Dynamic Association Between Board Independence and Firm Profitability: The Moderating Role of Director Ownership

Abstract

The study investigates the association between board independence, directors' ownership, and organisational profitability. To illustrate the links, the case of listed nonfinancial enterprises on the Dhaka Stock Exchange between 2015 and 2019 is examined. To effectively manage the concern of endogeneity, the generalized method of moments (GMM) is used as the econometric techniquein this research. The study reveals that board independence has a negative and significant effect on profitability, however, the effect of directors' shareholdings on the same is positive and significant. Further to this, the study finds that ownership of directors positively moderates the adverse effect of board independence on organisational performance. The outcome of this study suggests that the influence of a certain governance component may behave differently depending on the power of ownership concentration.The study investigates the association between board independence, directors' ownership, and organisational profitability. To illustrate the links, the case of listed nonfinancial enterprises on the Dhaka Stock Exchange between 2015 and 2019 is examined. To effectively manage the concern of endogeneity, the generalized method of moments (GMM) is used as the econometric techniquein this research. The study reveals that board independence has a negative and significant effect on profitability, however, the effect of directors' shareholdings on the same is positive and significant. Further to this, the study finds that ownership of directors positively moderates the adverse effect of board independence on organisational performance. The outcome of this study suggests that the influence of a certain governance component may behave differently depending on the power of ownership concentration.