Ownership Structure, Corporate Governance and Retained Free Cash Flows: An Empirical Study of Listed Shariah-Compliant Enterprises

Abstract

The study investigates the relationship between retained free cash flows in sharia-compliant firms and its ownership structure. A sample of 65 firms, consistently part of sharia index from 2011 to 2020 is analyzed for this study to assess the impact of ownership structure on retained cash flows in sharia-compliant firms. The proxies used in the study for ownership concentration are the combined ownership of the largest 03 shareholders and the combined diffused shareholding of shareholders having < 1% stake in the companies. The study employs two proxies for ownership concentration: the combined ownership of the largest three shareholders and the aggregate of shareholders with less than a 1% stake (diffused ownership). Additionally, ownership mix is examined through executive director’s shareholding, institutional and retail shareholding, shareholding by mutual funds, and the shareholding by independent non-executive directors in these sharia-compliant companies. Using panel data and the system Generalized Method of Moments (GMM) technique for regression analysis in STATA, the results indicate a statistically significant relationship between ownership structure and retained free cash flows. Ownership concentration, managerial ownership, mutual fund ownership, and institutional ownership are positively associated with higher levels of retained free cash flows. In contrast, diffused ownership exhibits a negative relationship with cash retention. The findings highlight the influential role of different ownership structures in shaping the financial behavior of Sharia-compliant firms, particularly in the context of retained free cash flows.

Keywords: retained free cash flows, ownership mix, ownership concentration, agency theory, Sharia complaint firms, generalized method of moments.