Methodology: Relationship between ownership structure and firm value

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3.1 Introduction

The methodology is simply the systematic way in which the researcher would attempt tofind answers to the research questions. Methodology refers to overall approach to the research process, from the theoretical underpinning to the collection and analysis of the data (Alreckand Settle, 1985). This chapter would discuss the methodology in detail where the previous chapter built a solid guideline about the problem statement through a detailed literature review. According to the literature, a conceptual framework developed by the author of this study would be further illustrated in this chapter. This conceptualization broadly categorizes the important variables which were identified as related to the problem during the previous chapter.

3.2 Population & Sample

There are 294 companies listed in the CSE as at 30th June 2014 with a market capitalization of 2,673.02 Billion. Therefore, present study considered all the companies which are listed in the CSE as the population. And top twenty capitalized companies as of 28.02.2014 are considered as the sample. This is a purposive sampling method of sampling. The reason for rational selection of these companies is that these companies are relatively bigger companies and the researcher can identify various types of ownership structure in these companies. And other reason for small proportion of sampling (at around 9% of the total population) is time limitation and resource availability. But three years data obtained (60 samples which is equal to 20% of the population) to enhance the validity of the study.

3.3 Research Design and Data Collection

The research question involves investigating the relationship between ownership structure and firm value. In the present study, ownership structure consists of institutional ownership, managerial ownership and foreign ownership and firm value is obtained using Tobin’s Q. Therefore, details of ownership structure and firm value can be obtained from company annual reports. So, in the present study, the researcher uses secondary data for model development in this study. Those secondary data were collected from annual reports of top twenty capitalized companies which are listed in the CSE. And those annual reports are readily available in either CSE data base or relevant company web site. There are advantages in using annual reports as a data source because it is readily available and accessible. Since it is a secondary data source, information disclosed in annual reports does not involve any subjectivity. Also, annual reports are the chief communications path for the transmission of communication of Economical, Social and Environmental information from the companies to their stakeholders. Since information in annual reports has been made and audited under the bounds of corporate law, annual reports are considered to be more formal, authoritative and accurate for researchers.

3.4 Data collection period

Present study collects secondary data from past three years. Past three financial years from 31.03.2011 of top twenty capitalized companies as at 28.02. 2014 are considered as data period for the study. This means financial years of 2010/2011, 2011/2012, 2012/2013 were considered as data collection period. The reasons for considering past three years as data collection period are; before the year 2010/11 period in Sri Lanka, there was a war prevailing situation and the year 2009/10 data shows the post war economic booming situation. Therefore, it is more appropriate to take last three years as data collection period.

3.5 Research coding method

Research objectives can be achieved and research problem can be answered by evaluating relationship between ownership structure and firm value. Therefore, in the present study, ownership structure of a firm was obtained by getting institutional ownership percentage, managerial ownership percentage and foreign ownership percentage. Firm value was calculated using Tobin’s Q ratio. These details are available in annual reports.

3.6 Variables

3.6.1 Independent variables

Ownership structure is considered as the independent variable in this study. The ownership structure consists of Institutional ownership, Managerial ownership and foreign ownership. Brief description on each has been provided below: Institutional ownership As per the definition of financial dictionary, Institutional Ownership refers to the ownership stake in a company that is held by large financial organization, pension funds or endowments. Institution generally Purchase large block of a company’s outstanding shares and can exert considerable influence upon its management. Managerial ownership is the way in which a firm is owned and managed. A firm can be owned and managed in many ways. At one extreme, a firm can be owned by a large number of individual investors. These individual have voices in many strategic decisions, but the day-to-day management of the firm remains in the hands of managers. In other words managerial ownership is the shareholding by the managers. Foreign ownership refers to the ownership or control of a business or resource in a country by who are not citizens of that country, or by companies whose headquarters are not in that country (Wikipedia). Though foreign direct investment is usually appreciated, some nations see excessive foreign ownership as problem, and might take actions against it.

3.6.2 Dependent variable

Present study considers firm value as dependent variable. Firm value is an economic measure reflecting the market value of whole business. It is a sum of claims of all claimants: creditors and equity holders (Wikipedia). This study intends to use Tobin’s Q to measure the value of a firm. Tobin’s Q is the ratio of the firm’s market value to the replacement cost of its assets (Wikipedia). Although it is not the direct equivalent of Tobin’s Q, it has become common practice in the finance literature to calculate the ratio by comparing market value of a company’s stock with its equity book value (Wikipedia).

3.6.3 Controlling variables

Present study considers firm age and board size as controlling variables. As per ManoranjanPattanayak, Age is defined as the number of years between the observation year and the firm’s incorporation year. And as per Bhagat& Black (2002), the board size referred to total number of directors on the board of each company including Chief Executive Officer (CEO), executive directors and non-executive directors.

3.7 Conceptualization

Figure 1: The relationship between independent variables and dependable variables.

Independent variables controlling variablesDependent variable

Ownership structureFirm value

Source: Develop by the researcher.

3.8 Operationalization

Table 3.8: The relationship between independent variables and dependable variables




Independent Variable

Ownership structure




Shareholding percentage by relevant variable

Dependent Variable

Firm value

Tobin’s Q

Value of Stock Market Corporate Net Worth

Controlling Variable

Firm age

Board size

Firm age

Board size

Number of years

Number of board members

Source: Develop by the researcher.

3.9 Data analysis and model formulation

The data were analyzed using computer Predictive Analytics Software (PASW), which is also known as Statistical Package for Social Science (SPSS). First, descriptive statistics was adopted to explore the data collected, and then univariate analysis was considered to test the relation between each independent variable and the dependent variable. This will require correlation analysis. Thirdly, the ordinary least square multi-regressions model was used to identify the Contribution to the significance of each added independent variable. A regression model is considered to provide better robust results because it examines the combined influence of all variables to explain their relations to firm value. Multi-regression model evaluates the predictive power of explanatory variable objectively while improving the prediction of dependent variable. Thus, it demonstrates statistical significance to how each independent variable affects the firm value. The relationship between ownership structure and firm value can be obtained by running an independent model representing independent and controlling variable dimensions. The model was tested is shown below.


TOBIN’SQ= βO + β1INO + β2MNO + β3FRO + β4FAGE + β5BSIZE

TOBIN’SQ is Tobin’s Q ratio of the company

βOis the Intercept coefficient

INO is the institutional ownership percentage

MNO is the managerial ownership percentage

FRO is the foreign ownership percentage

FAGE is the firm age

BSIZE is the director board size

3.10 Chapter summary

This chapter describes the sample selection, research design, data collection, coding method and data analysis for the present study. Present study intends to investigate the relationship between ownership structure and firm value. For this purpose, top twenty capitalized companies over three years are selected as sample and for analysis purpose, descriptive statistics, univariate analysis, multivariate analysis and regression analysis are used.

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