SMEs are the backbone of global economies. They play a decisive role in the diversification of the economy, create employment, foster economic growth, enhance a country´s production, and reduce the ability of large companies to control the market (Benedict et al., 2021; Hacini et al., 2022). Most studies on corporate governance have focused on large firms and have not considered many of the typical or recommended processes and activities carried out by SME boards. In fact, a common practice in small and medium-sized enterprises (SMEs) is the combined ownership-management function within the organizational structure that facilitates both the accountability of owners and the empowerment of managers (Arthurs & Busenitz, 2003). The result is that governance is more efficient in SMEs, as it avoids the agency problem that exists in larger organizations (Lappalainen & Niskanen, 2012; Omri et al., 2014).

However, these findings were not conclusive and did not reach a unanimous consensus in European contexts (Corbetta & Tomaselli, 1996; Daily & Dalton, 1992; Hermalin & Weisbach, 2003; Roffia, 2020). Researchers have argued about specific areas such as board independence, board composition, ownership structure, and management ownership, but the scientific approach has not expanded to the effectiveness of corporate governance variables within the SME segment, in which certain characteristics emerge such as low levels of board independence and high ownership concentration. In small and medium-sized enterprises, where managerial ownership is usual, agency problems are more likely to arise due to information asymmetry. Moreover, the ownership concentration can lead to risk aversion and an unwillingness to engage in strategic changes. Therefore, the managerial and ownership structure may be associated with firm performance (Lappalainen & Niskanen, 2012).

The Spanish context presents a number of unique aspects of Spanish enterprises, such as high levels of ownership and managerial concentration. The average listed Spanish firm has several large controlling shareholders, and floating stock is less than 50% for many firms. Moreover, Spanish private SMEs have a negative discount, suggesting a premium over listed firms due to the relative illiquidity and higher risk (Rodríguez-Valencia et al., 2023). On the other hand, it is very important to point out that companies listed on the Spanish Stock Exchange are required to implement a Good Governance Code and must disclose a standardized Annual Report on Corporate Governance (ARCG). However, SMEs listed on alternative stock exchanges are normally exempt from complying with this code, resulting in a certain flexibility in terms of corporate governance.

The purpose of this paper is to provide empirical evidence of enhanced firm value resulting from corporate governance mechanisms related to ownership and managerial concentrations. The above arguments lead to our central research question, i.e., Can listed Spanish SMEs enhance firm value through managerial and ownership concentration variables?

Our study contributes to the literature in the following ways. First, our research extends the strand of literature that investigates how corporate governance instruments, such as managerial and ownership concentration, affect firm value from the perspective of Spanish small and medium-sized firms. For instance, the results of the studies conducted by Fama and Jensen (1983) show that the cost of monitoring decreases and that the agency problem is mitigated, resulting in higher firm value. Second, we found that both managerial and ownership structures are significant determinants of firm performance in our sample of small and medium-sized Spanish firms. This study is based on a panel data set covering 108 firms over a time period of five years. The results suggest that (a) less board independence might be better for firm value (b) CEO duality positively affects firm value (c) controlling shareholders positively affect firm value, and (d) second-largest shareholders positively affect firm value. Our findings are in line with previous studies (Deb & Wiklund, 2017; du Plessis et al., 2018; Garg, 2020; Hamelin, 2011; Li et al., 2020; Liao et al., 2014; Martin et al., 2017; Mortazian et al., 2019). Finally, to address the problem of endogeneity in the study of managerial and ownership structures, we employed the Generalized Method of Moments (GMM) and the instrumental-variable (IV) methods. Moreover, the independent variables are one-year lagged to the respective dependent (performance) variables in order to reduce concerns over endogeneity.

This paper is organized as follows. In Section 2, we present the theoretical background and elaborate our hypotheses. In Section 3, we describe the data sources, sample formation, and empirical analyses. In Section 4, we report the results; and finally, in Section 5, we present a discussion and the conclusions of the study.

The corporate governance literature has mostly focused on large listed companies. Conversely, corporate governance features in SMEs have received much less research attention compared to large companies. The definition of corporate governance originated in the large business environment (Fama & Jensen, 1983; Jensen & Meckling, 1976), who studied the effect of separating corporate control and ownership. According to agency theory (Jensen & Meckling, 1976), there are various ways in which management may not act in the best interest of the shareholders, e.g., a board mainly consisting of directors cannot effectively monitor management, and combining the roles of the CEO and the chair of the board of directors concentrates too much power in the hands of just one person (Baysinger & Butler, 1985; Fama, 1980; Lefort & Urzúa, 2008).

An alternative technique to solving agency problems is board composition. The board can be seen as a decisive connection between management and shareholders (Brunninge et al., 2007). Agency theory suggests that the separation of ownership from control may lead to agency problems when the interests of owners and managers are misaligned (Lappalainen & Niskanen, 2012). Managerial ownership or the presence of a large shareholder can lead to better performance as this significantly reduces agency problems between managers and owners, since they will be less likely to deviate from the main purpose of shareholder wealth maximization.

The result is that governance is more efficient in SMEs as it avoids the agency problem that exists in larger organizations (Banham & He, 2010). In the context of SMEs, the accountability of owners and the empowerment of managers are embedded in the organizational structure (Arthurs & Busenitz, 2003). Therefore, SMEs do not often face the classic agency problem since their directors discuss strategic issues and have a solid understanding of the company’s long-term success (Garg, 2013).

Some academics argue that monitoring by independent directors can be ineffective, as they have much less knowledge of the firm and therefore their decisions are mainly based on biased information provided by managers (Choi et al., 2021). For example, Harris and Raviv (2008) showed that firm value is maximized with less board independence when the cost of monitoring by independent directors is high; Muth and Donaldson (1998) found that board independence adversely affects firm value; Jentsch (2019) concluded that firm value is reduced by adding more independent directors to the board, and also suggested that having executive directors on the board adds value. Hence, we present the following hypothesis:

Hypothesis 1: Firm value is reduced by including independent directors to the boards of listed SMEs.

There is also no conclusive evidence regarding CEO duality, although various theoretical perspectives, such as agency theory, predict the effect of CEO duality (Donaldson & Davis, 1991). According to the separation hypothesis, two separate individuals in the highest positions of an organization can monitor more effectively (Brickley et al., 1997; Elsayed, 2007; Fosberg & Nelson, 1999). Generally, this hypothesis applies to the environments of large organizations. However, in SMEs, the situation is completely different. The combination hypothesis shows that one person unifying both roles is more efficient (Davis et al., 1997; Donaldson & Davis, 1991; Jentsch, 2019; Y.-F. Lin, 2005). Therefore, we propose the following hypothesis:

Hypothesis 2: CEO duality has a positive effect on firm value for firms listed on alternative stock markets.

Agency theory is often associated with the separation of ownership and control (Jensen, 1994; Li et al., 2020; Liao et al., 2014; Schulze et al., 2001). Nevertheless, SMEs present a diverse governance structure. Based on the corporate governance literature for SMEs, the advantages of having controlling shareholders are emphasized under the convergence of interest and the efficient monitoring premises. According to these premises, controlling shareholders are likely to exert more effective monitoring on management than small shareholders, since they possess significant investments and large voting power to protect their investments, can mitigate collective action problems faced by different shareholders, and are more committed to the firm in the long run (Berle & Means, 2017; Jensen & Meckling, 1976; Jentsch, 2019; Shleifer & Vishny, 1986; Zeckhauser & Pound, 1990). According to Kroll and Walters (2007), ownership by top management team members who are also on the board is positively associated with post-IPO performance. In line with the controlling shareholders premise, we propose the following hypothesis:

Hypothesis 3: Controlling shareholders enhance firm value for listed firms on alternative stock markets.

The second-largest shareholder represents the dispersion of power in the company among all groups of shareholders. Commonly, shareholders with a small number of shares find themselves in an unfavorable situation, as monitoring managers is costly and the exacerbation of the information asymmetry problem between investors is growing. Therefore, small shareholders rely only on market regulations to protect themselves from being expropriated by managers (La Porta et al., 2000). Nevertheless, the presence of small shareholders also diminishes the incentives to extract private benefits at their expense. According to Maury and Pajuste (2005) and Mortazian et al. (2019), the second largest blockholder has a positive impact on firm value. Thus, we present the following hypothesis:

Hypothesis 4: The second largest shareholders of SMEs have a positive impact on firm value.

Conventional corporate governance theory argues that a board should primarily consist of a significant number of independent directors, the chairman should not simultaneously serve as CEO, and ownership concentration should not be allowed. However, this theory only applies for larger corporations. This paper finds that agency theory may not adequately explain the case of listed SMEs due to the different governance scheme that applies specifically to large firms. The innovative aspect of our study is that it demonstrates that the governance configuration of listed SMEs can mitigate several of the central issues, such as the agency problem, that large corporations face.

In this study, we hypothesized that three variables i.e., CEO duality, controlling shareholder, and second-largest shareholder lead to improved company performance, and that a lower ratio of independent directors on the boards of SMEs leads to better firm value. To test these hypotheses, we conducted a firm-year-fixed model as the baseline model, and performed robustness tests such as the generalized method of moments and the two-stage least-square (2SLS) analyses.

The empirical results suggest important findings. First, they suggest that listed SMEs have better governance systems since the agency conflict is not as relevant as in large corporations. We demonstrate that, as corporate governance practices differ between small and medium enterprises and large firms, these could have different impacts on firm value. Second, a negative relationship was found between the independent director ratio and Tobin's Q, used as a proxy for firm performance. Third, CEO duality may improve firm valuation in the context of Spanish listed firms. This finding is also consistent with previous literature (Colombo et al., 2014; Deb & Wiklund, 2017; Garg, 2013; Wasserman, 2017). Fourth, the results of the analysis, with regard to blockholder ownership, further suggest that the presence of a controlling shareholder does in fact increase firm value. Fifth, our findings reveal that the second-largest shareholder has a positive impact on the performance (Tobin's Q) of small and medium-sized listed firms. This result is in line with previous studies (du Plessis et al., 2018; Koh, 2022; Martin et al., 2017; Mukherjee, 2022).

This research has some limitations. First, the data were collected in a limited geographical area (i.e., Spain), thereby limiting the possibility of generalizing the results. Second, a considerable problem with managerial and ownership concentration studies is endogeneity. To address endogeneity concerns, at least to a certain extent, this study uses lags. Moreover, the use of year-firm-fixed effects is aimed at reducing potential endogeneity problems. Third, this research aims to limit omitted variable bias by controlling for year-firm-fixed effects, and also tries to avoid omitted variable bias by including the most common control variables.

Future research could focus on the relationship between governance variables and firm value in the context of non-listed SMEs. In addition, research could be conducted in other developed economies with similar levels of ownership and managerial concentration, such as Germany, France, and Italy. Furthermore, we plan to expand the literature by considering different samples of corporate governance variables, i.e., management ownership, frequency of meetings, auditing, etc.

The results of this paper contribute to the existing literature in three ways. First, it extends the analysis of governance schemes to SMEs. Corporate governance characteristics in SMEs have received much less research attention compared to large companies. By employing the findings of this paper, SME directors will be able to identify the key governance variables that affect firm value, and will therefore be able to concentrate their efforts on them. Second, our study includes financial and some corporate governance variables, but it would be possible to analyze other governance variables that also influence firm performance. Finally, the findings may also be useful for various stakeholders, such as investors or regulators of corporate governance, considering the active contribution of SME boards in the value creation process.