Homeworks writing service


Ownership structure and firm performance literature review

Abstract The objective of the paper is to survey the theoretical basis for and empirical evidences on the impact of ownership structure on firm performance. Ownership structure is considered as an important corporate governance mechanism ownership structure and firm performance literature review resolve the conflict arising between the managers and shareholders. Extensive theoretical and empirical work on this topic was done over the last two decades. However, there are inconsistencies in the results and the impact of ownership structure on firm performance was found positive, negative and insignificant.

The probable reasons for the inconsistencies include corporate governance environment, endogeneity of ownership structure and measures of firm performance used. The failure of several leading companies in India and abroad emphasized the importance of corporate governance issues in last two decades.

Looking for the full-text?

Corporate governance mechanisms include board parameters and ownership structure. How ownership structure affects the firm performance is one of the major issue of concern for the policy makers, economists and that of a company as well. The fundamental insight into this issue was given by Berle and Means who believed the diffusion of ownership results in decrease in firm performance.

Jensen and Meckling further developed their concern in the form of Agency Theory which provided the framework for ownership and firm performance studies worldwide. This theory is based on Principal-Agent relationship, according to ownership structure and firm performance literature review the agents managers perform their functions which are not in line with the interest of the shareholders principals and thereby reduces their wealth.

On the other hand Klein et al. However, the impact of ownership structure on firm performance was widely studied in developed countries. The impact is discussed very recently in emerging markets like India.

Thus an attempt has been made here to bridge the gap by focusing on the studies on emerging economy as well.

Ownership Structure and Firm Performance: A Review of Literature

Ownership studies throughout the world have focussed on the different aspects of ownership structure and their impact on corporate performance. Along with findings, the ownership structure and firm performance literature review used to derive impact of ownership structure and the various aspects of ownership structure viz.

The remainder of this paper is organized as follows: Section 3 presents the probable reasons for the inconsistency in the research findings. Section 4 gives the directions for future research and section 5 concludes. Researchers have been trying to identify the optimal ownership structure and International Journal of Multidisciplinary Research Review, Vol.

The impact of ownership structure on firm performance is twofold. On the one hand, concentrated ownership can provide for better control of management, as the ownership structure and firm performance literature review of ownership stake and the incentive to monitor are positively correlated which in turn should improve firm performance and equally benefit minority shareholders. On the other hand, it can come with costs for minority shareholders as the controlling owners might try to expropriate from them.

Demsetz and Villalonga argued in contrast to Berle and Means thesis.

They proposed that ownership structures, whether concentrated or diffused, emerge from the interplay of market forces that maximize shareholder expected returns. Ownership concentration is considered as an endogenous variable and the two dimensions of ownership structure are considered viz.

Insider shareholding is measured as the fraction of shares owned by management and ownership structure and firm performance literature review fraction of shares owned by the five largest shareholding interests denoted Ownership Concentration. However, using the 2SLS estimates they found that there is no significant impact of ownership structure on firm performance.

Their results were consistent with the view that ownership structure is chosen so as to maximize firm performance, and that greater diffuseness in ownership offers competitive advantage and thus increase firm performance.

Kumar and Singh analysed promoter ownership of companies listed on the BSE for the period using linear regression analysis to find the effect of promoter ownership on the firm value. The results of the analysis revealed that there exists a significant positive relationship between firm value and promoter ownership.

The findings concluded that as ownership increases, there is a greater alignment of managerial interests with those of stockholders. Pathak and Pradhan examined manufacturing firms of seven industries for the years and with the objective of finding out whether shareholding has any effect on firm performance.

Return on Assets ROA was used as performance measure. Dummy variable multiple regression analysis was employed to detect the effect of change in ownership structure on firm performance with the passage of time. The results revealed that the model used was significant. The findings showed that promoters do not have a significant impact on firm performance.

Institutional shareholding has negative impact on firm performance which means higher the institutional shareholding, the lower is the return, however, individual holding was also found to be insignificant.

The study concluded that Tobin's Q first increases, then declines, and finally raises slightly as ownership by the board of directors increases. They used instrumental variables to control for endogeneity of ownership and found a quadratic form of the effect of ownership on firm performance.

Using OLS regression, the firm value as measured by market to book value ratio first decreases and then increases as the ownership is concentrated in the hands of insiders. The market signaled a negative relation between inside ownership and firm value until a significant high level of ownership is reached. Therefore the results showed that corporate insiders expropriate corporate assets at lower level of their ownership, hence resulting in lower firm value in the capital market.

However there are inconsistencies in the results and the impact of firm performance on ownership structure varied from positive to negative and to insignificant. The possible reasons could ownership structure and firm performance literature review The different corporate governance environment- legal, political, economic, social, communities, cultures and ideologies, and the financial markets is one of the most important reason of the diverse relationship between the ownership structure and firm performance relationship.

A specific corporate governance environment may determine that whether the relationship between ownership and firm performance is positive, negative and insignificant. The model specification and the estimation method used may also lead to different conclusion on ownership-firm performance studies.

Endogeneity of the ownership structure could be the probable reasons as a general trend is to determine the ownership structure exogenously. A single equation estimation model will produce biased results if ownership is endogenously determined. In such case simultaneous equation models and instrumental variable techniques would produce better estimates.

The firm performance measure used ownership structure and firm performance literature review also produce different results. In exiting literature firm performance is measured using both the market based measures and accounting based measures. Though different scholars have modified the formula due to unavailability of data on the replacement costs of assets and used book value of assets as denominator. While much has been learned about the ownership and firm performance relation, there are certain issues that can studied in future research.

Most of the studies on ownership structure and firm performance relationship are performed in developed economies and very few focused on the developing markets.

Thus there is need for more studies considering various aspects of ownership structure in emerging economies especially in light of recent changing environment.

Another avenue for future research is to examine the endogenous issues. It requires careful design of the empirical test and careful interpretation of the results. Studies generally focused on the direct relationship between the ownership structure and firm performance relation, thus there is also potential for evaluating the indirect relationship between the ownership structure and firm performance relationship via other corporate governance mechanisms.

Ownership structure can influence the corporate strategy like financing decisions, investment decisions, compensation and pay performance, dividend policy, mergers and acquisitions etc. Finally evaluating the ownership- firm performance relationship across countries in different corporate International Journal of Multidisciplinary Research Review, Vol. The review of the exiting studies concludes that the impact of Ownership Structure on firm performance is inconsistent.

While some studies reported a positive relationship between the two, other found the relationship negative and some studies concluded that there is insignificant relationship between ownership structure and firm performance. The paper found that the reasons for inconsistencies in the results include the corporate governance environment, endogeneity of ownership structure and firm performance measures used.

Further studies in this area can be conducted considering cross country analysis of ownership - firm performance relationship in different corporate governance environment. Managerial ownership and firm valuation: Evidence from Japanese firms. Pacific-Basin Finance Journal, 11 3 Ownership Structure and Corporate Performance. Journal of Corporate Finance, Vol. Corporate governance and performance of Indian firms: The effect of board size and ownership. Employee Responsibilities and Rights Journal, 17 3 Understanding the determinants ownership structure and firm performance literature review managerial ownership and the link between ownership and performance.

Journal of Financial Economics, Vol. Corporate governance, family ownership and firm ownership structure and firm performance literature review An International Review, 13 6 Effect of board size and promoter ownership on firm value: The international journal of business in society, 13 ownership structure and firm performance literature review Additional evidence on equity ownership and corporate value, Journal of Financial Economics, Vol. Management ownership and market valuation: Journal of financial economics, 20, A Study of Indian Manufacturing Firms.

Ownership concentration and firm value: A study from the Indian corporate sector. Emerging Markets Finance and Trade, ownership structure and firm performance literature review 6 ,