Director Ownership and Performance of Small and Medium Enterprises: Insights from Northeast Italy

Purpose of the paper: This article examines the relationship between the proportion of shares that are owned by directors and a firm’s financial performance in small and medium enterprises (SMEs). Methodology: We collected data on ownership and director structures from 214 SMEs in the provinces of Verona and Vicenza (Italy). We used the return on assets (ROA) ratio as a proxy for financial performance over a 4-year period (2014-2017) and implemented an ordinary least squares (OLS) regression model with time-period and industry fixed effects. Results: We found a statistically significant correlation between director ownership and the ROA ratio and identified a nonlinear relationship indicating that the influence of director ownership on performance may be positive or negative and that both the convergence of interests and entrenchment effects are present, depending on the level of ownership and other contextual variables such as it being a family firm, firm age and generational change. Research limitations: Despite our efforts, reverse causality problems cannot be completely excluded. Collecting data in a limited geographical context over a four-year period restricts the generalization of our results and the use of the Likert scale (1-5) to evaluate managerial ownership may reduce the accuracy of our analysis. Practical implications: Directors and shareholders should carefully consider the benefits deriving from director ownership in overlapping roles, and regulators could better define corporate governance models. Originality of the paper: This study specifically addressed the issue of director ownership in SMEs by considering their relevant contextual variables, such as family firm, firm age, and generational change.