CEO power, ownership structure and firm investment efficiency: A three-way interaction model

Abstract

The study aims to investigate the moderating role of ownership structures in the relationship between CEO power and investment efficiency. Specifically, we examined the direct impact of various dimensions of CEO power on investment efficiency. Moreover, we explored the moderating effect of family ownership on the relationship between CEO power and investment efficiency. Lastly, we examined whether institutional ownership weakens this negative effect. To achieve these objectives, we employed a sample of 310 listed non-financial firms in Pakistan for the financial years ending 2016–2025. Further, we employed panel regression and Driscoll-Kraay fixed-effects models to analyze the baseline, two-way, and three-way interaction equations. Our findings showed that CEO power is negatively related to investment efficiency, and this relationship is amplified in family-owned firms. Moreover, we found that institutional ownership mitigates this negative effect, suggesting that the negative moderating effect of family ownership is reduced in its presence. Our study extends Type 2 agency theory by employing a complex interaction of ownership structures, providing unique insights into corporate governance dynamics. The findings offer practical implications for regulatory authorities and corporate boards intending to restrict suboptimal capital allocation in family-owned businesses. Furthermore, the findings also assist investors in preferring to invest in companies with a strong institutional environment.