Does Inside Ownership Matters in Financial Decisions and Firm Performance: Evidence from Manufacturing Sector of Pakistan

2014:107

This study provides the evidence on the effect of managerial ownership on the firm’s performance and financial policies (debt and dividend) for 140 listed manufacturing firms of Pakistan. Firstly, effect of managerial ownership on dividend and leverage policies of the firm are investigated by simultaneous equation model. The results indicate that high level of managerial ownership decreases the tendency of firms to go for debt financing. Similarly in firms having high financial leverage probability to engage in managerial ownership programmes decreases. As managerial ownership increases the firm chose to distribute less to shareholders. These results support the predictions of agency theory which is of the view that managerial ownership results in the decrease in asymmetric information. Secondly, the impact of managerial ownership on the performance is examined. The study finds conclusive evidence that managerial ownership exerts positive and significant on performance only up to a moderate level. The relationship revolves around the cubic function of managerial ownership and firm performance by following convergence of interests (incentive alignment theory) and entrenchment theories. Thirdly, the response of managerial share ownership to the agency cost is considered and result indicate that managerial ownership is an important instrument to reduce agency cost in-case of manufacturing sector of Pakistan.