1485
0.2169
0.2479
0.1430
0.1742
ISD
0.1361
0.1815
0.1426
0.2222
0.1939
0.1997
0.2704
0.2161
FIS
0.2406
0.1063
1.0835
0.7195
0.6667
0.3712
1.6764
0.9839
DUA
0.3719
0.2519
0.4841
0.4345
0.4583
0.2727
0.4998
0.4471
LEV
0.3793
0.4023
0.1484
0.2305
0.4153
0.3963
0.1842
0.2568
EPS
1.4999
0.7371
2.9184
1.8591
-0.3144
0.9189
2.6489
2.4479
ROA
0.0442
0.0205
0.1015
0.0638
-0.0382
0.0224
0.1733
0.0964
This table shows the descriptive statistics. It reveals that insider shareholding structures are different among industrial settings. Companies in
traditional
AA
industries tend to have higher ISR, higher ISD, and lower FIS, which implies a high and stable insider shareholding (comparing with
technological industries). OTC companies tend to have higher ISR and ISD, accompanied with higher FIS, which implies a high and unstable insider
shareholding
(comparing with TSEC companies).
AAA
A 2: Correlation Matrix
Table
TSEC Companies
ISR
ISD
ISR
0.9002
FIS
***
ISD
0.8763***
FIS
-0.1926***
-0.1629***
-0.0501
-0.1177**
DUA
LEV
0.0779
0.0820
DUA
LEV
EPS
*
0.0557
0.1947
-0.0748*
0.0486
0.0158
-0.0720
0.0141
0.0342
***
ROA
***
0.2141***
0.0994**
0.1522***
0.2258***
0.1349***
-0.0432
-0.0890**
-0.0091
-0.0002
0.1140
-0.0574
***
-0.0368
-0.1891
***
EPS
0.0523
0.0149
-0.0899
0.0446
-0.2306
ROA
0.0612
-0.0014
-0.0553
-0.0216
-0.3422***
-0.0490
0.8119***
0.8800***
OTC Companies
ISR
ISD
0.8869***
ISR
ISD
FIS
0.9015
-0.1267
***
FIS
DUA
LEV
EPS
-0.0428
0.1584*
0.5825***
0.1866**
-0.0041
*
***
0.1605
*
-0.1479
0.0284
6
0.5019
0.1803
**
ROA
0.2404
***
***
-0.3673
0.1128
0.1053
-0.4278***
Proceedings of 9th Annual London Business Research Conference
4 - 5 August 2014, Imperial College, London, UK, ISBN: 978-1-922069-56-6
DUA
0.0105
0.0267
LEV
-0.0943
-0.1619**
EPS
0.1257
0.1730
**
ROA
0.2097***
0.2427***
0.1546*
0.0905
0.0623
-0.0971
0.0010
0.0073
-0.0085
-0.1281
***
-0.0749
-0.0343
-0.2797
-0.1369*
-0.0238
-0.1700**
0.8766***
0.8348***
This table shows the correlation matrixes for TSEC and OTC companies respectively. The lower-left corner indicates technology industries, and the
upper-right corner indicates traditional industries. *, **, and *** indicate significance at the 10%, 5%, and 1% levels respectively.
Table 2 presents correlation matrix of independent variables. It can be observed that all the 4 correlation
coefficients of ISR and ISD are much higher than others and with statistical significance, which implies a
collinearity might exist. After running a variance inflation factor (VIF) analysis, the all-variable-included
mode of regression was excluded because of high VIF values (> 10). Instead, the regression models
respectively include ISR (Mode A) and ISD (Mode B) were adopted in the following empirical analysis.
4.2 Insider Ownership and Firm Performance
The primary results of this study are presented in Table 3. EPS and ROA are the independent variables to
perform fixed effect panel data regression in empirical model (1) and (2) respectively. In general, the results
of the two empirical models are quite consistent, revealing impacts of industrial settings on the relationship
between insider ownership and firm performance.
In the results of empirical model (1), ISR and ISD have a positive coefficient with statistical significance in
three of the four tested industrial settings (i.e. 5.9776 and 1.2041 for TSEC-traditional, 9.4940 and 6.9018 for
OTC-technological, 9.9342 and 1.5757 for OTC-traditional). This implies a higher level of insider ownership
induces a better firm performance, concurring in the convergence-of-interest hypothesis. However, the
coefficients of ISR and ISD in TSEC-technological setting are negative (-3.4229 and -1.6516) with strong
statistical significance (p = 0.0022 and p = 0.0025 respectively), implying a support for the entrenchment
hypothesis. Similar results can be found in empirical model (2), which uses ROA as performance proxy. In the
results of model (2), the TSEC-technological setting was discriminated from the other three with negative ISR
and ISD coefficients (-0.1835 and -0.0920) with strong statistical significance (p = 0.0000 and p = 0.0013
respectively).
The industrial setting effect can also be found in the empirical results on FIS, though different from ISR and
ISD. As shown in Table 4, the only circumstance that FIS has negative coefficients is OTC-traditional. In
empirical model (1), the FIS coefficients are -0.3971 (Mode A) and -0.4286 (Mode B) with strong statistical
significance (p = 0.0008 and p = 0.0016 respectively). Same results can be observed in empirical model (2),
with statistical significance a bit lower (p = 0.0159 and p = 0.0625 respectively). Recalling FIS is an indirect
measurement of insider shareholding, it surely bears effects of the minimum shareholding rules (Chou & Ko,
2014). Nevertheless, the results here imply low insider shareholding (high FIS) is linked with poor firm
performance in OTC-traditional setting.
Figure 1 synthesizes the empirical results of the relationship between insider ownership and firm performance.
It shows a tendency that the entrenchment argument prevails in high-industry-complexity and large-firm-scale
setting, while the convergence-of-interest argument prevails in low-industry-complexity and small-firm-scale
setting. The empirical results in the remaining two settings are mixed and could be considered as gray areas.
From the perspective of resource dependency theory, the tendency unveiled in Figure 1 is totally reasonable.
According to resource dependency theory, bringing in “resources” to reduce environmental uncertainty is
exactly the organizational function of boards. Firms in the high-industry-complexity and large-firm-scale
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setting need more outsiders contribute their capital, knowledge and experience, access of information, social
connections, legitimacy, and channels to all kind of other “resources.” It explains why a high insider
ownership induces poor performance in this industrial setting. Conversely, in the low-industry-complexity and
small-firm-scale setting, the needs of resource are easier to be satisfied by insiders. In this circumstance, the
relationship between insider ownership and firm performance is more dominated by internal decision
efficiency logic, hence the convergence-of-interest argument, rather than dealing with external uncertainty.
Table 3: Effects of Insider Ownership on Firm Performance
TSEC Companies
Technological Industry
Mode A
Empirical Model (1):
Mode B
Traditional Industry
Mode A
Mode B
Mode A
5.9776
(0.0000) ***
-1.6516
(0.0025) ***
ISD
Technological Industry
Mode B
Traditional Industry
Mode A
Mode B
𝑬𝑷𝑺𝒊𝒕 = 𝜶𝒊𝒕 + 𝜷𝟏 (𝑰𝑺𝑹𝒊𝒕 ) + 𝜷𝟐 (𝑰𝑺𝑫𝒊𝒕 ) + 𝜷𝟑 (𝑭𝑰𝑺𝒊𝒕 ) + 𝜷𝟒 (𝑫𝑼𝑨𝒊𝒕 ) + 𝜷𝟓 (𝑳𝑬𝑽𝒊𝒕 ) + 𝜺𝒊𝒕
-3.4229
(0.0022) ***
ISR
OTC Companies
9.4940
( 0.0000) ***
1.2041
( 0.0927) *
9.9342
( 0.0000) ***
6.0918
( 0.0006) ***
1.5757
( 0.0137) **
FIS
0.0329
( 0.5400)
0.0414
( 0.4308)
0.2211
( 0.0005) ***
0.1126
( 0.0687) *
0.2293
( 0.0000) ***
0.2340
( 0.0001) ***
-0.3971
(0.0008) ***
-0.4286
(0.0006) ***
DUA
-0.2074
(0.3004)
-0.1946
(0.3304)
-0.2512
(0.0826) *
-0.2169
(0.1446)
1.2227
( 0.0002) ***
1.0588
( 0.0003) ***
-0.4038
(0.0284) **
-0.3870
(0.0573) *
LEV
-5.7713
(0.0000) ***
-5.5237
(0.0000) ***
-1.9885
(0.0000) ***
-2.3085
(0.0000) ***
-3.4731
(0.0012) ***
-3.7869
(0.0003) ***
-9.7717
(0.0000) ***
-5.9960
(0.0001) ***
Adj. R2
0.8903
0.9236
0.8977
0.8977
0.8356
0.8643
0.7721
0.7893
F
32.2029***
47.4544***
35.2701***
35.2573***
19.8591***
24.6307***
13.3281***
14.6281***
D-W
2.2894
2.2996
2.2935
2.3219
2.4385
2.3730
2.2163
2.1823
Empirical Model (2):
𝑹𝑶𝑨𝒊𝒕 = 𝜶𝒊𝒕 + 𝜷𝟏 (𝑰𝑺𝑹𝒊𝒕 ) + 𝜷𝟐 (𝑰𝑺𝑫𝒊𝒕 ) + 𝜷𝟑 (𝑭𝑰𝑺𝒊𝒕 ) + 𝜷𝟒 (𝑫𝑼𝑨𝒊𝒕 ) + 𝜷𝟓 (𝑳𝑬𝑽𝒊𝒕 ) + 𝜺𝒊𝒕
-0.1835
(0.0000) ***
ISR
0.3173
( 0.0000) ***
-0.0920
(0.0013) ***
ISD
0.7020
( 0.0000) ***
0.0625
( 0.0000) ***
0.4937
( 0.0000) ***
0.6192
( 0.0000) ***
0.1604
( 0.0001) ***
FIS
0.0030
( 0.2469)
0.0030
( 0.2652)
0.0032
( 0.0000) ***
0.0004
( 0.1802)
0.0086
( 0.0001) ***
0.0137
( 0.0000) ***
-0.0124
(0.0159) **
-0.0098
(0.0625) *
DUA
-0.0066
(0.5319)
-0.0063
(0.5472)
-0.0036
(0.0001) ***
-0.0017
(0.0423) **
0.0777
( 0.0000) ***
0.0876
( 0.0000) ***
0.0015
( 0.7802)
0.0046
( 0.3678)
LEV
-0.2490
(0.0000) ***
-0.2368
(0.0000) ***
-0.0598
(0.0000) ***
-0.0639
(0.0000) ***
-0.3457
(0.0000) ***
-0.3544
(0.0000) ***
-0.4758
(0.0000) ***
-0.3215
(0.0000) ***
Adj. R2
0.8098
0.8126
0.9324
0.8831
0.7822
0.7576
0.9520
0.9469
F
17.3684***
17.6658***
54.8526***
30.4927***
14.3310***
12.5962***
73.1788***
65.8522***
2.3759
2.3530
2.2471
2.2872
2.5257
2.4191
2.5018
2.4673
D-W
This table shows the regression results based on Empirical Model (1) and (2). The number before the ( ) is the coefficient; the number within the ( )
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Proceedings of 9th Annual London Business Research Conference
4 - 5 August 2014, Imperial College, London, UK, ISBN: 978-1-922069-56-6
is the p-value. *, **, and *** denote the 10%, 5%, and 1% significant level respectively.
In general, the results of the two empirical models are quite consistent, revealing that industrial settings do have impacts on the relationship between
insider ownership and firm performance.
In both empirical model, ISR and ISD have a positive coefficient with statistical significance in three of the four tested industrial settings
(TSEC-traditional, OTC-traditional, and OTC-technological), implying the convergence-of-interests argument prevails in these industrial settings.
However, the coefficients of ISR and ISD in TSEC-technological setting are negative with statistical significance results, implying a support for the
entrenchment hypothesis in high complexity-large scale context.
The empirical results on DUA show a different tendency between TSEC and OTC companies. All the 4 coefficients of DUA are negative for TSEC
companies. Conversely, coefficients of DUA for OTC companies tend to be positive, with an exception from empirical model (1) for OTC-traditional
setting. The empirical results on LEV are consistently negative for all the tested industrial settings.
The empirical results on DUA show a different tendency between TSEC and OTC companies. For TSEC
companies, all the 4 coefficients of DUA are negative, though only with statistical significance in traditional
industry. Conversely, coefficients of DUA for OTC companies tend to be positive, with an exception from
empirical model (1) for OTC-traditional setting. The empirical results on LEV are consistently negative for all
the tested industrial settings, implying an inverse relationship between leverage and performance.
Figure 1: Empirical Results in Different Industrial Settings
5. Conclusion
This study examines the empirical relationship between insider ownership and firm performance in Taiwan,
where the agency problem is typically the one of conflict interests between inside owners (inside directors)
and outside shareholders. Based on the resource-based view (RBV) in strategic management field, this study
argued that the relationship in concern may vary among different industrial settings. Through a two
dimensions (scale, market-technology complexity) matrix, the four industrial settings were defined, and the
convergence-of-interests and entrenchment hypotheses are tested via fixed effect panel regression models.
The results show that, the convergence-of-interests argument was supported in three of the four industrial
settings (TSEC-traditional, OTC-traditional, and OTC-technological) while the entrenchment argument got
support in TSEC-technological setting, which means a high complexity-large scale context.
Accordingly, this study inserts a new aspect in the related discussion, arguing that the positive
convergence-of-interests effect and the negative entrenchment effect may co-exist in different industrial
settings. This argument implies contextual-fitness must be taken into account in searching for effective
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Proceedings of 9th Annual London Business Research Conference
4 - 5 August 2014, Imperial College, London, UK, ISBN: 978-1-922069-56-6
regulations of corporate governance. In addition, the results of this study could have an important implication
on the widely adopted employee stock option plan, specifically the stock option and other equity-related items
in executives’ pay packages.
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