Do board characteristics affect the interplay between managerial ownership and firm performance? Evidence from South African banks

Abstract

Managerial ownership has been identified as a mechanism to align the interests of the principal and agent and to guarantee superior returns to the principal. This study aims to explore the moderating role of board characteristics on the relationship between managerial ownership and the firm performance of the listed commercial banks in South Africa between 2017 and 2022. To ensure the consistency and robustness of the outcomes, the study applies the pool OLS, fixed effect, robust standard error approach, and fully modified OLS to control for serial correlation, cross-sectional dependence and endogeneity issues. The results show that managerial ownership has a significant and negative effect on the return of equity while its effect on Tobin’s Q is negative but not significant. This outcome supports the existence of the entrenchment hypothesis in the South African banking sector where the impact of managerial ownership is found to hurt firm performance. However, additional findings from the study reveal that board size, independence and diversity mitigate and reduce the detrimental effect of managerial ownership on firm performance. This study provides fresh insight into the importance of board characteristics as vital governance instruments that can be employed to align the interests of owners and managers toward optimal performance.