Insider ownership and firm performance in Taiwan's electronics industry: a technical efficiency perspective

Abstract

This paper applies agency theory to explore the relationship between insider stock ownership and firm performance, particularly in terms of technical efficiency. Insiders are further classified into executives, outside directors, and large shareholders to conduct a detailed study. Six-year (1996-2001) panel data of 416 Taiwanese listed electronics firms are examined by the stochastic production frontier approach. It is observed that raising the executive-to-insider holding ratio first causes a decrease and then an increase in technical efficiency, forming a U-shaped relationship. However, the board-to-insider holding ratio is negatively associated with technical efficiency. The results indicate that equity ownership of top officers in high-tech firms should be encouraged to enhance firm productivity. Copyright © 2005 John Wiley & Sons, Ltd.

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“…In an agency scenario, corporate governance ensures the strategic orientation of the company, effective monitoring, accountability, investor confidence building, better access to external capital, the reduction of agency costs and, ultimately, improves organizational efficiency (John & Senbet, ; Organization for Economic Co‐operation and Development, ; Williamson, ). In this respect and empirically, there are several studies that demonstrate the positive relationship between the quality or effectiveness of corporate governance and corporate performance (Destefanis & Sena, ; Klapper & Love, ; Sheu & Yang, ; Zelenyuk & Zheka, ). Among the mechanisms of government, the level of diversity of this body guarantees the success of its operation.…”

“…Business profitability measured by accounting ratios or market variables, such as Tobin's Q and technical efficiency, are the parameters most often used to evaluate the performance of a company (Bhagat & Black, ; Campbell & Mínguez‐Vera, ; Hermalin & Weisbach, ; Pletzer, Nikolova, Kedzior, & Voelpel, ; Rose, ). However, technical efficiency can be considered a better estimator of business performance because the central axis of a company is its productive process; moreover, technical efficiency reveals the information needed to know how things are being done (Sheu & Yang, ), while becoming determinants of business profitability, the market value of companies, and so on (Destefanis & Sena, ; Lehmann, Warning, & Weigand, ).…”

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“…We introduce two control variables for ownership: Directors' Ownership and Large Blockholders' Ownership. According to the property rights view of equity structure, the greater the cash-flow rights of the manager (proxied by the director), the more likely that the managers will not divert firms' assets to their own ends, and be interested in maximizing the value of the firm (Sheu and Yang, 2005;Destefanis and Sena, 2007). Concentrated ownership in the form of higher equity ownership among large blockholders would fulfil the same objective as large shareholders can engage in concerted action to discipline managers (Shleifer and Vishny, 1997).…”

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“…Second, industries relying on innovation play an important role in Taiwan's economy. Sheu and Yang (2005) indicated that the electronics industry alone accounted for 72% of total profits of firms listed on the Taiwan Stock Exchange. Moreover, computers and peripherals, telecommunication and electronics industries together accounted for 31% of Taiwan's total exports, and its shipment volumes of LCD monitors and notebooks were ranked first in the world in 2005 4 .…”