Manuscript Type: Empirical Research Question/Issue: This study aims to evaluate the suitability of Taiwan's minimum shareholding requirement for small- and medium-sized enterprises (SMEs), and to examine whether stewardship theory and both incentive and entrenchment effects can characterize the ownership-performance relationship simultaneously. Research Findings/Results: We apply new empirical methods to a balanced panel dataset including 496 firm-level observations of 62 Taiwanese SMEs publicly traded from 1999 to 2006. The results show a nonlinear ownership-performance relationship, first negative then positive, with a single threshold value of insider ownership (5.4 per cent). This indicates that both effects combine and that the current regulated minimum level of insider shareholdings for public SMEs may be too high. Theoretical Implications: Our evidence supports both convergence-of-interests and entrenchment effects and suggests a better specification that prevents spurious relations obtained from traditional methods. The stewardship theory does work in Taiwan. Insiders behave as loyal stewards rather than motivated by desire for entrenchment. Our empirical evidence suggests an avenue of future research, specifically to form better strategies for those involved in corporate governance. Practical Implications: We suggest that Taiwanese authorities should lessen ownership obligations, thereby leading to improved corporate governance by increasing the independence of the boards of directors. Emerging markets can learn from the Taiwan experience and then formulate their own regulations. Publicly traded SMEs could offer compensation to insiders such as stock options and performance shares. Asymmetric information problems often experienced by outside stockholders and foreign investors can be alleviated by these signals of insider ownership.
