The effect of institutional investor type on the relationship between CEO duality and financial performance

Abstract

Corporate governance literature presents inconclusive evidence regarding the relationship between board characteristics and financial performance. Remembering that certain types of, but not all, institutional investors exert influence on monitoring and influencing management, this study goes beyond the traditional analyses of institutional investors and focuses on the effect of two different types of institutional investors, namely, pressure-sensitive and pressure-resistant, on the relationship between board leadership structure and financial performance. While pressure-sensitive type includes those institutions that are less likely to challenge management, pressure-resistant type incorporates those institutions that have no business relationships with the firms in which they hold stocks, and therefore are better suited to impose controls on management decisions and behaviour. The findings strongly suggest that institutional ownership moderates the relationship between CEO duality and financial performance, with the relationship being positive (negative) in presence of pressure-resistant (pressure-sensitive) institutional ownership. These findings support prior studies that argue that corporate governance mechanisms, and hence board leadership structure, should be neither modelled nor isolated from other organisational variables. The results of this study can be of interest to researchers in corporate governance, policy makers and managers who aim to maximise the value of their firms and improve board effectiveness.