“Ownership structure and firm performance: the mediating role of board characteristics”

• Pages: 719-737
• DOI: https://doi.org/10.1108/CG-02-2019-0056
• Published date: 05 May 2020
• Date: 05 May 2020
• Author: Md Mamunur Rashid
• Subject Matter: Corporate governance,Strategy

“Ownership structure and f‌irm

performance: the mediating role of board

characteristics”

Md Mamunur Rashid

Abstract

Purpose –The purpose of this studyis to examine the mediating role of corporate board characteristics

in the relationship between ownership structure and firm performance in the listed public limited

companiesof Bangladesh.

Design/methodology/approach –The study analyzed 527 annual reports of listed companies in

Bangladesh for the years 2015-2017. The direct and indirect effect of ownership structure on firm

performance was examinedusing AMOS 23. Baron and Kenny’s (1986) four steps procedurewas used

to establishthe mediating role of board characteristics.

Findings –The results demonstrated that foreign ownership and director ownership have significant

positive influenceon both accounting and market based firm’sperformance, while institutional ownership

exhibits positive influence only on accounting-based performance (return on assets). With respect to

mediating effect, the results show that board size and board independence partially mediate the

relationshipbetween ownership structure and firm performance.

Research limitations/implications –The major limitation of the study is that it focuses only on three

years datain examiningthe hypothesized relationship amongthe variables.

Practical implications –Investors, regulators and managers can get evocative insights, particularly

who seek to improve their company’s performance in the capital market through restructuring their

ownershipstructure and board composition.

Originality/value –The study focuses on both directand indirect effect of ownership structure on firm

performancein the context of an emerging and developingeconomy. In examining the indirect effect,the

study usesboard size and board independence as the mediating variables.

Keywords Bangladesh, Firm performance, Mediating effect, Board characteristics,

Ownership structure, Emerging economy

Paper type Research paper

1. Introduction

There are tons of studies in the corporate governance (CG) literature that have focused on

the direct relationship between ownership structure and firm performance. However, the

findings of these studies are rather inconclusive and misleading (Tam and Tan, 2007).

Though majority of the prior studies demonstrated positive association between institutional

ownership (Omran et al., 2008;Kansil and Singh, 2018;Yeh, 2019), foreign ownership

(Ferreira and Matos, 2008;Bentivogli and Mirenda, 2017;Kao et al.,2018) and director

ownership (Kao et al., 2018;Hanafi et al.,2018) and firm performance, others documented

negative (Muttakin et al.,2012) or no association (Demsetz and Villalonga, 2001). The

underlying reason for such findings may be attributed to the fact that owners/shareholders

have limited capacity, in majority of the cases,to influence the activities of management (as

general shareholders cannot take part in the day to day operation or crucial decision

making process) unless they take part in the corporate board. More specifically,

Md Mamunur Rashid is

based at Department of

Business Administration,

Stamford University

Bangladesh, Dhaka,

Bangladesh.

Received 8 February 2019

Revised 13 May 2019

19 November 2019

14 February 2020

Accepted 17 April 2020

DOI 10.1108/CG-02-2019-0056 VOL. 20 NO. 4 2020, pp. 719-737, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 719

shareholders exercised their voting right (using the ownership capacity) to shape and

reshape the structure of corporate board to make sure that the board direct the

organizational activities in the interest of the shareholders. Therefore,it can be held that the

relationship between ownership structure and firm performance is more complicated than

the results of many prior studies suggest. Consequently, the present study attempts to

extend pervious research on the relationship between ownership structure and firm

performance. In this endeavor, the study aims to examine whether corporate board

characteristics such as board size and board independence can mediate the relationship

between ownership structureand firm performance.

Bangladesh has been used as the context for the current study on a number of grounds.

IMF has declared Bangladesh as an “emerging economy” in 2008 in its “World Economic

Outlook” report (IMF, 2008). Despite its weak law enforcement (Khan, 2003) and

interference from different levels of government in the private sectors (Muttakin et al.,2015;

Rashid, 2018), PricewaterhouseCoopers (PwC) forecasted that Bangladesh will be one of

the top three fastest growing economy of the world by 2030 (Dhaka Tribune, 2017).

Moreover, market capitalization to GDP ratio was 19.43% in 2017 as reported by Dhaka

Stock Exchange (DSE) as on June 30, 2017 (DSE, 2017a) and it was about 37.10% in 2011

(World Bank, 2011), which signifies the importance of public limited companies in the

economy of Bangladesh. Furthermore, recently the United Nation (UN) Committee for

Development Policy furnished a letter to Bangladesh ambassador in UN which announced

that Bangladesh has fulfilled the criteria for graduation from the Least Developed Country

(LDC) category (The Independent,2018).

The present study contributes to the literature in a number of ways. First, the study extends

the previous research on ownership structure and firm performance by examining the

mediating effect of corporate board characteristics. Second, majority of the prior studies

have focused either on accounting-based (Lauterbach and Vaninsky, 1999;Rouf and

Hossain, 2018) or market-based (Demsetz and Villalonga, 2001;Kapopoulos and

Lazaretou, 2007) firm performance in analyzing the effect of ownership structure on firm

performance. Very few studies (Mollah et al.,2012;Kao et al.,2018;Yeh, 2019) have

focused on both the measures in analyzing such association. The current study

concentrates on both accounting [return on assets (ROA) and return on equity (ROE)] and

market-based (Tobin’s Q and market-to-book ratio) performance considering the

significance of both the measurers. Finally, the study uses the context of an emerging and

developing economy –the context of Bangladesh –that differs in terms of institutional and

legal frameworks from that of developed economy, and therefore expects to facilitate the

comparison with the context of other economy.

The remainder of the paper is organized as follows. Section 2 provides institutional

background of corporate practices in Bangladesh. Section 3 provides discussion on

literature review and hypotheses development. Section 4 presents methodology of the

study followed by section 5 that presents resultsand discussion of the findings of the study.

Section 6 presents robustness test. Finally, section 7 presents conclusion including the

limitations of the study and avenues for furtherresearch.

2. Institutional background of corporate practices in Bangladesh

Before attaining its independence from Pakistan in December 16, 1971, Bangladesh was

ruled by the British for approximately 200years which has intensely affected the

development of its CG mechanisms (Al Farooque et al., 2007). The Companies Act,

parliamentary democracy and highly authoritative bureaucracy are all considerably

analogous to the English institutional and regulatory framework (Al Farooque et al.,2007).

Furthermore, the long-run economic exploitation and political domination lead to the

institutionalization of corruption and impediment of the development of a broad-based

capital market (Al Farooque et al., 2007). Insiders such as board of directors reside at the

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