Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
Insider Ownership and Firm Performance in Taiwan
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. The convergence-of-interests and the entrenchment hypotheses
were tested in four industrial settings defined along industrial complexity and
corporate scale dimensions via fixed effect panel regression models. The
results showed that the convergence-of-interests hypothesis prevailed in three
of the four industrial settings, while the entrenchment hypothesis got support in
high complexity-large scale context. 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: Ownership Structure, Insider Ownership, Agency Problem, Performance
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
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. Even the world’s largest listed companies generally have a
concentrated ownership structure (Bozec, Rousseau, and Laurin, 2008; Roosenboom
and Schramade, 2006; Lins, 2003; Faccio and Lang, 2002; Claessens, Djankov, and
Lang, 2000; La Porta, Lopez-de-Silanes, and Shleifer, 1999). In European, Latin America
____________
Dr. Te-Kuang Chou, Department of Finance, Southern Taiwan University of Science and Technology,
Taiwan. Email: dkchou@mail.stust.edu.tw
and East Asia countries, founding partners and their families may still in control of a
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
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. 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 the 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
vary 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 industrial setting do have impacts. 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
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
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
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 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 higher shareholdings, which increase 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).
Recently, a stream of articles suggested a non-linear relationship between insider
shareholding and firm performance in an attempt to synthesize the two rival arguments.
However, the empirical results are even more diversified because of the inherent
complexity of non-linear model. 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.
In summary, existing research articles indicate that insider ownership has complex
consequences. To explore its effects, a more realistic strategy is to differentiate industry
settings. This study adopts such an approach.
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. To compare between the technological industry and the
traditional industry, companies in the electronics and biotech segments were labeled
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
“technological” to reflect its high industrial complexity, and companies in the textile, steel,
construction, food, chemical, and machinery industries 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 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
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
the years observed. The fixed effect panel data models adopted to examine the
relationship between insider ownership and firm performance were as follows:
𝑬𝑷𝑺𝒊𝒕 = 𝜶𝒊𝒕 + 𝜷𝟏 (𝑰𝑺𝑹𝒊𝒕 ) + 𝜷𝟐 (𝑰𝑺𝑫𝒊𝒕 ) + 𝜷𝟑 (𝑭𝑰𝑺𝒊𝒕 ) + 𝜷𝟒 (𝑫𝑼𝑨𝒊𝒕 ) + 𝜷𝟓 (𝑳𝑬𝑽𝒊𝒕 ) + 𝜺𝒊𝒕
(1)
𝑹𝑶𝑨𝒊𝒕 = 𝜶𝒊𝒕 + 𝜷𝟏 (𝑰𝑺𝑹𝒊𝒕 ) + 𝜷𝟐 (𝑰𝑺𝑫𝒊𝒕 ) + 𝜷𝟑 (𝑭𝑰𝑺𝒊𝒕 ) + 𝜷𝟒 (𝑫𝑼𝑨𝒊𝒕 ) + 𝜷𝟓 (𝑳𝑬𝑽𝒊𝒕 ) + 𝜺𝒊𝒕
(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 public 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
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
OTC Companies
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
Mean
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
A Atable shows the descriptive statistics. It reveals that insider shareholding 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
(comparing with technological industries). OTC companies tend to have higher ISR and ISD, accompanied with higher
AAA
FIS, which implies a high and unstable insider shareholding (comparing with TSEC companies).
A
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 severe collinearity might exist in the regression
model. To avoid the collinearity problem, this study adopts variance inflation factor (VIF)
to detect the potential problem. According to Hair et al. (2006), the acceptable VIF value
should be lower than 10. As Table 3 presents, the all-variable-included mode (Mode 1)
tends to have a high VIF value on ISR and ISD. However, when the regression models
only include ISR or ISD (Mode 2 and Mode 3), most of VIF value on all variables are
lower than 2. Thus, the following empirical analysis only adopts Mode 2 and Mode 3 to
run regression models.
4.2 Effects of Insider Ownership on Firm Performance
The primary results of this study are presented in Table 4. EPS and ROA are the
independent variables to perform a 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 that industrial settings do have impacts on the relationship between
insider ownership and firm performance.
In the results of either 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). These results imply 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 with statistical significance results, implying a support for the entrenchment
hypothesis.
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
The impacts of industrial setting can also be found in the empirical results on FIS. In both
of the empirical model, the coefficients of FIS are negative with statistical significance in
OTC-traditional setting, are positive with and TSEC-traditional settings, and are positive
without statistical significance in TSEC-technological setting.
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.
Table 2: Correlation Matrix
TSEC Companies
ISR
ISR
ISD
FIS
DUA
LEV
0.9002***
-0.0720*
0.0557
0.1947***
0.1140***
0.2141***
-0.0748*
0.0486
0.0994**
0.1522***
0.2258***
0.0158
0.1349***
-0.0432
-0.0890**
-0.0091
-0.0002
-0.0574
-0.1891***
-0.0490
ISD
0.8763***
FIS
-0.1926***
-0.1629***
DUA
-0.0501
-0.1177**
0.0141
LEV
0.0779
0.0820
0.0342
EPS
-0.0368
ROA
***
EPS
0.0523
0.0149
-0.0899
0.0446
-0.2306
ROA
0.0612
-0.0014
-0.0553
-0.0216
-0.3422***
0.8119***
0.8800***
OTC Companies
ISR
ISD
0.8869***
ISR
ISD
0.9015
***
-0.1267
-0.1479
DUA
0.0105
0.0267
-0.0943
DUA
LEV
EPS
-0.0428
0.1584*
0.5825***
0.1866**
-0.0041
*
***
0.1605
*
FIS
LEV
FIS
0.0284
0.0905
**
-0.1619
**
0.0623
ROA
***
0.5019
0.2404
0.1053
**
0.1803
-0.3673
-0.4278***
0.1546*
0.0010
0.0073
-0.0085
-0.1281
-0.0971
***
0.1128
***
EPS
0.1257
0.1730
-0.0749
-0.0343
-0.2797
ROA
0.2097***
0.2427***
-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 3: Variance Inflation Factor (VIF) Analysis
TSEC Companies
Technological Industry
OTC Companies
Traditional Industry
Technological Industry
7
Traditional Industry
Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
Mode
Mode
Mode
Mode
Mode
Mode
Mode
Mode
Mode
Mode
Mode
Mode
1
2
3
1
2
3
1
2
3
1
2
3
1.141
－
7.830
1.367
－
10.619
1.559
－
14.289
4.552
－
ISR
7.345
ISD
11.518
－
1.361
8.404
－
1.229
5.469
－
1.070
7.815
－
6.063
FIS
1.008
1.008
1.009
1.003
1.003
1.003
1.079
1.082
1.078
1.031
1.025
1.025
DUA
1.107
1.020
1.063
1.013
1.012
1.013
1.068
1.066
1.068
1.065
1.057
1.063
LEV
1.036
1.037
1.033
1.222
1.179
1.113
1.121
1.045
1.044
2.941
2.489
1.626
This table adopts VIF to detect the potential collinearity problem. The all-variable-included mode (Mode 1) is excluded from
regression analysis because of its high VIF value on ISR and ISD.
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Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
Table 4: Effects of Insider Ownership on Firm Performance
TSEC Companies
Technological Industry
Mode 2
Empirical Model (1):
Mode 3
Traditional Industry
Mode 2
Mode 3
Mode 2
5.9776
(0.0022) ***
Mode 3
9.4940
(0.0000) ***
-1.6516
ISD
Technological Industry
Traditional Industry
Mode 2
Mode 3
𝑬𝑷𝑺𝒊𝒕 = 𝜶𝒊𝒕 + 𝜷𝟏 (𝑰𝑺𝑹𝒊𝒕 ) + 𝜷𝟐 (𝑰𝑺𝑫𝒊𝒕 ) + 𝜷𝟑 (𝑭𝑰𝑺𝒊𝒕 ) + 𝜷𝟒 (𝑫𝑼𝑨𝒊𝒕 ) + 𝜷𝟓 (𝑳𝑬𝑽𝒊𝒕 ) + 𝜺𝒊𝒕
-3.4229
ISR
OTC Companies
9.9342
( 0.0000) ***
1.2041
(0.0025) ***
6.0918
( 0.0927) *
0.0329
0.0414
0.2211
( 0.5400)
( 0.4308)
( 0.0005) ***
( 0.0687) *
-0.2074
-0.1946
-0.2512
-0.2169
(0.3004)
(0.3304)
(0.0826) *
(0.1446)
-1.9885
-2.3085
FIS
DUA
( 0.0000) ***
1.5757
( 0.0006) ***
0.1126
0.2293
0.2340
( 0.0000) ***
1.2227
( 0.0001) ***
1.0588
( 0.0137) **
-0.3971
-0.4286
(0.0008) ***
(0.0006) ***
-0.4038
-0.3870
( 0.0002) ***
( 0.0003) ***
(0.0284) **
(0.0573) *
-3.4731
-3.7869
-9.7717
-5.9960
-5.7713
-5.5237
LEV
(0.0000)
(0.0000)
***
***
(0.0000)
***
(0.0000)
***
(0.0012)
***
(0.0003)
***
(0.0000)
***
(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
0.3173
ISR
(0.0000)
0.7020
( 0.0000) ***
***
0.4937
( 0.0000) ***
( 0.0000) ***
0.1604
-0.0920
ISD
0.0625
(0.0013) ***
0.6192
( 0.0000) ***
0.0030
0.0030
( 0.2469)
( 0.2652)
( 0.0000) ***
( 0.1802)
-0.0066
-0.0063
-0.0036
-0.0017
(0.5319)
(0.5472)
(0.0001) ***
(0.0423) **
( 0.0000) ***
-0.2490
-0.2368
-0.0598
-0.0639
(0.0000)
(0.0000) ***
(0.0000) ***
(0.0000) ***
FIS
DUA
LEV
0.0032
0.0004
0.0086
***
-0.0098
(0.0159) **
(0.0625) *
0.0015
0.0046
( 0.0000) ***
( 0.7802)
( 0.3678)
-0.3457
-0.3544
-0.4758
-0.3215
(0.0000) ***
(0.0000) ***
(0.0000) ***
(0.0000) ***
0.0777
0.0137
0.0001)
-0.0124
( 0.0001) ***
9
(
( 0.0000) ***
( 0.0000) ***
0.0876
Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
***
Adj. R2
0.8098
***
0.8126
0.9324
***
F
17.3684
17.6658
D-W
2.3759
2.3530
0.8831
***
0.7822
***
54.8526
30.4927
2.2471
2.2872
0.7576
***
0.9520
***
14.3310
12.5962
2.5257
2.4191
0.9469
***
73.1788
2.5018
65.8522***
2.4673
This table shows the regression results based on Empirical Model (1) and (2). The number before the ( ) is the coefficient; the
number within the ( ) 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.
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 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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