Relating Managerial Ownership to Firm’s Performance: Evidence from Banking Sector of Pakistan

Abstract

This study has tried to investigate relationship between managerial ownership and bank performance in banking sector of Pakistan. Data of 23 commercial banks from Pakistan for period 2007 to 2013 has been used where 2SLS is applied on panel data in order to capture the endogeneity. Three models (quadratic, dummies and piecewise linear regression) have been used to test two hypotheses (Convergence-of-interests and entrenchment hypotheses). Results confirm the presence of entrenchment effect in banking sector of Pakistan suggesting that ownership may be good governance tool which brings convergence of interest but up to certain threshold, so too much giving way of stock options could wane firm performance due to entrenchment effect. However, piecewise  linear  regression  concluded a significant non-monotonic  relationship  that  increased  between  0%  and  5%,  decreased  between  5%  and  25%,  and  again increased after 25% .