Firm Performance: Do Non-Executive Directors Have a Mind of Their Own? Evidence from Uk Panel Data

Abstract

I investigate the relation between firm performance, ownership structure and board composition. I use the GMM methodology to control simultaneously for endogeneity of the independent variables and for endogeneity due to fixed effects. I use an original, large, hand-collected panel dataset of UK firms for the period 1991-2001. Results indicate that the direction of causality runs from ownership and board composition to performance. I find a cubic relation between performance and ownership by executive directors. The proportion of non-executives on the board, but not their proportional ownership, is significantly and positively related to firm performance. Finally, I detect a negative relation between performance and blockholding by institutional and non-institutional owners, which suggests that they are not effective monitors.

Keywords: firm performance, ownership structure, corporate governance, endogeneity, GMM, panel data

JEL Classification: G32, G34