A FINANCIAL STATEMENT ANALYSIS OF COMPANIES

WITH DIFFERENT OWNERSHIP CONCENTRATION

Candidate NO.: ______

Module Code: 874N1

Supervisor: ______

Number of words: 9019

Date of submission: 29/08/2014

 ACKNOWLEDGEMENT

First and foremost, I would like to show my deepest gratitude to my supervisor, ______ , a

respectable and responsible scholar, who has provided me with valuable guidance and

suggestions in writing this report. Without his enlightening instructions, impressive kindness

and patience, I could not have completed my report.

My sincere appreciation also goes to all lecturers who have provided many supports to help

me to develop the fundamental and essential academic competencies.

Last but not least, I shall extend my thanks to my family and all my friends for their respected

encouragement and spiritual support during my research.

Table of Contents

ACKNOWLEDGEMENT ................................................................................. 2!
INTRODUCTION .............................................................................................. 1!
Background of the Study ........................................................................................................... 1!
Problem Statement ..................................................................................................................... 2!
Aims and Objectives .................................................................................................................. 3!
Research Question ..................................................................................................................... 4!
Significance of the Study ........................................................................................................... 4!
LITERATURE REVIEW .................................................................................. 6!
Theories of Ownership Structure and Firm Value ..................................................................... 6!
Financing.................................................................................................................................. 11!
Types of corporate finance....................................................................................................... 13!
Difference between Internal and External Financing .............................................................. 14!
Impact of Ownership Structure on Financial Performance...................................................... 14!
METHODOLOGY ........................................................................................... 20!
Method and Model ................................................................................................................... 20!
Data .......................................................................................................................................... 21!
FINANCIAL STATEMENT ANALYSIS ...................................................... 23!
Financial Statement Analysis of Ted Bakers: A Comparison with French Connection .......... 23!
1.! Ownership,Concentration,.......................................................................................................................,23!
2.! Leverage,Analysis,....................................................................................................................................,25!
3.! Liquidity,Ratio,Analysis,............................................................................................................................,30!
4.! Profitability,Ratio,Analysis,.......................................................................................................................,35!
5.! Investor,Ratios,.........................................................................................................................................,38!
CONCLUSIONS ............................................................................................... 42!
Discussion ................................................................................................................................ 42!
Limitations ............................................................................................................................... 42!
Conclusion ............................................................................................................................... 43!
REFERENCES ................................................................................................. 45!
APPENDICES................................................................................................... 54!
Appendix A: Financial statements of Ted Bakers ................................................................... 54!
Appendix B: Financial statements of French Connection ....................................................... 63!
Appendix C: Spreadsheet used ................................................................................................ 63!
 INTRODUCTION

Background of the Study

Corporate Finance is a part of financial management, which has a slightly broader in scope

and applies in addition to private sector entities and to all other forms of organizations.

Jegadeesh and Titman (1993) then determined momentum was also relevant. More recent

research seems to have taken three paths. The first path is one that continues in the approach

of Fama and French and Jegadeesh and Titman, and looks to see if there are characteristics of

the portfolios themselves that could affect cross-sectional variations in performance.

Kacperczyk, Clemens, and Zheng (2005) evaluated whether domestic equity mutual funds

that hold positions concentrated in a few industries perform better than mutual funds that are

more diversified. Cremers and Petajisto (2007) also conducted important. With the ever-

increasing number of investment firms and the proliferation of exotic investment strategies,

there is now an unprecedented number of investment offerings available to investors.

Combined with the sheer volume of data available on said offerings, investors can find it

difficult to determine what information is relevant in their quest to find a strong performing

management firm. Companies need to grow its financial resources. These resources are

defined as sources of financing, which may be internal and external (Stern, Chew, 2003, 80).

The internal financing are the equity and are contributions made by members that the

entrepreneur is in the process of formation and duration; legal reserves, accrued since the law

requires and extraordinary, aside free enterprise; and reinvestment of profits forgone by the

entrepreneur or not distributed to shareholders (Chirinko Shingha, 2000, 417). The operations

research literature has largely ignored corporate financing decisions on the assumption that a

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firm's optimal investment level or production decisions can be fully financed by internal

capital.

Overoptimistic managers are found to perceive that their firm's stock is undervalued by the

market. This leads managers to possibly turn down positive net present value projects that

must be financed externally. Optimistic managers overvalue their own corporate projects and

may wish to invest in negative net present value projects even when they are loyal to

shareholders (Chirinko Shingha, 2000, 417). Also, overoptimistic managers underestimate

the uncertainty about a potential project. This leads to them making the decision to move

forward with a project faster than an unbiased manager. These managers tend to overinvest if

they have sufficient internal funds for investment and are not disciplined by the capital

market or corporate governance mechanisms.

Problem Statement

A problem for investors is that they often have difficulty choosing an investment manager,

and a single erroneous investment decision can have terrible consequences for lifelong

financial security. As has been seen with investors in funds managed by Bernard Madoff, the

effect of an erroneous investment decision can have severely negative and life-changing

consequences (Fuerman, 2009). Some variables, namely, prior performance and assets under

management, have been proven to be effective in selecting strong performing investment

managers and can be used by investors. However, those variables alone do not ensure good

investment manager selections. To the extent that additional variables can be uncovered that

are also effective in identifying strong performing managers, investors will be able to avoid

making investment decisions that may negatively affect their lifelong welfare.

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This problem impacts all investors who use investment managers, whether it be through

mutual funds, limited partnerships, or separately managed accounts, because when poor

performing investment managers are chosen, consequences can be dire. Retirement savings

can be wiped out, debts can begin to mount, and all financial stability can be lost. The

investor not only loses money, but also can see huge impacts on lifelong welfare. There are

many possible factors contributing to this problem, one of which is the volume of information

available to investors. With so much information to evaluate, it is challenging to determine

what is relevant. In the past, getting access to data on investment managers was the challenge.

Now the challenge is figuring out what to do with all of the information that is available and

ascertaining what data to consider when selecting an investment manager.

Possible lines of research can follow two main paths. First, variables that are qualitative can

be evaluated to determine if they have a relationship to investment performance. Second,

variables that are quantitative can be evaluated to determine if they have a relationship to

performance. This research project contributed to the body of knowledge needed to address

this problem by focusing on a quantitative variable, specifically the level of employee

ownership. The project focused on determining if the level of ownership concentration was

related to performance over the sample period. The benefit of evaluating ownership as a

variable was its easy identification by prospective investors. Had there been a positive

relationship between ownership concentration and firm performance?

Aims and Objectives

The main aims and objectives of this study will be:

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 • To explore the concept of ownership structure.

• To analyse the relationship between ownership structure and financial performance of

the company.

Research Question

In quantitative research, a researcher has both research questions and hypotheses. Research

questions are meant to be directly answered during the research. The research questions of

the study are the following:

What is the relationship between ownership concentration and the corporate performance

of the company?

Significance of the Study

The constituents who may benefit from the findings of this study are investors and the

consultants and advisors who provide service to investors. Using the findings of the study,

these groups may be able to improve their manager selection processes by gaining knowledge

about which factors affect investment manager performance. Investors may able to increase

the likelihood of meeting their investment objectives via increased investment performance.

The types of investors who may benefit are wide-ranging and diverse. Individual investors

may be able to use the findings to assist themselves in evaluating mutual funds in their

defined contribution plans, annuities, and brokerage accounts. The improvement in their

investment manager selections in these areas will improve the level of income, savings, or

both, depending on how investor selects to utilize the gains from investment performance. In

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general, investors can obtain greater financial security as a result of incorporating the study's

findings into their investment process. Plan sponsor investors may be able to use the findings

to assist in their own selection process for investment managers in the pension plans they

oversee. The stronger the manager selection methodology employed by the plan sponsor, the

greater the likelihood of maintaining a well-funded and beneficial plan for employees. This in

turn could lead to more options to employees in terms of when and how they retire. Non-

profit investors may be also able to use the findings to assist their committees and boards in

the investment manager selection process.

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 LITERATURE REVIEW

There is a material amount of research on factors that affect the performance of investment

managers. This literature review was intended to focus on research that supports the research

question. Research related to market capitalization and investment style will be presented

first, as support for the construction of the research study. Other researchers have found that

performance is affected by both market capitalization and investment style; I have chosen to

focus on a single market capitalization range (small cap) and investment style (value) in order

to eliminate the influence of these two variables on results.

Research that directly relates to the variables in question will appear next. Given that the

impact of ownership has not been studied, articles related to the issue of incentives will be

summarized. The underlying principle is that ownership concentration functions similar to

properly aligned incentives. The economics of ownership is such that employee owners will

focus their attention on investment performance first. In this way, incentives are aligned

directly with their investors. Therefore, research related to the issue of incentives is presented

in this literature review. Specifically, research related to the levels of personal investment by

the board and fund managers will be discussed. In addition, articles will be included that

relate to the other variables in the research study: assets under management and historical

firm performance. Research related to how performance can be affected by the level of assets

under management and prior performance will be presented. Finally, research in support of

the chosen methodology will be evaluated. Specifically, studies that have been successfully

executed with the chosen research methodology will be reviewed.

Theories of Ownership Structure and Firm Value

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Berle and Means (1932) take the view that there is a separation of ownership and control in

the modem large corporation. Large modern corporations, "quasi-public corporations” in

their term, rely on the public capital market for their financing. This dilutes their ownership,

and the result is that neither shareholders nor managers have a significant stake in the firm.

The shareholders in diffusely owned firms would not monitor the managers because they bear

all the monitoring cost.

Small managerial ownership does not provide the managers enough incentive to serve

shareholders. Instead, managers pursue their own utility-maximizing objectives even at the

expense of shareholders. Those presumptions imply that diffuse ownership structure is related

to lower firm value. Any self-interested individual does not allow her wealth to be

systematically exploited.

Demsetz argues that realized ownership structures are the outcome of shareholders’ capital-

raising decisions. A more concentrated ownership structure increases the effectiveness of

monitoring and hence reduces agency cost, but it also increases the cost of capital. This is

because a risk-averse investor would purchase additional share only at lower price due to the

burden of taking firm-specific risk from concentrated ownership. Thus this raises the cost of

capital. After all agency cost is just a part of production cost and is allowed up to the level

where the bearing of it increases profit through the reduced capital cost that it brings. Thus,

depending on the severity of the agency problem and the importance of capital cost, each firm

may choose a different ownership concentration.1 This leads to the conclusion that there

should be no relationship between ownership structure and firm performance. Demsetz and

Lehn (1985), hereafter referred to as D-L study, investigate the determinants of ownership

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structure and show that the fraction of shares owned by five largest shareholders, as

determined by firm size, control potential, systematic regulation and amenity potential of a

firm’s output, is unrelated to accounting profit rate. For a large firm the proportion of shares

needed for control purposes is small. Also, this large firm size increases the cost of capital for

a given proportion of shares. Control potential is the potential gains from a more effective

monitoring on managers. D-L suggests that under an unstable business environment, it is

difficult for owners to observe managers’ behaviour. Thus, a more concentrated ownership

structure is needed when a firm shows a high firm specific risk. Systematic regulation may

reduce control potential and plays a substitution role of monitoring managers. For some

industries, for example professional sports clubs and media industry, investors are interested

in being a controlling shareholders rather than the profit from the business. D-L terms this

factor as amenity potential of a firm's output. Other researchers seek to examine the

entrenchment effect of management shareholding. Morck, Shleifer, and Vishny (1988)

develop the hypothesis of "convergence of interests and managerial entrenchment." hereafter

referred to as MSY hypothesis. The "convergence of interests” part says that as managerial

ownership increases, firm value should increase due to an incentive aligning effect. However,

the "managerial entrenchment” part asserts that as managerial holdings become larger,

managers become more entrenched. This is because higher managerial ownership protects the

managers from the corporate control market. This means that firm value should decrease with

managerial ownership. Taken together, the MSV hypothesis argues that there is a nonlinear

relationship between managerial ownership and firm performance.

The differences between the two theories lie in the different concepts of ownership

concentration and in whether ownership structure is viewed as an equilibrium decision or not.

Demsetz and Lehn study the controlling role of large ownership interests and examine the

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determinants of ownership structure, focusing on various conditions that require better

monitoring. Morck et al. (1988) do not seek to explain ownership structure, but seek to

examine the entrenchment of managerial holding on firm performance. In other words, there

is no equilibrium concept in their model. Consequently, their model cannot explain the

different management ownership structures across firms. According to their logic, managers

should seek an entrenched position with a very large management shareholding.

Capital Structure Theories

Capital structure theories focus on two areas. One area stresses that there is an optimal capital

structure for each company and the company should always be making changes to try to

achieve this optimal value. The other area does not center on a target capital structure. Instead

this area explains capital structure through a variety of market and manager influences that

are based on asymmetric information. Each of the capital structure theories that have been

proposed combine these two areas in different ways to explain what a firm takes into

consideration when making capital structure decisions. The first area of capital structure

theory focuses on an optimal capital structure target. Bradley, Jarrell, Kim, (1984, 1260) did

the first work that proposed that capital structure has an optimal target. The research in this

area has focused on finding the optimal capital structure for a firm to minimize their cost of

capital or to maximize the firm value by using a mixture of debt and equity financing. The

optimal capital structure is determined by various tradeoffs between the costs and benefits of

debt versus equity.

Bradley, Jarrell, Kim, (1984, 1260) explored how capital structure affects the cost of capital.

Their work showed that in perfect capital markets with no taxes, capital structure does not

affect cost of capital or company value. In this scenario, capital structure essentially does not

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matter and capital goes to the most efficient users. Bradley, Jarrell, Kim, (1984, 1260) added

corporate taxes to the analysis. This addition changed their conclusion about capital structure.

The interest tax shield causes the value of the firm to increase with the increase of interest on

the debt being carried. Therefore, the firm value is maximized when the firm is financed

entirely with debt. Bradley, Jarrell, Kim, (1984, 1260) incorporated personal taxes in to the

analysis. This addition showed that the optimum capital structure could be either at 0% debt

or 100% debt thereby shifting the conclusion back to capital structure being irrelevant.

Flannery, (1986, 18) incorporated the addition of tax shields other than interest payments on

debt. This study found optimal levels of capital structure that are a mix of debt and equity.

Flannery, (1986, 18) also found optimal levels of capital structure as a mix of debt and equity

when personal and capital gains taxes were considered with respect to default conditions.

Theory X and Theory Y

The way managers think about is work and what they want to lead them to adopt different

behaviors. There are two conflicting approaches.

X theory is based on a negative activity compared to the employee. Managers presume that

no one wants to work or would like to work at work. Employees dislike work and avoid it

where possible. That leads to some consequences on the performance of the leader (Chirinko

Shingha, 2000, 417).

A deduction of Theory X is that employees would flee from any liability, since all that really

matters is to keep working. The consequence is that the leader focuses all decisions in a spirit

of authority. Theory Y is contrary to the previous one. Considers that the worker does not

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mind making the effort necessary to perform their activity, and they are interested in the goals

of the company and is willing to take responsibility.

The worker is able to enjoy the tasks performed and considered a disgrace not to apply their

ability, creativity and imagination. This leads to a type of behavior management at which the

delegations of responsibilities, flexible working and participatory are the essential part in the

conduct of the company.

Model of Hersey and Blanchad

Leadership styles are produced by very different motives. One model of leadership is the

best known and Blanchad Hersey. The situational leadership theory is a contingency that

contra in the followers (Bertrand, Schoar, 2003 1208).

The maturity of the followers is the variable of situation into account in this model. Maturity

considered in two aspects:

• Disposition: the maturity to want to do the job and take responsibility.

• Capacity: the maturity to do to have sufficient knowledge.

The leadership style is not recommended for people who are motivated and trained to do the

job order is a style called. Delegate: the style of leadership that recommend when followers

are motivated and trained on the job. Enter: are the fans to act before they are trained but are

not motivated. Persuade and support: the style when fans want to do if you work, i.e., they are

motivated but are not trained (Loxley, 1986, 75).

Financing

For a company, there are many and diverse ways of financing their impending investments

(Davey, 1982, 34). A distinction is made between equity and debt, and between internal and

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external financing. Debt and equity differs in a number of different factors. Shareholders'

equity of the company is usually made available indefinitely, while borrowings are usually

paid back at some point be. The equity investors have in general not only wealth but also

membership rights, which means that they have the opportunity to influence corporate policy

(Eastaugh, 1987, 537). Securitization is the equity in the joint-stock companies, for example

by means of shares, the shares. Stocks have the advantage that they are usually very liquid,

because the equity holders of their shareholdings can usually just keep on the stock exchange.

Borrowing is usually limited, and leaves with a fixed interest rate.

If the capital loss offset as buffers so that the company can not operate its liabilities, it must

file for bankruptcy. The administrator of the observed residual value is then divided among

the creditors according to their share of their demand to the total liabilities of the company

(Kuo, 1989, 40).

Borrowing may be in very different ways provided. It goes from normal loan agreements

with the bank to marketable debt securities. The latter are highly standardized and very liquid,

whereas the normal resale credit agreements can be quite expensive, however. This is done

using so-called asset-backed securities. External financing is characterized in that cash flow

into the company, while preventing the internal financing that cash flow from the company.

On the catchiest is in the inner-self-financing, which is called self-financing. These are, for

example, the retention and reinvestment of profits gained. If corporations reinvest their

profits, so do not pour in the form of a dividend, corporate income tax of currently 25%

becomes due (Eastaugh, 1987, 537).

An internal financing is also caused by an over-estimation of liabilities and an undervaluation

of the assets of the company. In this way, the gain is reduced and remaining cash in the

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company. Since this form of internal self-financing is very difficult to detect, we speak here

of the so-called silent self-financing. Also, depreciation and provisions to reduce the gain and

thus ensure that cash will remain in the company. Here, however, the allocation to the equity

or debt financing is difficult. Provisions against potential losses of banks are clearly assigned

to equity. Pension provisions are however classified as internal debt financing (Ross,

Westerfield, Jordan, 2004, 537).

Basically, is not a clear-to-one, as the assets of a company are financed, as no direct

correlation between the liabilities and the assets side of the balance sheet is. Therefore, it is

also in the financing of disinvestment, which - of course is ultimately nothing more than an

exchange of assets is not, whether this is an inner self or inner-party financing - if they are in

equity (Parrino, Kidwell, 2009, 99).

Types of corporate finance

Internal financing

The money comes from the self-financing or to raise capital from reserves from within the

company (Brealey, Myers, 1991, 34). The Company retains a maximum of independence.

Neither lenders nor shareholders are in a position to influence company policy. One danger is

that the company escapes through a rigorous pursuit of self-sufficiency of capital for

additional profits.

External financing

If the equity base of the company used for many loans, this can be done at the expense of

security and independence. After all, lenders can obtain some influence - for example in the

area of spending (Berk, DeMarzo, 2007, 80).

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In the case of equity financing, the money also comes from outside. Here is granted to

investors, depending on the type of investment, partly massive participation rights, although

these may be restricted in practice (Stern, Chew, 2003, 80).

Difference between Internal and External Financing

When analyzing capital structure decisions, it is important to distinguish between the sources

of internal and external funding. The Internal Financing comes from the operations of the

company it includes sources such as retained earnings, wages due or accounts payable (Berk,

DeMarzo, 2007, 80). For e.g. the company makes profits and reinvested in new plant and

equipment, i.e. domestic financing. External Financing occurs whenever managers of the

company have to obtain funds from outside investors or lenders. For e.g. a company issues

bonds or shares to finance the purchase of plant and new equipment, this is External

Financing (Brealey, Myers, 1991, 34).

Usually, time management is the effort required to make these decisions of domestic

financing and the degree of scrutiny of the planned expenditures are lower than in the

External Financing. As a result, the domestic financing plans hold the company more directly

to the discipline of capital markets than domestic financing (Ross, Westerfield, Jordan, 2004,

537).

Impact of Ownership Structure on Financial Performance

The research question I proposed is that employee ownership is related directly to

performance. The rationale is twofold. First, employee owners have more control over the

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overall level of assets they manage and can close their strategies to capital inflows when the

overall size of the fund, as measured by assets under management, becomes problematic.

Second, employee owners have interests that are directly aligned with investors in that their

personal wealth is tied directly to investment performance.

Kacperczyk et al. (2005) evaluated how assets under management play a role in performance.

They hypothesized funds with lower assets under management (i.e., smaller funds) would

outperform larger ones because of diseconomies of scale. The authors confirmed the

hypothesis and found that smaller funds tend to perform better than larger ones. The return

differential of 0.32% per quarter was found to be statistically significant. One possible cause

is that more concentrated funds tend to have lower assets under management. This is not

particularly surprising as many investors look for broadly diversified, benchmark-like

portfolios.

Funds that do not fulfil the criteria may not see much investor interest in the form of capital

inflows. The same conclusion was reached by Chen et al. (2004). The authors found a fund's

performance to be inversely correlated to lag assets under management. More specifically, a

two standard deviation shift in lagged AUM led to a 5.4 to 7.7 basis point move in

performance the subsequent month. The performance shift was more significant in small cap

funds where liquidity becomes a problem when asset size grows. The authors noted the effect

also could be attributed to hierarchy costs, where small organizations do better than large

ones at processing and acting on "soft" information, which is information that is not easily

verified. At large organizations, such information is difficult to get up the hierarchy structure

whereas at smaller organizations soft information is easier to disseminate and act upon.

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Chen et al. (2004) found that a high level of AUM did not adversely affect the performance

of funds with a larger cap investment focus. Also of note is the finding that fund performance

improved as the fund size for other strategies offered by the same firm increases. This could

be because of better rates being available for trading and lending. The authors' work provided

strong support for the belief that managers who have control over assets under management

may have a leg up on generating excess performance. The finding is particularly relevant

because my study focuses specifically on small cap managers, the group most affected by

lagged AUM. According to the authors' work, if the group of managers studied had been

different (e.g., large cap), AUM would not have been expected to play such a significant role.

It seems feasible then that employee-owned firms, which have more control over the level of

assets they choose to manage and have more flexibility about making a decision about

whether or not to take on new assets, have an inherent advantage over other firms. While

employee-owned firms are able to readily control the level of AUM, non-employee owned

firms are at the mercy of upper management (i.e., the firm president, directors, etc.) about

determining whether AUM can be limited. This could be considered an extension of

hierarchy costs because the prospective loss of performance if the firm were to take on more

assets is not always readily calculable and may be a form of soft information.

Persistence of performance is not addressed in either study, however, and support for relying

on persistence of returns needs to be found elsewhere. Carhart (1997) provided such support.

Carhart examined diversified equity mutual funds from 1962 to 1993 and evaluated whether

there is persistence in mutual fund returns. To conduct the analysis, he combined several

factors that may account for fund returns. He focused on a four-factor model that combines

the Fama-French (1992) three-factor model with Jegadeesh and Titman's (1993) momentum

factor. Thus, the four factors are essentially a market equilibrium model with four risk factors:

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beta, capitalization, valuation (book to market), and return momentum. He found these four

factors could explain a considerable amount of the variation in mutual fund returns.

Capitalization, valuation, and momentum account for most of the variation. Carhart noted the

low correlation between all four factors, indicating multi-collinearity is not a problem in the

model. In essence, cross-sectional variations in fund returns can be determined by whether

they hold high beta stocks as opposed to low beta, whether they invest in smaller cap

companies or larger caps, whether they invest in value stocks or growth, and whether they

pursue a momentum oriented strategy or one that is more contrarian.

The relevance of Carhart's (1997) work to this study is that he clearly showed there are

factors that need to be accounted for when evaluating mutual fund performance. Beta, cap,

valuation and momentum all account for some differences in fund returns. To best deal with

these factors in my work, I will focus specifically on a certain universe within domestic

equity fund managers, namely small cap value managers. This approach will fully and

effectively deal with cap, valuation and momentum, and, to a lesser extent, with beta. While

differences in beta may be detected within the small cap value manager universe, one would

expect the differences to be small and not material enough to effect results.

Further support for the studies mentioned above comes from Chevalier and Ellison (1999a).

While the main purpose of their study was to evaluate the relationship between performance

and a manager's age, SAT score and degree achievement, Chevalier and Ellison also

evaluated the portion of the return differences between managers is attributable to the

common risk factors of Fama and French (1992) and Jegadeesh and Titman (1993). The

remaining excess return is then attributed to managers' stock picking ability, which is related

to their choice of weights on the factors. They found managers with MBAs tend to buy

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growth stocks, that is, those with low book-to-market ratios. In addition, older managers tend

to use momentum-oriented strategies. Chevalier and Ellison confirmed that large differences

in performance are explained by investment style and cap.

Taking into account valuation, momentum and capitalization becomes a necessity when

evaluating investment manager performance. Effects of these factors need to be controlled for

in order for a robust analysis to take place. To control for the effect in my study, I chose to

focus on a specific grouping of managers who employ similar weightings to these factors.

Specifically, by focusing on only small cap value managers, I controlled for the effect of

valuation, momentum, and capitalization. Differences between managers in terms of

exposure to these factors will, of course, remain. But differences will be less material than if

a broader grouping of managers were being used. It could certainly be said that within the

small cap value universe, differences in factor loadings are a function of skill itself in that

managers are identifying which parts of the small value universe are more attractive. This

sort of periodic 'style drift' could be seen as part of the manager's skill set. Chevalier and

Ellison (1999a) also found that expenses have an impact on differences in manager returns.

This is a rather intuitive result as higher expenses make it more difficult to generate higher

net-of-fee results. To eliminate the impact of fees on my analysis, I used gross of fee returns

only. This levelled the playing field for all managers. It also allowed for a true equitable

comparison of performance data.

Finally, Kacperczyk, Sialm and Zheng (2005) confirmed that market capitalization, value and

momentum have an impact on cross-sectional returns. They confirmed findings that small

capitalizations do better than large cap. Contrary to other researchers' findings, however, they

found growth does better than value. Their results are influenced by the time period used for

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analysis, which is from January 1984- December 1999. This time period captures the

significant rise in technology stocks (growth stocks) while failing to incorporate the

subsequent massive declines, which started in March 2000. As a result, the authors found the

differential between small growth funds and large value funds to be the widest differential

between any cap-style groupings at 0.39% per quarter. They indicated that concentrated funds

tended to overweight both small and growth during their sample period. The authors also

found expenses have a negative impact on returns, thereby supporting the use of gross of fee

returns as a neutralizing method.

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 METHODOLOGY

Method and Model

The method chosen to conduct a research study should be selected on the basis of

appropriateness for the study. In quantitative methodology research questions are used to

structure the study, and in many cases a theory is used as the basis for the research. The

theory often relates variables and poses the relationships in terms of a hypothesis or research

question (Black, 1999). The objective proposed in this study is to discover the relationship

between the ownership concentration and firm performance. Reviewing the previous studies,

the method that researchers use are mainly regression model, and the instruments typically

used by the quantitative researcher to reveal relationships are surveys and experiments. In this

study, however, it was not possible to use experiments because, as is typical in financial

market research, it was not possible to have a control group and a test group. Therefore, ratio

analysis through financial statements has been conducted in this research.

Financial statements are often seen as a mirror to reflect the company’s real performance. It

may be useful to identify the users of the financial statements before analysing them, since

different users may have different needs. To achieve a complete interpretation for financial

statements, the research will cover the following aspects: profitability, liquidity, working

capital cycle, financial risk, and investment return.

Financial ratio analysis has been perceived as a very important tool for making an analysis of

the performance of an organization. It can provide assistance to the interpretation and show a

logical year- to- year comparison between companies when applying the same ratios to the

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different years’ financial statements. Some ratios are calculated using fixed formulas, such as

working capital ratios, return on capital employed, net asset turnover, quick ratio and gearing,

etc. Others are calculated by the proportional method, for example, changes in turnover and

profit margins. Comparing financial performances between the two will enhance accurateness

of the research conclusion.

The two companies, which will be examined in this research, Ted Baker PLC and French

Connection Group, are from apparel industry and has a similar range of firm size which is

measured by the total assets and employee numbers. However, Ted Baker has a lower

ownership concentration, and French Connection is relatively higher concentrated.

Data

As the use of existing data is widely accepted in financial market research, this study was a

study of existing data. Because the data were not gathered me, the data were considered

secondary. All data was collected from Orbis database and the annual reports of selected

companies, which is professional and highly reliable. I believe the number of data points

appearing on the database and annual reports is higher than the number that I could have

collected. In addition, the database contains the same information that I would have collected

if a primary data study had been pursued. I believe the use of secondary data was justifiable

for the purposes of this study.

Moreover, for financial analysis performance in this research, three years data is adequate for

the in-depth ratio analysis. The selected company had significant policy and marketing

21
structural changes before 2010 and if the research incorporated the data of five years, it could

not have reflected the results which the core purpose of this research.

The dependent variable in this study is the corporate performance, which is measured by the

profitability ratios like ROE, operating profit margin and profit margin. And the independent

variable is ownership concentration, which can be represented by the proportion of large

shareholders among all the shareholders in the firm. In this case, we define large shareholders

as the shareholders who own more than 5% of the total share in the company.

22
 FINANCIAL STATEMENT ANALYSIS

This section will analyse the financial and business performance of Ted Bakers and will

compare the financial performance of Ted Bakers with the financial performance of French

connection in the past three years. This section will first focus on analysing the financial

performance analysis of Ted Bakers, which will involve comparison with the financial

performance of French Connection.

Financial Statement Analysis of Ted Bakers: A Comparison with French Connection

For the purpose of financial performance analysis, the researcher had decided to focus on

four major areas of financial performance of Ted Bakers, i.e. leverage, liquidity, profitability,

and investor perception of Ted Bakers (Eisenbeis 2011). Focusing on these areas of Ted

Baker with the help of financial ratios would assist the researcher in covering every major

facet of the financial performance of Ted Bakers in the past three years and will assist in

depicting a comprehensive picture regarding the financial performance of Ted Bakers

(Eisenbeis 2001).

1. Ownership Concentration

As discussed above, the proportion of large shareholders among all the shareholders in the

firm has been used to represent the ownership concentration in this study. The statistics from

Orbis shows that Ted Baker has 8 shareholders own more than 5% of total shares in the firm;

the ownership concentration of Ted Baker is 13.79%.

23
Ted Baker PLC (First 12 out of 58 shareholders)

Shareholder name Total share ownership (%)

1 A 35.59

2 B 7.91

3 C 7.88

4 D 7.02

5 E 6.95

6 F 6.75

7 G 6.52

8 H 5.45

9 I 4.83

10 J 4.04

11 K 3.67

12 L 3.08

Table 1: Current Shareholders of Ted Baker

(Source: Orbis)

In French Connection Group, 6 large shareholders owns more than 5% of total share among

all shareholders, but there are only 28 shareholders currently. The ownership concentration of

French Connection is 21.43%. Therefore, French Connection has a relatively higher

concentrated ownership comparing with Ted Baker.

French Connection Group PLC (First 12 out of

28 shareholders)

Shareholder name Total share ownership (%)

1 A 39.19

24
 2 B 12.07

3 C 12.05

4 D 8.48

5 E 6.30

6 F 5.00

7 G 3.84

8 H 3.80

9 I 2.86

10 J 1.61

11 K 1.36

12 L 1.31

Table 2: Current Shareholders of French Connection

(Source: Orbis)

2. Leverage Analysis

Leverage was the major and the first factor of the assessment of the financial performance of

Ted Bakers. The analysis of the leverage of Ted bakers would help in analysing the amount

of dependency of Ted Bakers on debt financing for their running their business and carrying

out their daily operations (Foster 2006). This would help in analysing the amount of default

risk that might be associated with Ted Bakers (Galai and Masulis 2002).

Debt to Assets Ratio Analysis

2012 2011 2010

Total Debts to Assets-Ted Baker 0.36 0.35 0.31

Total Debts to Assets-French connection 0.40 0.39 0.44

25
Table 3: Total Debts to Assets comparison

The first ratio for analysing the leverage of Ted Bakers and French Connection is the debt to

assets ratio. Debt to assets ratio helps inn analysing the amount of company assets that they

have financed through debts and is a very useful indicator of the debt dependency of a firm

(Hansen 1997). Table 3 has summarized the debt to assets ratio of Ted Bakers and French

Connection in the past three years.

Figure 1

(Source: www.frenchconnection.com, www. tedbakerplc.com)

Figure 2

(Source: www.frenchconnection.com, www. tedbakerplc.com)

The above table is showing that Ted Bakers was not so much dependent on debt financing for

managing their assets in comparison to French Connection and over the past three years, Ted

Bakers (on an average had financed around 30 to 35% of their total assets through debt

financing. However, on the other hand, French Connection was much more dependent upon

26
debt financing for financing and managing their assets, and in the past three years, their

average debt dependency was around 40% in the past three years.

Figure 3: Total Debts to Assets comparison

(Source: www.frenchconnection.com, www. tedbakerplc.com)

Figure 3 has summarized the trend of the debt to assets ratio of Ted Bakers and French

Connection in the past three years. It can be seen from the trend in the past three years that

Ted Bakers had somehow increased their dependency on debt financing; however, French

Connection had managed to reduce their debt dependency in the same period. However, it is

easily observable that the Ted Bakers had lower level of debt financing as compared to

French Connection.

Capitalization Ratio Analysis

2012 2011 2010

Capitalization Ratio-Ted Baker 1.64% 1.99% 1.95%

Capitalization Ratio-French connection 1.20% 1.26% 1.09%

Table 4: Capitalization ratio comparison

The second ratio in the ratio analysis was the capitalization ration, through which the

researcher has assessed the leverage element of the capital structure or capitalization of Ted

27
bakers and French Connection to manage their operations and growth (Holmen 2008). Table

4 has summarized the capitalization ratios of Ted Bakers and French Connection and from

the above figures. It is evident that both of the companies were not dependent on long-term

debt financing for managing their operations.

Figure 4: Capitalization ratio comparison

(Source: www.frenchconnection.com, www. tedbakerplc.com)

The trends of capitalization ratios of Ted Bakers and French Connection in figure 4 are

showing that both of these companies had reduced their dependency on long-term debt

financing in the past three years. However, in this case, table 4 is showing that Ted Baker was

slightly more dependent upon long-term debts in comparison to French Connection.

Debt to Equity Ratio Analysis

2012 2011 2010

Debt to Equity-Ted Baker 0.56 0.54 0.45

Debt to Equity-French connection 0.67 0.66 0.80

Table 5: Debt to Equity Comparison

28
In the previous section, it was seen that both Ted bakers and French Connection did not had

much dependency on dent financing for managing their business. Therefore, this section had

analysed the debt to equity ratio of both these companies that would help in analysing the

capital structure and financing priorities for both of these companies. Table 5 is representing

the analysis of the previous section and is showing a very low level of debt dependency of

Ted Bakers and French Connection.

Figure 5

(Source: www.frenchconnection.com, www. tedbakerplc.com)

Figure 6

(Source: www.frenchconnection.com, www. tedbakerplc.com)

29
Figure 7: Debt to Equity Comparison

(Source: www.frenchconnection.com, www. tedbakerplc.com)

The trend of debt to equity of French Connection and Ted Bakers is showing that Ted bakers

had been increasing debt financing in the past three years, which is supporting the analysis of

the capitalization ratio of Ted bakers. Therefore, it could be said that both Ted Bakers and

French Connection were majorly dependent upon equity financing and short-term debt

financing with a minimal amount of long-term debt financing. This heavy dependence on

short-term debt financing is justified as both French Connection and Ted Bakers are

operating their business in the menswear business in US and they had to invest heavily in

current assets for managing their daily operations.

3. Liquidity Ratio Analysis

As discussed in the previous section, Ted Bakers and French Connection had high level of

dependence on the equity financing and short-term debt financing. A heavy dependence on

short-term debt financing have pros and cons, as short-run debt financing like running finance

or over draft would mean that a company would have ample amount of finance at all times.

However, it can also create liquidity problems in the short-run (Prahalad & Ramaswamy

30
2009). Therefore, this section would analyse the liquidity position of Ted Bakers and French

Connection.

Current Ratio Analysis

2012 2011 2010

Current ratio-Ted Baker 1.98 2.14 2.36

Current ratio-French connection 2.19 2.19 1.93

Table 6: Current ratio comparison

Figure 8: Current ratio comparison

(Source: www.frenchconnection.com, www. tedbakerplc.com)

Current ratio was the first financial ratio that has been used to analyse the liquidity position of

Ted Bakers and French Connection. Table 6 has summarized the current ratios of Ted Bakers

and French Connection in the past three years and figure 8 is representing the trend

comparison of Ted Bakers and French Connection. It is evident that the current ratio of both

the companies was very similar and both the companies had a very current ratio of nearly 2,

in the past few years. This is showing that both French Connection and Ted Bakers had

almost £2 of current assets for every £1 of current liability. This is showing that the liquidity

position of Ted Bakers and French Connection was pretty satisfactory, as the previous section

31
had showed that French Connection and Ted Bakers was heavily dependent upon short-term

debt financing and a current ratio of 2:1 is showing that they had enough liquidity to manage

there short-run obligations. The coming sections would further analyse the liquidity positions

of Ted Bakers and French Connection in more depth and would analyse the liquidity position

of Ted Bakers and French Connection from a critical perspective.

Quick Ratio Analysis

2012 2011 2010

Quick ratio-Ted Baker 0.86 1.05 1.19

Quick ratio-French connection 1.24 1.31 1.21

Table 7: Quick ratio comparison

Figure 9: Quick Ratio comparison

(Source: www.frenchconnection.com, www. tedbakerplc.com)

For the purpose of in-depth analysis of liquidity position of Ted Bakers and French

Connection, the quick ratio has been used. Quick ratio compares the liquid assets of a

company (i.e. Current assets – inventory) against the current liabilities of the company (Chow

Gritta & Leung 1991). Table 7 has summarized the quick ratio of Ted Baker and French

32
Connection in the past three years and figure 9 is displaying the trend of the quick ratio of

both the company’s over the past three years.

It is evident that the quick ratio of Ted Baker had deteriorated in the past three years; while,

the quick ratio of French Connection had somehow fluctuated. From figure 10 and 11, it is

evident that the difference between the quick ratio and current ratio of Ted Baker was more

than the same difference for French Connection. The difference between quick ratio and

current ratio for Ted Bakers had been increasing in the past three years; while, the difference

for French Connection had somehow fluctuated in the same period.

Figure 10: Liquidity ratios comparison French Connection

(Source: www.frenchconnection.com, www. tedbakerplc.com)

33
Figure 11: Liquidity ratios comparison Ted baker

(Source: www.frenchconnection.com, www. tedbakerplc.com)

This comparison is showing that Ted Bakers had made more comparison in inventory in

comparison to French Connection in the past three years. This investment from Ted bakers

could be justified from the fact that Ted Bakers is aiming to explore global markets.

Therefore, it is imperative for Ted Bakers to make sure that they have enough inventories to

support this expansion. Furthermore, being a retailer it is very important for a large retailer to

have a good portion of money in inventories to support ongoing sales (Carey 2006).

Cash Ratio Analysis

2012 2011 2010

Cash ratio-Ted Baker 0.18 0.35 0.48

Cash ratio-French connection 0.70 0.75 0.63

Table 8: Cash ratio comparison

Figure 12: Cash ratio comparison

(Source: www.frenchconnection.com, www. tedbakerplc.com)

34
After the quick ratio, the other ratio that has been used for in-depth liquidity analysis of Ted

Bakers and French Connection is the cash ratio. The cash ratio makes a comparison between

the cash and equivalents of a company with the current liabilities of a company (Brealey and

Myers 2004).

Figure 13: Liquidity comparison

(Source: www.frenchconnection.com, www. tedbakerplc.com)

From table 8 and figure 12, it is evident that the French Connection had a heavy amount of

their current assets in form of cash as compared to Ted Bakers, which had invested a

comparatively smaller amount of cash in current assets. It is a very important ratio as it shows

the amount of cash a company has for paying its current liabilities. However, a very high cash

ratio of French Connection is indicating that they had made a heavy investment in their cash.

Figure 12 is implying that a big amount of cash of French Connection is not earning anything

for them. On the other hand, the cash ratio for Ted Baker is comparatively lower. The heavy

amount of investment from French Connection in short-term debt financing, as shown in the

previous section, is supporting such a high level of cash ratio for French Connection.

4. Profitability Ratio Analysis

35
Operating Income Margin Ratio Analysis

2012 2011 2010

Operating Income Margin-Ted Baker 11.28% 12.88% 12.10%

Operating Income Margin-French connection 1.95% 4.46% -4.24%

Table 9: Operating Income Margin Comparison

The first financial ratio that has been used to analyse the profitability of Ted Baker and

French Connection is the operating margin ratio. This ratio analyses the operating ratio

margin of a company as compared to its sales and is an important indicator of the ability of a

company to generate profits. From table 9, it is evident that Ted Bakers clearly had the upper

edge in terms of profitability against French Connection as the operating profit margin of

French Connection was very low and was even negative in the year 2010 and it had managed

to reach a figure of around 2% in the year 2012. However, on the other hand, as could be seen

in figure 14, as well, the operating profit margin of Ted Bakers was much greater than French

Connection.

Figure 14: Operating Income Margin Comparison

(Source: www.frenchconnection.com, www. tedbakerplc.com)

36
Ted Bakers had been operating at an operating profit margin of around 11-12% in the past

three years in comparison to 1% operating profit margin of French Connection. This has

shown that the Ted Baker was much more profitable as compared to French Connection in

the past three years.

Return on Equity (ROE) Ratio Analysis

2012 2011 2010

Return on Equity-Ted Baker 20.61% 22.73% 20.42%

Return on Equity-French connection 7.15% -4.39% -34.44%

Table 10: ROE (using net income) comparison

Figure 15: Return on Equity (ROE) Comparison

(Source: www.frenchconnection.com, www. tedbakerplc.com)

After the operating profit margin, the next financial ratio for comparing the profitability of

Ted Bakers and French Connection was the Return on equity, which is an important measure

of profitability of a company (Bhattacharya 2009). In this study, net income has been used in

calculating ROE. As this ratio measures the amount of profit that a company is generating on

its investments (Beneish 2008). Table 10 is once again showing that the performance of Ted

37
Baker in this aspect was once again way above French Connection as the return on equity for

French Connection was very low as compared to the return on equity for Ted Baker.

Profit Margin Ratio Analysis

2012 2011 2010

Net profit margin-Ted Baker 8.14% 9.21% 8.27%

Net profit margin-French connection 2.46% -1.12% -11.72%

Table 11: Profit margin comparison

The last financial ratio for measuring the profitability was the net profit margin, which

compares the net profit of a company against the sales of that company (Bragg 2007). The

comparison of net profit margin of these companies is showing that even though French

Connection showed net loss in the years 2010 and 2011, it has improvement in the past three

years in terms of performance. However, the net profit margin of Ted Baker has been a bit

smooth in the past three years.

Figure 16: Net Profit Margin Comparison

(Source: www.frenchconnection.com, www. tedbakerplc.com)

5. Investor Ratios

38
When analysing the financial performance of a company, it is imperative to analyse the

investor perception and suitability of a company, as well (Bell 2006). This would enable a

researcher in analysing every aspect of the financial and business performance of a company

(Begley, Ming, and Watts 2006).

Earnings Per Share (EPS) and Price to earnings ratio

2012 2011 2010

EPS-Ted Baker £ 48.90 £ 41.40 £ 32.60

EPS-French connection £ 5.5 -£ 2.4 -£ 9.6

Table 12: EPS Comparison

Figure 17: EPS Comparison

(Source: www.frenchconnection.com, www. tedbakerplc.com)

2012 2011 2010

Price-Earnings Ratio-Ted Baker 15.52 17.16 16.91

Price-Earnings Ratio-French connection 8.28 -34.93 -5.10

39
Table 13: Price to earnings comparison

Figure 18: Price to earnings comparison

(Source: www.frenchconnection.com, www. tedbakerplc.com)

EPS and price to earnings ratio were the initial financial ratios used to analyse the advantage

for the investor, if the investor would purchase that particular stock. Table 12 has

summarized the three-year EPS for Ted Bakers and French Connection and once again, the

performance of Ted Baker was much better than the performance of French Connection.

French Connection had reported loss in the years 2010 and 2011; therefore, the EPS was also

negative. On the other hand, Ted Bakers had reported very healthy EPS in the past three years

and had shown an improvement in the EPS in the past three years. It was the vase with the

Price to earnings ratio of both the companies.

Dividend Yield Ratio Analysis

2012 2011 2010

Dividend Yield-Ted Baker 4.08% 2.90% 4.11%

Dividend Yield-French connection 4.51% 1.23% 1.02%

40
Table 14: Dividend yield comparison

The dividend yield ratio helps in assessing the approximate return that an investor is earning

on the stock of a particular company. Once again, the dividend yield of Ted Bakers was better

than the dividend yield of French Connection in the past three years except the year 2012, in

which the dividend yield of French Connection exceeded the dividend yield of Ted Baker.

The reason for this increase in the yield of French Connection was the lower price of Ted

Baker.

Figure 19: Dividend yield comparison

(Source: www.frenchconnection.com, www. tedbakerplc.com)

41
 CONCLUSIONS

Discussion

The analysis of the leverage position of Ted Bakers and French Connection had showed that

both Ted Bakers and French Connection are heavily dependent on equity financing and short-

term debt financing for managing their business. This strategy has resulted in the reduction of

default risk for both of these companies as long-term debt carries with it a risk of default. The

reduction in the default risk and dependency on short-term debt financing might have made a

positive impact on the liquidity of these companies. The liquidity position of both the

companies, i.e. Ted Baker and French Connection is good. However, Ted Baer has an edge

over French Connection in terms of liquidity and both of them have a comparatively low

level of liquidity risk.

Also, the profitability ratios shows that Ted Baker is much more profitable than French

Connection from 2010 to 2012. Both ROE, operating profit margin and profit margin of Ted

Baker is much high than French Connection. Moreover, the profitability ratios of French

Connection is negative in 2010, which represents a badly performance at that time. Overall,

Ted Baker performed well than French Connection in these three years. As Ted Baker has a

relatively lower concentration in ownership, it represent that a company with a lower

concentrated ownership may have better corporate performance than the higher ownership

concentration counterpart.

Limitations

42
The tool of financial ratio analysis has a limitation that it only analyzes past performances,

and ratio analysis is based on historical figures; variables such as inflation are ignored from

comparison. As a result, interpretation may not show a true picture of organization

performance (Kaplan F7, 2010). When comparing performances, we are assuming the same

accounting policy is consistently applied each year; however, there may be matters affect

management’s mind to change accounting treatments, thus, comparison is invalid.

The balances on financial statements indicate the company’s whole year performance, while,

throughout the year, performances may vary upon seasonal demands. Ted Baker operates in

designer brand business. Collections are often on sale at the end of each season. Therefore, it

is improper to conclude good financial performances while turnovers are mainly generated

from on-sale seasons.

Conclusion

The main purpose of this research is to discover the underlying relationship between

ownership concentration and firm performance, in order to present a clear picture for

investors and help them make right selection. In summary, the analysis from the financial

statements testifies that through comparing the profitability ratios between firms, lower

concentrated firm perform well than higher ownership concentration ones. Therefore, we can

conclude that the ownership concentration has a negative correlation with firm performance.

However, due to the limitation of ratio analysis, more researches about the underlying

relationship between ownership concentration and firm performance should be conducted in

the future. Moreover, during the analysis, we find that the leverage level and liquidity of a

43
firm may positively link with the ownership concentration. Hence, the connection between

leverage level and ownership concentration needs to discover in the future as well.

44
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