Analysing the Impact of Managerial Ownership on the Performance of Shariah-Compliant Firms in Pakistan

Abstract

This paper analyses the impact of managerial ownership upon firm performance in the Shariah-compliant firms of Pakistan. Agency theory that suggests involving managers as part of firm's ownership can help firms reduce the agency cost, has widely been applied in the corporate setup of conventional finance, however, there is growing need of academic research to find out the role and application of this theory in the Shariah-compliant organizations. All around the Muslim world, there is the rise of Shariah-compliant firms; however, little work has been done to critically evaluate such important concepts based on agency theory, it is, therefore, an optimistic approach to familiarise the idea of firm performance with the relationship of managerial ownership under Agency Theory in such organizations. In order to better understand the acceptability and adaptability of Agency Theory, the objective of this study is to examine the impact of managerial ownership upon firm performance in Shariah-compliant firms of Pakistan for the first time. This paper is based upon panel data and regression models applied to the sample of 68 Shariah-compliant firms listed on Pakistan’s Karachi Stock Exchange covering five years from 2009 to 2013. This paper tests the firm performance through two different dependent variables Tobin’s Q and ROA by regressing through OLS, Fixed effect (FE) and Random effect(RE) methods. Both models are proved empirically significant. The robust results confirm that managerial ownership (MO) has a positive and strong impact upon firm performance (Q)/ (ROA) in the Shariah-compliant firms of Pakistan. The outcomes may provide a good understanding and help in making a better decision regarding investment on the ethical grounds. It proves that more concentrated managerial ownership produces the higher firm profits. It can be also inferred that the increased proportion of managerial ownership tends to align with the interests of owners and thus help to reduce the agency conflict in our sample of Shariah-compliant firms in Pakistan. Moreover, Size (LNTA) has a positive relationship with firm performance (Q)/ (ROA) viewing that the Shariah-compliant firms depend on retained earnings. It may be due to the restricted criterion on the leverage for Shariah-compliant firms by the board of Shariah compliance. Leverage (DAR) is negatively and significantly correlated with profitability and growth (GROW) is positively and significantly correlated with firm performance (Q). In the developing and Muslim world, this study may reserve a unique place due to its virgin attempt and highlight the ignored aspect in the body of literature. These findings are of great benefit to investment managers, and Shariah cautious and other ethical investors regarding investment and portfolio related decisions.

Manufacturing Companies :The Effect of Liquidity and Corporate Governance on Financial Performance with Firm Size as a Moderating

“…Mahrani & Soewarno, (2018), Ahmad et al, (2019) H2: Institutional ownership positively affects financial performance GCG through the management ownership mechanism has a good impact on the company performance, because it can increase management's motivation to continue to work better and be careful in every decision-making activity so that it will not harm the company, and an increase in company profits makes managers feel they have the right to these profits, and this is in line with agency theory, namely the interests that occur in agents and company owners will establish good relationship to improve financial performance (Tertius & Christiawan, 2015). Research by Anželika et al, (2017), Katper et al, (2018), Irawati et al, (2019), Novitasari et al, (2020), and Hermawan et al, (2021) showed significant positive results. H3: Managerial ownership positively affects financial performance Nawangwulan, (2019) explained that liquidity is a condition of company will be considered in good condition if it is able to pay off its short-term debt, this is related to the firm size, namely the large companies will be relatively more stable and able to face uncertanty because they have a higher amount of assets, and then are able to strengthen the influence of liquidity on the financial performance.…”

“…Anželika et al, (2017) show a significant positive influence GCG with the mechanism of ownership structure on Article's contents are provided on a Attribution-Non Commercial 4.0 Creative commons license. To see the complete license contents, please visit http://creativecommons.org/licenses/by-nc/4.0/ financial performance, and supported by Katper et al, (2018), Mahrani & Soewarno, (2018), Ahmad et al, (2019), Arianpoor, (2019, Irawati et al, (2019), Panda & Leepsa, (2019), Suryanto & Refianto, 2019, Hindasah et al, (2020), Novitasari et al, (2020), Setiawan & Setiadi, (2020), Sakawa & Watanabel, (2020), Hermawan et al, (2021) and Sofiana et al, (2022). Meanwhile the negative influence shown by Elisetiawati & Artinah, (2016), Saidu et al, (2018), Tsouknidis, (2019), and Sani, (2020.…”

Concomitant of Inside-Shareholding, Group Affiliation and Firm Value: Evidence From Pakistan

“…Many studies examine the insider ownership-performance relationship and find mixed results. Some studies find positive relation (Kaserer & Moldenhauer, 2008;Hu & Zhou, 2008;Katper et al, 2018), few studies observe negative (Fahlenbrach & Stulz, 2008;Shah et al, 2011;Ali et al, 2020;Vintilă & Gherghina, 2015). Yet some others find no relationship (Demsetz & Lehn, 1985;Abdullah et al, 2011;Hamza & Suman, 2018).…”

“…Inside shareholdings align the insiders' interests with those of minority shareholders, helping control the agency problem. A substantial ownership stake of the insiders 1 It motivates them to monitor firm because of the "incentives effect" and contributes to increased performance (Jensen, 1986;Kamardin, 2014;Katper et al, 2018). It discourages the insiders' motivation in tunnelling firm's assets by various channels, including inside trading, transfer pricing, in-efficient or over-investment, employing incompetent management and excessive perquisites (Djankov et al, 2008).…”

Shariah compliance and information transmission: evidence from an emerging market

“…Increased demand for Shariah -compliant products has also resulted in considerable amount of academic research (Farooq, 2014; Farooq and AbdelBari, 2015; Farooq and Alahkam, 2016). Most of this research is, however, concentrated on the issues related to risk and return of Shariah -compliant assets (Alam and Rajjaque, 2016; Katper et al , 2018; Hassan et al , 2018). An important question that has received insufficient attention in prior literature is related to the information transmission capacity of stock prices of Shariah -compliant firms.…”