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Ownership concentration and firm performance: the moderating effect of the

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ISSN: 0210-2412 (Print) 2332-0753 (Online) Journal homepage: http://www.tandfonline.com/loi/refc20

Ownership concentration and firm performance:

the moderating effect of the monitoring and
provision of resources board roles

Jaime Guerrero-Villegas, Pilar Giráldez-Puig, Leticia Pérez-Calero Sánchez &

José Manuel Hurtado-González

To cite this article: Jaime Guerrero-Villegas, Pilar Giráldez-Puig, Leticia Pérez-Calero Sánchez
& José Manuel Hurtado-González (2018): Ownership concentration and firm performance:
the moderating effect of the monitoring and provision of resources board roles, Spanish
Journal of Finance and Accounting / Revista Española de Financiación y Contabilidad, DOI:
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SPANISH JOURNAL OF FINANCE AND ACCOUNTING, 2018
https://doi.org/10.1080/02102412.2018.1449722

ARTICLE

Ownership concentration and firm performance: the

moderating effect of the monitoring and provision of
resources board roles
Jaime Guerrero-Villegas a, Pilar Giráldez-Puig b
, Leticia Pérez-Calero Sánchez a

and José Manuel Hurtado-González a

a
Department of Management and Marketing, Universidad Pablo de Olavide, Seville, Spain; bDepartment of
Financial Economics and Accounting, Universidad Pablo de, Seville, Spain

ABSTRACT ARTICLE HISTORY

This paper explores the effect that the monitoring and the provi- Received 13 June 2016
sion of resources board roles have on the relationship between Accepted 5 March 2018
ownership concentration and firm performance. The sample of this KEYWORDS
study is made up of 579 European firms registered on the STOXX Board of directors; firm
Europe 600 index during the period 2002–2011. The results of this performance; monitoring
study show that the monitoring provided by the board positively role; ownership
influences the effect that ownership concentration has on perfor- concentration; provision of
mance. The results also highlight that the moderating effect of the resources role
provision of resources role has a positive influence on firm perfor-
mance concerning almost all levels of ownership concentration,
diminishing and having slightly negative effects when the con-
centration levels are extremely high.

Concentración de la propiedad y rendimiento de la

empresa: el efecto moderador de la supervisión y
la provisión de recursos proporcionados por el
consejo de administración
RESUMEN
Este trabajo explora el efecto de la supervisión y la provisión de
recursos proporcionados por el consejo de administración en la
relación existente entre la concentración de la propiedad y los
resultados de la empresa. La muestra está compuesta por 579
empresas europeas registradas en el índice STOXX Europe 600
durante el período 2002-2011. Los resultados muestran que la
supervisión ejercida por el consejo influye positivamente en el
efecto que tiene la concentración de la propiedad en los resulta-
dos. El trabajo también pone de manifiesto que la provisión de
recursos del consejo tiene una influencia positiva en el rendi-
miento de la empresa en casi todos los niveles de la
concentración de la propiedad, disminuyendo y teniendo efectos
ligeramente negativos cuando los niveles de concentración son
extremadamente altos.

CONTACT José Manuel Hurtado-González jmhurgon@upo.es Department of Management and Marketing,

Universidad Pablo de Olavide, Carretera de Utrera, Km. 1, ES-41013 Seville, Spain
© 2018 Asociación Española de Contabilidad y Administración de Empresas (AECA)
2 J. GUERRERO-VILLEGAS ET AL.

Introduction
During recent years, special attention has been paid to the study of ownership con-
centration and its impact on firm performance (Francis, Schipper, & Vincent, 2005; La
Porta, Lopez de Silanes, & Shleifer, 1999; Miller, Le Breton-Miller, Lester, & Cannella,
2007; Wang & Shailer, 2015). According to the agency theory, ownership concentration
is a key corporate governance mechanism that helps to limit agency problems arising
from the divergence of interest between shareholders and managers (Shleifer & Vishny,
1986). However, it could also mean the controlling of shareholders’ extraction of private
benefits at the expense of minority shareholders.
In addition to ownership, there are other internal governance mechanisms – the
board of directors – designed to mitigate the agency conflicts between managers and
shareholders and, therefore, affect firm performance (Kang, Cheng, & Gray, 2007). The
board of directors is the main internal mechanism through which shareholders can
constrain managerial choices (Shleifer & Vishny, 1988). Some studies have analysed the
substitution effects between ownership concentration and the board of directors in
terms of monitoring management (Mangena, Tauringana, & Chamisa, 2012; Munisi,
Hermes, & Randøy, 2014). Desender, Aguilera, Crespi & García-Cestona (2013, p. 824)
proposed that: ‘large shareholders do not typically rely on the board to monitor
management because they have both the incentives and abilities to hold management
accountable for actions not aligned with their interests through their direct control’.
Also, to prevent the opportunistic behaviour of controlling shareholders, the board’s
monitoring role is an essential aspect in order to protect the interests of not only large
shareholders, but also of small ones (Mangena et al., 2012).
Another important board role is the provision of resources (Hillman & Dalziel, 2003). As a
resources provider, the board of directors could also affect firm performance providing the
decision-making process with skills, knowledge and contacts (Boyd, 1990; Dalton, Daily,
Johnson, & Ellstrand, 1999; Pfeffer, 1972). Based on these arguments, it appears that the
ownership concentration and firm performance relationship could be influenced not only by
the board’s monitoring role, but also by the provision of resources role. In a low ownership
concentration scenario, managers generally prefer tangible and low-risk investments, while in
a high ownership concentration scenario; some risky strategic activities become more
relevant for the pressure of large shareholders. Thus, the provision of resources role of the
board is necessary and different for each firm level of ownership.
To the best of our knowledge, no study exists that has analysed the relationship between
different levels of ownership concentration such as organisational factors, board roles and
firm performance. Thus, in this work we analyse to what extent the impact that different
levels of ownership concentration have on performance could be affected by the roles
performed by board members. In this sense, we believe that this paper has important
contributions to offer regarding the previous literature. First, we provide a more realistic
perspective of boards, considering and measuring the main activities carried out by directors
(monitoring and provision of resources roles). Instead of assuming that the effectiveness of
the board in the performance of its duties is measured through certain aspects of the board’s
composition and structure, we measure the real output that the board achieves by fulfilling its
roles (Nicholson & Kiel, 2004; Petrovic, 2008). Second, this study highlights that the impact
which ownership concentration has on firm performance may be affected by the monitoring
 SPANISH JOURNAL OF FINANCE AND ACCOUNTING 3

and provision of resources board roles. In this way, we aim to give some clues about what
level of ownership concentration is more suitable for directors to exercise their monitoring or
their provision of resources role. Finally, from a practical point of view, we provide the
business area with some recommendations about the board configuration that better fits one
of the organisational factors: ownership concentration.
This paper is structured as follows. In the first section, we present the theoretical
background, defining hypotheses regarding the literature reviewed. In the second
section, we set out the methodology. In the following section, we describe the results
and, as a final section, we discuss revealing conclusions, limitations and future lines of
investigation resulting from the research that we have conducted.

Theoretical background and hypotheses

Ownership concentration and firm performance
The central premise of arguments regarding the ownership concentration–performance
relationship is the potential trade-off between the monitoring and the expropriation effect
of ownership concentration (Filatotchev, Jackson, & Nakajima, 2013). Predictions of the
positive effect of ownership concentration on performance are based on the monitoring
effect. Accordingly, ownership concentration has a disciplinary effect on managers because it
is easier for large shareholders to monitor managers (Shleifer & Vishny, 1986, 1997). This
helps to mitigate the agency problems that, in turn, leads to improving performance (Jensen
& Meckling, 1976). On the other hand, predictions of the negative effect of ownership
concentration on performance are based on the expropriation effect (Young, Peng,
Ahlstrom, Bruton, & Jiang, 2008). According to this line of research, concentrated ownership
may facilitate the controlling of shareholders’ extraction of private benefits at the expense of
minority shareholders’ wealth (Filatotchev et al., 2013; Wang & Shailer, 2015), thus increasing
the expropriation effect which, in turn, leads to the damaging of performance.
Based on both effects mentioned above, some studies have found a curvilinear
(inverted U-shaped) relationship between ownership concentration and firm perfor-
mance (Thomsen & Pedersen, 2000; Tuschke & Sanders, 2003). That is, when the
concentration of ownership increases, there is a positive effect on performance (mon-
itoring effect); but as ownership becomes highly concentrated, the relationship between
these two variables becomes negative (expropriation effect).
In spite of the relationship previously presented between ownership concentration and
firm performance, studies highlight the key role played by another internal governance
mechanism – the board of directors (Daily, Dalton, & Cannella, 2003). In this vein, some
studies have pointed out the impact of board roles on firm performance (Ong & Lee, 2000).
Boards of directors perform two key roles: monitoring and provision of resources (Hillman &
Dalziel, 2003). In the following sections, we analyse the impact of these board roles on the
relationship between ownership concentration and firm performance.

The effect of the monitoring board role

Agency theory has been considered the dominant framework for research on the board
of directors, both from a theoretical and an empirical perspective (Dalton, Daily, Certo,
4 J. GUERRERO-VILLEGAS ET AL.

& Roengpitya, 2003). This describes the potential conflicts of interest that arise from the
separation of ownership and control in organisations (Fama & Jensen, 1983). The
underlying premise of agency theory is that the managers act out of self-interest and,
consequently, do not always protect the shareholders’ interests. The board of directors
is an instrument of control having the main role of monitoring management activities
in order to protect shareholders’ interests (Stiles & Taylor, 2001).
Board monitoring is considered a main determinant of the board’s effectiveness and the
firm’s performance, and is thus subject to severe public scrutiny (Minichilli, Zattoni, Nielsen,
& Huse, 2012). One of the most important characteristics that the board should have is being
independent (Dalton, Hitt, Certo, & Dalton, 2007). In this respect, agency theory highlights
that boards composed of outside members and the separation of the CEO and board chair
positions are critical to perform their monitoring role. However, the empirical evidence on
the relationship between board independence and firm performance is inconclusive (Dalton
& Dalton, 2011; Kumar & Zattoni, 2013), with studies reporting a positive (Rechner &
Dalton, 1991)-negative (Bauer, Guenster, & Otten, 2004) relationship, as well as none at all
(Dalton et al., 1999; Wintoki, Linck, & Netter, 2012).
One of the reasons for these inconclusive results could be that the nature of agency
problems varies significantly between firms without and with large shareholders (La
Porta et al., 1999). On the one hand, when the ownership of a company is highly
dispersed (without large shareholders), the owners’ incentive to control managers is
low. The justification is that when they are controlling, the owners support the total cost
of control actions, but they only collect in relationship to the proportion of the
percentage of the capital of which they are owners (Shleifer & Vishny, 1997).
Dispersed ownership places significant power in the hands of managers – whose
interests do not coincide with the interest of shareholders – making it harder for
shareholders to monitor managers and thus adversely affecting performance (Li, Luo,
Wang, & Wu, 2013). Under these circumstances, the use of the board of directors to
monitor the managers becomes a key element in order to resolve the conflicts of
interest between shareholders and managers (Stiles &Taylor, 2001).
On the other hand, the presence of a highly concentrated ownership may increase
the conflicts of interest between controlling shareholders and minority shareholders
(Filatotchev et al., 2013). In other words, the agency problem is likely to shift from the
traditional principal–agent conflict to principal–principal conflicts (Bebchuk &
Weisbach, 2010; Young et al., 2008). Large shareholders have more incentives and
powers than dispersed small shareholders to actively monitor and/or influence man-
agers (Shleifer & Vishny, 1986). For example, the controlling shareholders are able to
determine the profit distribution and may sometimes deprive minority shareholders of
their rights to share profits (Dahya, Orlin, & McConnell, 2008; La Porta, Lopez de
Silanes, Shleifer, & Vishny, 2002). To prevent the opportunistic behaviour of controlling
shareholders, the board’s monitoring role is an essential aspect in order to protect the
interests not only of large shareholders but also of small ones (Mangena et al., 2012).
To sum up, and according to the above arguments, we propose that the board’s
control role moderates the relationship between ownership concentration and perfor-
mance. Specifically, in the absence of large shareholders, greater control can reduce the
opportunist behaviour of managers. Additionally, in companies where there are
 SPANISH JOURNAL OF FINANCE AND ACCOUNTING 5

controlling shareholders, greater board supervision can help to ensure the interests not
only of large shareholders but also of small shareholders. Then, we propose:

Hypothesis 1: the monitoring role of the board of directors improves the effect of
ownership concentration on firm performance.

The effect of the provision of resources board role

The resource dependence theory presents an alternative to the agency perspective,
arguing that the effectiveness of boards is achieved when their members provide
valuable resources to help firms successfully cope with the uncertainty of the external
environment (Pfeffer & Salancik, 1978). According to this theory, directors bring four
benefits to organisations: (a) counsel and advice; (b) channels of communication
between the firm and the environment; (c) access to resources and (d) legitimacy.
Boards are characterised by having outside board members with specific knowledge
acquired outside the firm (Hillman, Cannella, & Paetzold, 2000; Hillman & Dalziel,
2003) who can help managers in strategic decision-making on certain matters requiring
knowledge and skills and other specific resources, and therefore improve firm perfor-
mance (Hillman et al., 2000; Hillman & Dalziel, 2003; Kula & Tatoglu, 2006; Peng,
2004).
Besides, firms could benefit from professional counsel and advice from directors with
external networks in order to obtain valuable external resources (Mizruchi & Stearns,
1994; Stearns & Mizruchi, 1993). For example, Carpenter and Westphal (2001) found
that boards consisting of directors with ties to strategically related organisations were
able to provide better advice and counsel, affecting firm performance (Westphal, 1999).
In addition, several studies have shown that directors’ political connections can posi-
tively affect firm performance (Amore & Bennedsen, 2013; Boubakri, Cosset, & Saffar,
2012; Houston & Ferris, 2015). Finally, board members are also often selected because
they have knowledge, expertise and skills that enable them to enhance legitimacy and
accelerate the flow of resources to the firm (Hillman et al., 2000; Pfeffer & Salancik,
1978).
Regarding the provision of resources role, diverse studies have pointed out the
relevance of directors and the resources, which they provide in strategic decision-
making (Demb & Neubauer, 1992; Lorsch & MacIver, 1989; Stiles & Taylor, 2001).
Related to the need and typology of resources, there are studies suggesting that own-
ership concentration can affect the strategies developed by the company which, in turn,
could determine specific resources needed in each case.
On the one hand, when ownership is dispersed, managers have more freedom
compared with firms with a higher degree of ownership concentration (Eisenhardt,
1989). In a low ownership concentration scenario, managers generally prefer tangible
and low-risk investments and are reluctant to embark upon investment projects that
create long-term value. Firms tend to develop, for example, diversification strategies
(Amihud & Lev, 1981). Previous studies suggest that managers engage in diversification
strategies in order to reduce variability in earnings and consequently their employment
6 J. GUERRERO-VILLEGAS ET AL.

risk or increase status and managerial power (Aggarwal & Samwick, 2003; Fox &
Hamilton, 1994).
Diversification strategies allow firms to exploit and leverage their resources across
multiple markets (Collis & Montgomery, 2005). Some studies have pointed out the
importance of certain resources for the development and implementation of this type of
strategies. For example, in international diversification strategies, companies need to
have members with foreign experience (Sambharya, 1996). Reputation is also a key
resource that can positively affect international diversification (Fernández-Olmos &
Díez-Vial, 2013), and can reduce the perceived risk that international consumers
associate with new products (Sorescu, Chandy, & Prabhu, 2008). In this sense, directors
who usually have experience in international markets and a high reputation can add to
diversification strategies developed by the company and consequently contribute to
improving firm performance.
On the other hand, when ownership is concentrated, large shareholders – having a
long-term view – can force managers to value maximisation through the promotion of
the firm’s risk taking (Francis & Smith, 1995; Shleifer & Vishny, 1986). In high own-
ership concentration scenarios, managers usually engage in growth strategies, such as
R&D (Baysinger, Kosnik, & Turk, 1991). Investments in innovation are highly risky,
involving a long time horizon and uncertain returns. These strategic activities require
large amounts of resources to achieve them; so, the resources provided by the board
play a key role. As the legal representative of corporate shareholders, directors are
expected to help to promote strategic orientations and provide resources that benefit
stockholders’ wealth, including investment in R&D (Kosnik, 1990). For example, out-
side board members with specific knowledge (Hillman et al., 2000) can contribute to
strategic decision-making in order to gain an alternative access to resources and
financing channels (Mizruchi & Stearns, 1994) and improve firm performance (Kula
& Tatoglu, 2006). Specifically, firms pursuing innovation may be able to increase R&D
spending by appointing directors with, for example, an advanced education level (e.g. a
doctoral-level degree in business, engineering, science and other fields), and outside
directors with technical experience and interlocks to low-technology firms (Dalziel,
Gentry, & Bowerman, 2011).
These arguments taken together suggest that the previously established relationship
between ownership concentration and performance could be moderated by the provi-
sion of resources board role, in such a way that higher resources provided by the board
could positively improve the specific strategy developed by firms. This, in turn, could
improve the firm performance. Specifically, we suggest that when ownership is dis-
persed the resources, such as foreign experience and reputation, provided by directors
play a key role favouring diversification strategies, therefore, improving firm perfor-
mance. However, when ownership concentration is high, resources provided by direc-
tors, such as financial channels, an advanced education level, technical experience and
interlocks, play a key role furthering R&D strategies, also improving firm performance.
We therefore propose:

Hypothesis 2: the provision of resources role of the board of directors improves the
effect of ownership concentration on firm performance.
 SPANISH JOURNAL OF FINANCE AND ACCOUNTING 7

Methodology
Sample and data
The sample of firms used in this study consists of the European firms registered on the
STOXX Europe 600 index during the period 2002–2011. This index is derived from the
STOXX Europe Total Market Index (TMI) and a subset of the STOXX Global 1800
Index. With a fixed number of 600 components, the STOXX Europe 600 Index
represents large, mid and small capitalisation companies across 18 countries of the
European region: Austria, Belgium, the Czech Republic, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal,
Spain, Sweden, Switzerland and the United Kingdom. The Index is a broad-based
capitalisation-weighted index of European stocks that captures more than 90% of the
aggregate market capitalisation of European-based companies (Lorca, Andrées, &
Martínez, 2012). We acknowledge the limitation of our study only having selected the
boards of directors of large European companies quoted on the stock exchange, given
that these firms are just a small fraction of the total number of European firms.
Nonetheless, they were chosen because of their obligation to publish data relating to
corporate governance and performance.
In order to obtain the sample of firms in our study, we started with a total of 600 firms
quoted on the EUROSTOXX 600 index in 2011. Later, we eliminated those firms that were
removed from the stock market during the analysis period (we only included firms that
were quoted on the stock market from 2002–2011, inclusive), and firms whose data we did
not have access to. Applying these limitations created a balanced panel consisting of 5790
observations for each of the variables used, relating to 579 firms quoted on STOXX600 and
for which, the information is available for six consecutive years between 2002 and 2011.
The information was taken from the annual reports obtained from several sources,
depending on whether the variable was related to the firm or the board. At the firm level,
we used the Datastream database. This is a global financial and macroeconomic database
covering financial and accounting information on firms, banks and insurance companies
from all over the world, and has time series data. It also provides information about board
structure, processes and functions. Data are updated daily. Authors such as Elsilä, Kallunki
Nilsson & Sahlström (2013) and Campbell, Campbell, Sirmon, Bierman, and Tuggle (2012)
have used this database in their studies of corporate governance. In addition, the information
on the boards was taken from the annual reports available from the company websites. These
reports provided information on board structure, such as the number of members on each
board, whether there is a duality of President and Chief Executive and the type of directors that
make up the board, using the following categories: executive and independent. Finally, in
order to get information on the directors’ experience, we needed access to the curricula vitae of
the board members. This was obtained from the Amadeus and Lexis Nexis Annual Reports. In
addition, we utilised social media (LinkedIn) and specialised webpages (Zoominfo and
Businessweek).

Dependent variable
Tobin’s Q is the most common measurement for firm value and performance. Our
choice of Tobin’s Q as a dependent variable is motivated by the extant literature, as it is
8 J. GUERRERO-VILLEGAS ET AL.

widely accepted as a measure of firm value, or market-related performance (Klapper &

Love, 2004; Bebchuk, Cohen, & Ferrell, 2009; Bhagat & Bolton, 2008; García-Ramos &
García-Olalla, 2011; López-Iturriaga & Morrós- Rodríguez, 2014). Tobin’s Q is defined
as the equity market value plus the book value of debt divided by the book value of
assets.
With regard to its average (1.252) it is slightly under that reported by Buchwald (2017) for a
similar sample of 3376 firms of 17 European countries (1.49) and Burns, McTier, and Minnick
(2015), who selected a sample of firms located in 15 European countries, with a value of 1.551,
both of them for the period between 2003–2011. This is not surprising given the fact that our
sample covers a wider range of years, including the aftermath of the dot.com crisis period of
2002. That year the average Tobin’s Q was 20% lower than the medium value found for the
whole period; whereas for 2008, the spread even dropped 25%. Moreover, we find countries
strongly hit by the 2008 crisis mainly because of their exposure to the financial sector whose
values sank the average, such as Greece (with an averaged Q of 0.09) and Italy (0.07).

Independent and moderator variables

Ownership concentration was measured as the percentage of shares held by insiders
and significant shareholders, where significant means that they hold a share over 5%.
In order to develop the moderator variables, we built up two indexes: one to measure the
monitoring role of the board and another for the provision of resources role, using a factorial
analysis.

Role of the monitoring index

The board’s independence, the CEO-Chairperson duality and the remuneration of the
board have been recognised by the literature as key factors that affect board monitoring
execution (Baysinger & Hoskisson, 1990; Baysinger et al., 1991; Fama & Jensen, 1983;
Hill & Snell, 1988).
Firstly, independent board members – those outside directors who also fulfill the
conditions of independence – will be in a better position to control the decisions of the
managers and the CEO, and capable of representing the interests of the shareholders in
a better way (Baysinger & Butler, 1985; Daily & Dalton, 1994). They are not part of the
top management; nor do they maintain very close links to the CEO. This will favour
their propensity for high-risk investments, which mean high performance and benefits
for the shareholders.
Second, related to the CEO-Chairperson duality, agency theory suggests that for a
board to be effective in its control role, the figures of the Chair of the board and the
CEO of the firm must be separated (Rechner &Dalton, 1991). Thus, whereas non-
duality can reduce the managers’ possible self-interested behaviour (especially that of
CEOs who have considerable power in the company (Jensen & Meckling, 1976)),
duality compromises the board’s independence and weakens the supervision of the
board. A lack of independence fosters the consolidation of CEOs in their posts,
decreasing the effectiveness of the control exercised by the board of directors
(Finkelstein & D´Aveni, 1994).
 SPANISH JOURNAL OF FINANCE AND ACCOUNTING 9

Finally, regarding the remuneration indicator, high compensation encourages the

non-executive directors to create value for the benefit of the shareholders (Devers,
McNamara, Wiseman, & Arrfelt, 2008; García-Meca, 2016).
As far as the monitoring index is concerned, the factor analysis described the three
previously introduced dimensions, explaining 62.38% of the total variance. The first took
the measure of the board’s independence and included the percentage of independent
directors and strictly independent directors (being those not employed by the company; not
representing or employed by a majority shareholder; not having served on the board for
more than 10 years; not a reference shareholder with more than 5% of holdings; having no
cross-board membership; no recent, immediate family ties to the corporation and not
accepting any compensation other than that for board service). This factor explained
27.93% of the whole variance. The second was the CEO-Chairperson duality; this was
calculated by a dummy variable taking the value of 1 when the CEO also acts as the Board
Chairperson and 0 otherwise. This explained 18.73% of the total variance. Finally, the
remuneration of the board explained 14.08% of the variance and the logarithm of the total
compensation of non-executive board members was measured (García-Meca, 2016)

Role of the provision of resources index

Many studies have analysed the relational capability, diversity and policy board experience
variables as elements that influence the board’s execution of the provision of resources role
(Kiel & Nicholson, 2006; Milliken & Martins, 1996; Pearce & Zahra, 1992).
Firstly, board relational capability is defined here as: ‘the degree to which board members
have contacts in the external environment’ (Kim, 2005) and it was composed of the
percentage of non-executive directors and interlocks. On the one hand, a higher percentage
of non-executive directors implies more resources and external ties needed to deal with the
factors of the environment, to exploit opportunities which arise in the new markets and
industries, and to enable the firm to gain legitimacy vis-à-vis the internal and external
stakeholders (Baysinger & Hoskisson, 1990; Pearce & Zahra, 1992). On the other hand, a
high number of interlocks, defined as the firm’s board members who also serve on the
boards of other firms, will benefit from rapid access to important external information and
critical resources (Kor & Sundaramurthy, 2009), gaining support from external stake-
holders and other influential agents (Hillman et al., 2000; Kiel & Nicholson, 2006;
Westphal et al., 2001). Second, board diversity is defined as ‘variety in the composition of
the members of the board’ (Milliken & Martins, 1996) and we proposed the study of foreign
diversity. Foreign diversity is used as a proxy of the board’s experience and international
orientation (Oxelheim & Randoy, 2013; Palmer & Varner, 2007; Piekkari, Oxelheim, &
Randøy, 2015; Staples, 2007; Van Veen, Sahib, & Aangeenbrug, 2014). Board members who
have been born abroad have important knowledge about the markets, culture, behaviours
and rules concerning the country or region that they come from. These board members
could help to understand the complexities of the different markets and their presence is also
a signal for employees, clients, suppliers and authorities that the company is making a great
effort to understand new international markets.
Finally, many studies have proposed the positive aspects of having policies that ensure a
congruence of board experience (Devers et al., 2008; Pérez-Calero et al., 2016). The existence
of this policy guarantees that a company will ensure that board members have appropriate
10 J. GUERRERO-VILLEGAS ET AL.

experience related to what is needed, or at least that the company cares about the suitable
expertise of board members through taking some kind of actions, rules or policies.
As far as the provision of resources index is concerned, the factor analysis described above
presented three dimensions explaining 62.26% of the total variance. From the sediment graph,
we extracted three components standing for relational capability (explaining 25.07% of the
total variance), diversity (18.61%) and policy board experience (21.58%). The percentage of
non-executive members on the board and the interlocks (measured as the average number of
other corporative filiations per board member) formed the board’s relational capability. Two
dummy variables for diversity on the board (in terms of gender and foreign) were grouped
together to make up the indicator of diversity. Our third factor, policy board experience, was
measured by a dummy variable to check if the company has a policy for adequate experience
on the board.
For a better understanding, Monitoring and Provision Indexes were transformed
into dummies. We employed positive/negative values as thresholds in order to discri-
minate between effective/non-effective performances of every role. Thus, we codified
the values of the indexes depending on their sign, and transformed the indexes into
dummies, which took the value of 1 if they were positive and 0 otherwise. Moreover, we
checked the validity of the threshold through ANOVA tests (between every dummy and
Tobin’s Q) whose F-statistics were significant in both cases (p < 0.05).

Control variables
In accordance with previous studies on corporate governance, we have included
the following control variables that might affect the relationships proposed: firm
size, measured by the logarithm of the total assets of the firm (Méndez, García, &
Rodríguez, 2012); board size, measured as the number of directors on the board
(Barroso, Villegas, & Pérez-Calero, 2011; Kroll, Walters, & Wright, 2008; Zahra,
Neubaum, & Naldi, 2007); board members’ specific skills, measured by the percen-
tage of board members who have either an industry-specific background or a
strong financial background (Kor & Misangyi, 2008; Pérez-Calero Sánchez et al.,
2016; Sundaramurthy, Pukthuanthong, & Kor, 2014); percentage of non-executive
board members on the nomination committee, measured by the percentage of non-
executive board members on the nomination committee (Yammeesri & Kanthi
Herath, 2010); board gender, measured as the percentage of women on the board
of directors (Kathyayini, Carol, & Lester, 2012); disclosed professional background/
CV, measured as the total number of board members with a publicly-disclosed
professional background/Curriculum vitae; and board ownership measured as the
percentage of shares owned by board members (Pucheta-Martínez & García-Meca,
2014; Pugliese & Wenstop, 2007). Finally, as it is a multi-country sample, we must
control specific aspects that could affect each country (Durnev & Kim, 2005;
Klapper & Love, 2004; Van Essen, Engelen, & Carney, 2013). Therefore, we have
included dummy variables to control the effects of each country. The estimations
also control the temporal and industry effect, for which we have included dummy
variables for each year (2002–2011) and for each industry. All of these variables,
their definitions and a summary of the descriptive statistics (mean value, standard
deviations, quartiles and range of values) are included in Table 1.
Table 1. Main variables: definition and descriptive statistics.
Definition Mean SD Q1 Q2 Q3 Min. Max.
TOBIN’S_Q Equity market value plus the debt book value divided by the book value of assets 1.252 1.517 0.416 0.804 1.315 0.05 6.9
OWNERSHIP CONCENTRATION Percentage of shares held by all insiders and 5% of owners (by voting power) 55.216 21.935 60.28 61.73 66.97 0.01 67.63
MONITORING INDEX Dummy variable to measure the effectiveness of Monitoring role 0.467 0.499 0 0 1 0 1
PROVISION INDEX Dummy variable to measure effectiveness of the role of Provision of Resources 0.295 0.456 0 0 0 0 1
FIRM SIZE Natural logarithm of Total Assets 73.169 1.675 63.579 68.676 75.156 3.86 12.81
BOARD SIZE Number of members on the Board 11.582 43.693 9 11 14 1 44
% BOARD OWNERSHIP Percentage of shares owned by board members 24.588 22.318 4.945 18.94 39.29 0 100
% NON-EXECUTIVE NOMINATION Percentage of non-executive board members on the nomination committee 90.095 20.699 86 100 100 0 100
COMMITTEE
% SPECIFIC SKILLS OF BOARD Percentage of board members who have either an industry-specific background or a strong 49.348 26.061 30 50 66.67 0 100
MEMBERS financial background
% BOARD GENDER Percentage of women on board 9.448 10.872 0 7.690 14.290 0 66.670
DISCLOSED PROFFESIONAL Total number of board members with publicly disclosed professional background/CV 10.418 4.837 8 10 13 0 35
BACKGROUND/CV
TEMPORAL EFFECTS Dummy variables for each year (2002–2011)
INDUSTRY EFFECTS Dummy variables for each industry according to NACE codes at 2 digits
COUNTRY EFFECTS Dummy variables to control the effects of each country
SPANISH JOURNAL OF FINANCE AND ACCOUNTING
11
12 J. GUERRERO-VILLEGAS ET AL.

Statistical estimations
To test our hypotheses, we used an estimation process that is appropriate for our
theoretical arguments and robust enough to withstand the typical problems associated
with panel data analysis. We therefore used the Arellano–Bond model and used the
generalised method of moments (GMM) method (Arellano & Bond, 1991; Arellano &
Bover, 1995). These authors propose the use of GMM, using the lagged values of the
original independent variables as instruments, thereby resolving the problem of endo-
geneity. We used the Stata/SE software programme to calculate all of our estimations.
We also considered the possible problems of heteroscedasticity and autocorrelation. In
order to establish if there was a problem of heteroscedasticity we carried out a modified Wald
test, which rejected the H0 absence of heteroscedasticity, and we therefore selected the robust
option in Stata for all of our models. To control for autocorrelation, we ran the Wooldridge
test, using the xtserial command in Stata. The H0 absence of correlations was rejected, and the
test therefore indicated that there was a problem of autocorrelation to be corrected.
To test the validity of the model specification when using GMM, the Hansen Statistic of
over identifying restrictions was applied to evaluate the lack of correlation between the
instruments and the terminal error in all of our models. The acceptance of the H0 Hansen
statistic implies the absence of any correlation between the instruments used and the terminal
error in all of our models. We also included the m2 statistic, which enabled us to confirm the
absence of any secondary-order serial correlation in the regression residuals. Further to these
comparative specification tests, we included the following Wald tests in the estimations: first
(z1) joint significance of the reported coefficients of the explanatory variables and second (z2)
joint significance of the dummy time variables. Both were statistically significant.
Finally, to isolate the relationship between these two variables, all other factors
affecting them are assumed to remain constant in their average values. Recall that
this is the Marshallian assumption of ceteris paribus – ‘all other things being equal’.

Results
Tables 2 and 3 show the correlation matrixes of the variables employed. We found no
outliers in our data that should be removed. Moreover, the eigenvalues of independent

Table 2. Correlation matrix between variables for monitoring regression.

% NON-
EXECUTIVE
OWNERSHIP MONITORING FIRM BOARD % BOARD NOMINATION
TOBIN’S_Q CONCENTRATION INDEX SIZE SIZE OWNERSHIP COMMITTEE
TOBIN’S_Q 1.000
OWNERSHIP −0.0428 1.000
CONCENTRATION
MONITORING INDEX 0.0017 0.1973* 1.000
FIRM SIZE −0.3489* −0.0811* 0.0605* 1.000
BOARD SIZE −0.0158 0.0033 0.0115 0.0253 1.000
% BOARD 0.0834* −0.5264* −0.3165* 0.0156 −0.0019 1.000
OWNERSHIP
% NON-EXECUTIVE −0.0086 −0.0167 −0.0211 0.0071 0.0136 0.0385 1.000
NOMINATION
COMMITTEE
 SPANISH JOURNAL OF FINANCE AND ACCOUNTING 13

Table 3. Correlation matrix between variables for provision of resources regression.

% SPECIFIC
SKILLS OF % DISCLOSED
OWNERSHIP PROVISION BOARD BOARD PROFFESIONAL
TOBIN’S_Q CONCENTRATION INDEX MEMBERS GENDER BACKGROUND/CV
TOBIN’S_Q 1.000
OWNERSHIP −0.0428 1.000
CONCENTRATION
PROVISION INDEX 0.0237 −0.0111 1.000
% SPECIFIC SKILLS OF 0.0733* 0.0447 0.0208 1.000
BOARD MEMBERS
% BOARD GENDER −0.0167 −0.0110 0.0117 −0.0377 1.000
DISCLOSED −0.1491* 0.0075 0.0024 −0.1109* −0.0084 1.000
PROFFESIONAL
BACKGROUND/CV
*p < 0.01

variables were not equal to 0, the values of the condition index were less than 30, and all
of the Variance inflation factors (VIFs) were substantially lower than 2, with an average
VIF of 1.21 in the first model (model with a moderating control role) and 1.07 in the
second model (model with a moderating provision role). Therefore, our models do not
have any problems of multicollinearity. We also centred the independent variables
before creating the interaction variables (Aiken & West, 1991). The results from these
analyses were not materially different from those reported.
Table 4 shows the results of the GMM estimation of the panel data with a robust
standard error analysis. Model 1 is the baseline model with all control variables.

Table 4. Results of the moderating effect of monitoring and provision roles on the relationship
between ownership concentration and firm performance (GMM method).
Model 1 Model 2 Model 3
Ownership concentration 0.1043*** 0.0568*
Ownership concentration sq −0.0016** −0.0009**
Monitoring index 0.5880**
Provision index 0.1073
Ownership concentration × monitoring index −0.0221**
Ownership concentration sq × monitoring index 0.0002**
Ownership concentration × provision index 0.0370**
Ownership concentration sq × provision index −0.0010**
Firm size −0.3665*** −0.4176***
Board size 0.0000 0.0000***
% Board ownership −0.0009 0.0002
% Non-executive nomination committee 0.0005 0.0006
% Specific skills of board members 0.0090 0.0217
% Board gender −0.0014 −0.0011
Disclosed professional background/CV 0.0039 0.0018
Annual effects Yes Yes Yes
Industry effects Yes Yes Yes
Country effects Yes Yes Yes
Z1 53.77*** 47.73*** 33.78**
Z2 183.73*** 172.62*** 184.08***
M2 −1.06 −0.23 −1.38
Hansen 23.82 20.50 16.93
X2 239.56 *** 198.61*** 204.88***
Number of observations 5790 5790 5790
*p < 0.10; **p < 0.05; ***p < 0.01.
**Due to the high correlation between some variables, which make up both indexes, models 2 and 3 include different
control variables.
14 J. GUERRERO-VILLEGAS ET AL.

Hypothesis 1 proposes that the curvilinear (inverted U-form) relationship between

ownership and firm performance is moderated by the monitoring role. To test this
hypothesis, we analyse Model 2. As the table shows, the estimated coefficient of the
monitoring index was significant (p < 0.05) and had a positive sign (B = 0.558). The
estimated coefficient of ownership concentration is statistically significant and has a
positive sign (B = 0.1043; p < 0.01). The squared term for ownership concentration was
negative and significant (B = −0.0016; p < 0.05). The linear interaction term for the
monitoring index and ownership concentration was negative and significant
(B = −0.0221; p < 0.05), and the squared interaction term positive and significant
(B = 0.0002; p < 0.05).
In order to clarify the effect of the monitoring role, Figure 1 exhibits both curves: the
solid curve represents the effect of ownership concentration on performance; the dotted
curve represents the moderation of the monitoring function by the board. To isolate the
relationship between these variables, all other factors affecting them are assumed to
remain constant in their average values (Marshallian assumption of ceteris paribus). As
shown, better effects on firm performance are obtained through the role of monitoring
for lower values of ownership concentration; but, this enhances the results whatever the
ownership concentration level is. What is more, through the monitoring role, the
maximum reaches a Q value of 1.83; whereas without its moderation, the maximum
is only 1.71. Thus, hypothesis 1 is supported.
Hypothesis 2 suggests that the relationship between ownership concentration and
firm performance will be moderated by the provision role. In Model 3, also under
ceteris paribus assumptions, the estimated ownership concentration was statistically
significant and had a positive sign (B = 0.0568; p < 0.1). The squared term for owner-
ship concentration was negative and significant (B = −0.0009; p < 0.05). The linear
interaction term for the provision index and the ownership concentration was positive
and significant (B = 0.0370; p < 0.05) and the squared interaction term was negative and
significant (B = −0.001; p < 0.05).
Analysing the mathematic function, we found that the provision of resources role
positively affects Tobin’s Q for most values of ownership concentration level (see
Figure 2). Only for high concentrated ownership structures over the cutting-point of
40.5% does the provision of resources role not maintain its enhancing effect. We also
find that the provision of resources role reaches its highest effect for ownership

2
1.8
1.6
1.4
TOBIN'S Q

1.2
1 Q
0.8
0.6 MODERATED
0.4 Q
0.2
0
1 11 21 31 41
OWNERSHIP CONCENTRATION

Figure 1. Moderating effect of the monitoring board role.

 SPANISH JOURNAL OF FINANCE AND ACCOUNTING 15

1.4

1.2

1
TOBIN'S Q 0.8
Q
0.6
MODERATED
0.4 Q

0.2

0
1 11 21 31 41
OWNERSHIP CONCENTRATION

Figure 2. Moderating effect of the provision of resources board role.

concentration values between 23% and 24%, while the value reached for Tobin’s Q is
1.21. Thus, hypothesis 2 is partially supported.

Discussion and conclusions

This study supports past research focused on the relationship between ownership
concentration and firm performance and adds new evidence on how board roles
moderate this association. Related to this, previous studies found a curvilinear (inverted
U-form) in the link. That is, when the concentration of ownership increases, there is a
positive effect on performance up to a point at which the relationship between the two
variables begins to become negative (Morck, Shleifer, & Vishny, 1988; Thomsen &
Pedersen, 2000; Tuschke & Sanders, 2003).
Until now, this previous research had paid little attention to analysing other
factors that could affect this relationship. By using the agency and the dependence
of resources theories, we consider that our study advances research because it has
the novelty of considering other variables that may affect the link between owner-
ship concentration and performance. Particularly, this paper highlights the impor-
tance of the board as we take into account the monitoring and resource provider
roles performed by directors. In doing so, this study aims to add theoretical
insights, as our research tries to find out how these functions developed by the
members of the board could alter the effect that the different levels of ownership
concentration have on firm’s performance. Our first hypothesis considered that the
positive effects of low levels of ownership concentration on firm performance would
be enhanced by the monitoring board role, as well as the negative effect of high
levels of ownership concentration on firm performance being reduced. According to
our results, we find that the monitoring function developed by the board will be
more effective when ownership is diffused. In other words, the improvement in the
firm’s performance is more intense in low levels of ownership concentration than in
high levels. We believe that these results represent an important contribution, as
they show that greater board control improves the firm’s results when ownership is
dispersed. This is because dispersed shareholders not only individually may lack the
incentives and abilities to monitor management directly, but also find it challenging
16 J. GUERRERO-VILLEGAS ET AL.

to coordinate their monitoring efforts. Besides, when there are majority share-
holders, the greater control of the board has a less positive effect on the results.
This seems to indicate that the majority shareholders carry out the supervising role
directly.
This research also contemplates the provision of resources’ role played by the board.
In this regard, we can say that the provision of specific resources by the board (such as
advice and counsel, channels of communication, access to resources and legitimacy) in
general terms, has a positive effect on performance. When ownership is dispersed,
managers have more freedom to make decisions and generally prefer short-term value
and low risk. As a result, they are given to embarking on projects that reduce the
variability in their earnings, such as diversification strategies. This shows that the board
members should emphasise this function if they wish to achieve better results.
Nevertheless, when ownership concentration becomes higher, the positive effect
diminishes little by little, up to a point when it is too concentrated, where this board
function negatively affects firm performance. A possible explanation could be that large
shareholders could force managers to value maximisation through the promotion of
decisions of excessive risk taking. To sum up, the pressures exercised by large share-
holders could damage the results of the board’s decision-making.
As future research, we believe, there are some lines that may be further considered in
the research on this topic. Firstly, other organisational factors, such as the organisa-
tional life cycle, the firm age and the degree of technological change could be analysed
in the future. Secondly, measuring the differences between different contexts or
European countries could determine differences in the relationship between ownership
and performance. Thirdly, the analysis of the different roles played by different types of
shareholders could also be considered.
Moreover, we believe that this work has also practical contributions as it could help
to set up the best adequate board structures – in terms of which functions are more
needed – considering the different levels of ownership concentration.
Lastly, as a limitation, given that this study is focused on a sample of big European
firms registered in the STOXX Europe 600 index, the results could differ from those
that consider small- and medium-sized firms, which are characterised by having high
levels of ownership concentration. The decision-making and control structures of large
companies are more complex and diffuse than in small firms, resulting in a compara-
tively increased monitoring necessity to mitigate agency problems. On the contrary,
small and medium firms need more advice and counsel.

Disclosure statement
No potential conflict of interest was reported by the authors.

Funding
This work has been financed by the Ministry of Economy and Competence of Spain through
Project [ECO2016-75047-P, ECO 2014-58799-R and ECO2014-58799-R].
 SPANISH JOURNAL OF FINANCE AND ACCOUNTING 17

ORCID
Jaime Guerrero-Villegas http://orcid.org/0000-0002-1029-401X
Pilar Giráldez-Puig http://orcid.org/0000-0001-8903-2823
Leticia Pérez-Calero Sánchez http://orcid.org/0000-0001-6694-2939
José Manuel Hurtado-González http://orcid.org/0000-0001-7901-9748

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