Ownership Structure and Firm Performance Literature Review
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Published: Tue, 20 Mar 2018
In terms of corporate governance, the correlation between ownership structure and firm performance has been an important topic and the scholars pay sustaining interest on it. The debate of whether there is a relationship between ownership structure and firm performance is an on-going theme.
Berle and Means (1932) initiate the argument about the structure of firm ownership and its impact on the firm value. They find that the high ownership diffuseness level is, the poorer firm perform is; the high ownership concentration degree is, the better firm performance is. In their study, the ownership structure was viewed as an exogenous variable in their research and they argue that the relationship between the diffuseness of ownership and corporate performance should be studied in an adverse way. Since then the general research focus on studying the different impacts of two distinct ownership structure. Demsetz (1983) objects to Berle and Means’s conclusion and put forward the notion that the ownership structure of a corporate should be viewed as an endogenous .The ownership structure is result of decisions which is determined by the effect of shareholders and of trading on the market for shares. It turns out different outcomes on the correlations between the ownership and firm performance in the empirical researches. Moreover, it has been observed and proved that the macro-environment, including the legal and regulatory policy, the developing level of market in a country, even the historical factors have significant influence on the corporate governance system.
The results of following researches on the relationship between ownership and firm performance are quite different. Generally speaking, there are about five types of conclusions: positive linear relation, negative linear relation, no significant relation, and additionally, some combine the opinions of positive and negative linear relationship together. Further more, some authors get mix results of the above findings for the several different variables they examined.
Some scholars believe that the ownership structure and corporate value is positively related. Their findings show a positive linear relationship between ownership structure and firm value. Grossman and Hart (1980) proved that, if the company shares a high degree of ownership diffuseness, minority shareholders would not have enough incentive to monitor managers, the ownership concentration is conducive to better monitoring the managers to reduce agency costs.
With regard to the European context, Thomsen and Pedersen( 2000) examine the influence of ownership structure on company economic performance with a sample of 435 largest European companies. Using the Control variables of industry, capital structure and national effects, they find a significant positive influence of ownership concentration on shareholder value and profitability. The measurement of shareholder value and profitability is market-to-book value of equity and asset returns respectively.
Bonis and Alonso (2007) study the relationship between ownership structure and firm value in Spain. The ownership structure is viewed as endogenous variable, and at the same time, the unique feature of the Spanish company system is also taken into consideration. They use a selected sample of 101 companies quoted in the Madrid exchange market in the period from 1991 to 1997and what is the most important, they control the endogenous matter through econometric panel data techniques instruments. Their findings show that there is a significant positive effect of ownership concentration on firm market value.
Shleifer and Vishny (1997) present the negative correlation view on the topic. After Comparing the ownership structure of major capital market in the world, they get the conclusion that when the major shareholders control the company effectively, at the same time they tend to use controlling power to damage the interest of small stock holders. Later, La Porta et al. (1998) and Morck et al. (1999 ) also make the same findings in their studies. After studying the confliction between the large shareholders and minority shareholders, they find that when large shareholders can effectively control the company, the interests of minority shareholders are also occupied by them. There are varies of ownership structures across European countries. In their article, Grant and Kirchmaier (2004) divide these ownership structures into three different types: widely held, de-facto control and legal control. In their paper, they use a sample of 100 largest companies in five European countries and find that ownership has a significant impact on firm performance. Their observation shows that ownership structures in Europe are not accordance with the value-maximization principle. Finally, their results show that firm performance is harmed by the dominant shareholders. Their findings are a bit different with the conclusion made from U.S context in the same research field.
A small number of scholars have integrated both the views of positive relation and negative correlations together, and they think the relationship between the ownership structure and enterprise value is curvilinear. When the equity structure moves from dispersed to concentrated, the large shareholders will place a positive effect effective in the supervision mechanism, but when the ownership structure is too concentrated, it will lead to the large shareholders’ interest invasion effects.
Craswell, Taylor, Saywell (2006) examine the relationship between the distribution of ownership structure and corporate performance with a sample of 349 publicly listed Australian firms in the year 1986 and 1989 respectively. The results support the conclusion that there is a curvilinear relationship between insider ownership and corporate performance, while there is an insignificant correlation between institutional ownership and Australian firm performance. However, the relationship is a little bit weak because of a lock of optimal model for the relationship between managerial and institutional ownership and firm performance. The insider ownership doesn’t have a high explanatory power on the company performance.
Demsetz and Villalonga in 2001 investigate the relationship between the ownership structure and the firm value by using a 223 subsample of the sample which is originally used in the study of Demsetz and Lehn .The authors guess that it doesn’t matter whether ownership is concentrated or diffuse, the ownership structure is determined by the company goal of achieving profit-maximization of shareholders. So, there should be no significant correlation between ownership structure and corporate performance. They focus on studying the relation between the performance and managerial shares and fraction of shares owned by top-five shareholders and ownership structure is modeled as an endogenous variables. Managerial ownership comprises shares owned by members of the board, the CEO, the top managers. They find no evidence that there is any significant correlation between managerial ownership and firm performance, fraction of top-five shareholders and firm performance, which is consistent with their suppose. So they get the conclusion that there is no statistically significant relationship between ownership structure and company performance.
Welch does research on the relationship between ownership structure and corporate performance in Australian listed companies. The study takes the models used by Demsetz and Villalonga (2001), which examines the relationship between ownership structure and firm performance by viewing ownership as a multi-dimensional endogenously determined variable. The regression results shows that ownership has a robust impact on the firm performance, in other words, it is significant in explaining the dependent variable: firm performance. However, when they take the endogenous problem into consideration, ownership can’t be explained by the firm performance measurement. In their paper, their findings show restricted proof of a nonlinear relationship between managerial ownership and firm performance.
Many researches of the relationship between ownership structure and firm performance are done for developed countries, especially in the United States. Recently years, a variety of research also carried out in developing market countries.
Farooque, Zijl, Dunstan and Karim test the relationship between firm ownership and corporate performance in Bangladesh listed firms. Ownership and performance are measured by the percentage of the shares held by board members and Tobin’s Q and Return on Assets (ROA) respectively. After running a regression of 660 unbalanced pooled sample firms, their findings reveal that ownership structure does not have a significant influence on firm performance, but the firm performance does seem to have a significant negative correlation on ownership structure and for other governance and control variables, they appear to have significant effects on both performance and ownership. According to their results, we can get the conclusion that that in spite of distinct corporate governance contexts between Bangladesh and developed market countries, the relationship between the ownership and performance tends to be similarly, or not different much in a large extent.
Ming and Gee (2008) examine the influence of ownership structure on the corporate performance of Malaysian public listed companies. focusing on the impact of insider and institutional shareholders. The study is carried out in the Malaysian public listed companies (PLC), based on a data between the year 2002 to 2004. The measure of firm performance is stock returns and dividend yields. Jensen and Meckling (1976) point out that the effective way to avoid principal agent problem is align the interest of managers and investors together. One manner is increasing the insider shareholder ownership. Today the public listed companies usually provide the insider shareholders performance-oriented compensation package including stock options, discounted shares and free shares. However, according to the empirical evidence, there is no significant correlation between both the portion of insider and fraction of institutional shareholding and the Malaysian publicly listed company performance. Institutional shareholders, who should play an important role in monitoring the company decisions, seem failed to do so. Meanwhile, unlike expected before, increasing fraction of manager’s ownership the have no significant impact on the company performance. So they also get the conclusion that the principal agent problem can’t be resolved by increasing managerial ownership. Furthermore, their findings show the section of insider and institutional shareholding only influent firm stock returns and dividend yields significantly in large market capitalization enterprises. Comparing with the studies based on American firm samples on this topic, their research turns out to be the different result.
One of the reasons may be because in case of Malaysia, their managerial ownership is too low. As have been pointed out by Fama and Jensen (1983), the distinct policies, social environment, level of market, corporate governance culture maybe one of the main reasons.
There are also a mass of researches on this topic done in China. However, the conclusion is mixed.
When Chinese scholars do research on the impact of ownership and enterprise value (performance), they take the specific conditions of China into consideration, and started their study from the equity properties in China. Most studies show that the fraction of state-owned shares is negatively related with the enterprise value, while the portion of legal person shareholdings is positive correlated with corporate value.
InVong and Y.J. Lin’s research, the relationship between ownership structure and firm performance of Chinese listed corporations from the year 2002 to the year 2004. They use Tobin’Q and ROA respectively as the measurement of firm performance .However, the results turns out to be two different conclusions. The overall results reveal that when the Tobin’s Q used, there is a significant negative correlation between the stated-owned shares and corporation performance, while when the ROA is applied, the stated-owned shares appear have no significant impact on the firm market performance. The authors also test the relationship between the fraction of legal person and firm performance; however, it shows a positive correlation in terms of both performance measures, suggesting that a higher level of legal person ownership leads to better firms’ performance. As mentioned before, the stated-owned ownership plays an overwhelming role in Chinese corporations, and recently years, the Chinese government is actively carrying on certain implements to boost the privatization. The fact that it switches its equity share to legal person is in support of the inverse conclusion of the two types of ownership. Finally, the additional analyses on ownership structure show that if the ownership structure of firms is mixed, the market performance of companies tends to be poorer.
Xiaonian Xu and Yan Wang (1997) investigate if ownership structure has significant impacts on the performance of publicly-listed firms in China, and in what way if it does have certain effects. The reason that they choose the publicly listed stock firms is that their data materials are sufficient, so the ownership mix and concentration can be quantified and thus provide a particular chance for studying this topic.
The article use three accounting ratios, the market -to –book value, ratio (MBR), return on equity (ROE), return on asset (ROA) to compare the performance of companies with different degree ownership concentration and different shareholders. According to their empirical analysis, the final results show that both the mix and concentration ownership structure has significant influences on the performance of listed firms. In the empirical study, they use the profitability to measure the listed stock company performance. Their main findings are as following. First of all, the relationship between ownership concentration and profitability is significantly positive. Second, the ownership concentration has more robust impact on the profitability for the firms predominate by legal person shareholders than for those dominated by the state. Furthermore, the relationship between company’s profitability and the fraction of legal person shareholdings is positively correlated, but the correlation between firm profitability and portion of state-owned share and shares held by domestic individuals appears either negative or irrelevant. According to these findings, we can make conclusion that the institutional shareholders play an important role in the firm performance, and it is obvious that the
State-owned ownership is inefficient in some extent and the ownership structure of Chinese firms needs some changes.
Daqing Qi, Woody Wu and Hua Zhang (1997) also examine whether the firm performance of publicly listed Chinese companies is impacted by their equity structure and in which way if it is. They use a sample consisting of all firms listed in the Shanghai Stock Exchange from the year 1991 to 1996. They find the similar results with Xiaonian Xu and Yan Wang (1997), which is that the fraction of legal person shares are significantly positive related to the firm performance while the relationship between the listed firm performance and portion of state-owned share is negatively related. Further analyses show that as the increases in the level of relative dominance of legal-person shares over state shares, the firm performance tends to be better. On the other side, there is little result shows that there is a significant positive relationship between firm market performance and the fraction of tradable shares owned by either domestic individuals or foreign investors. All these findings indicate that the ownership structure with relative dominance by different types of shareholders can impact the performance of publicly listed firms in different ways.
By running a regression of 276 Chinese publicly listed firms in the 4 years period 1999 to 2002, Gang Wei (2007) finds that the correlation between fraction of state-owned shareholding and firm market performance is non-linear, however, it is not U-shaped, or reversed U-shaped. The results show that the relationship between the portion of state-owned ownership and firm performance is not significant negative as the figure of state-owned shareholdings is quite small. Whereas, when the proportion is more than 50 per cent, state-owned shareholdings have great negative influences on firm performance. On the other hand, the study shows that when the proportion of non-state-owned shares is relatively small, there is a significantly positive influence on the firm performance. On the other side, they also examine relationship between the fraction of independent directors and independent supervisory directors, size of board, directors’ incentives and audit committee, but the results indicate that all of them have no significant impact on company performance.
As many scholars work on the topic of ownership structure and firm performance, some of them narrow their research on the relationship between managerial ownership or insider ownership structure and firm performance. For many years, a large amount of researches have focus on the relation between managerial ownership structure and firm performance. Despite different samples, different governance environment in various countries, a majority of these studies shows that there is a significant positive relationship between managerial ownership and firm performance. In other words, the increasing fraction of managerial ownership leads to a better firm performance.
The impact of insider ownership on corporate performance is investigated specifically by Jensen and Meckling (1976). They dispute that managers have incentives to pursue activities which, while serving their own interests, may harm the interest of the principal. The increasing costs of shirking are borne by owners of the firm. So they give rise to convergence-of-interest hypothesis. The interest of managers is bound with that of shareholders by holding the insider shares. With empirically supported evidences, corporate performance is expected to increase with the fraction of insider ownership. However, Demsetz (1983) argue that increasing levels of insider shares fraction can be anticipated to lead to poorer firm performance, which give arise to the entrenchment hypothesis which is adverse with convergence-of-interest hypothesis.
Kaur and Gill (2008) point out that in all sectors of organization, the board directors play the most powerful role in dealing with the corporate governance issues. So the board is called the ‘soul’ of a firm, which determines the whole firm operations, and also the enterprise culture stems from the board’s spirit. Generally speaking, good corporate governance, including enterprise ethics, managerial discipline, independence, protection of shareholders’ rights, justice, transparency, board duty, accountability, and social responsibility, is regulated by the guide of the board. Their study shows that both the distribution of ownership and the large shareholders have a significant effect on firm performance. Using a data set of 117 publicly listed firms in India, they find there is a significant positive influence of institutional ownership on company performance. By analyzing the data, the authors draw the conclusion that as the increase of fraction of promoter ownership, the firm performance tends to be better and the ownership has a robust explanatory power on the firm value.
Even there are a large amount of studies on the topic of relationship between managerial ownership and firm performance in the world, the researches in this area in China is still rare.
Weian Li and Hanjun Li (2007) study on the relationship between managerial ownership and private listed company performance. The controlling shareholders of private listed companies are natural persons or private enterprises, so they are less bound to the relevant government departments, the firm operation is more correspond with the market economy law. The essence of non-private listed enterprises are large and medium state-owned enterprises, which can raise fund publicly after restructuring, asset restructuring, and meet the requirements of listed companies. In terms of ownership structure, board composition, decision control system, the corporate governance mechanisms, there exist significant differences between these two types of listed companies. Therefore, in their paper, using the private listed fiems as the sample for the study, they can avoided a range of non-market elements including the pricing of state-owned shares, Government factors in executives incentives, absence of real state-owned shareholders, and get on the rules of corporate operation under the Chinese stock market mechanism.
It is known that the executive pay incentive is still the main manner of management encourage in China, but in this study, it is found that the correlation between the ratio of managerial shareholding and firm performance is significant positive. Even though the fraction of managerial shareholdings appears very small, correlation coefficient is comparative large. As every increase of 0.01% in managerial shareholdings, the firm performance can be improved by 0.5 which using the Tobin’s Q as the measurement.
Using a 1500 non-listed firm dataset in ten industries and five cities, they Yifan Hu, Xianming Zhou (2008) examine the relationship between the managerial ownership and company performance from 1998 to 2000. There is little study about the relationship between managerial ownership and firm performance. The main reason is that in the regulatory system of China, the ownership structure is not the same with the developed market. The fraction of managerial ownership is quite low in listed firms, so the data of managerial ownership has insignificant effect on firm performs. For this reason, they focus on the non-listed firms. And by regression the model, they find a nonlinear relationship between the managerial ownership and firm performance. The turning point of level of ownership is above 50 percent. The relationship between managerial ownership and firm performance is positive and becomes negative when the percentage of managerial ownership is more than 50 percent, which is much higher than that occurred in foreign literatures. Their finding contributes to the existing literature because it is the first time the managerial ownership and firm performance of China is studies.
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