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1. DR AMAN SRIVASTAVA,
Associate Professor, Jaipuria Institute of
Management, Noida, India, firstname.lastname@example.org, M1/12, Vinayak Apartment , GH-4, Sec-9, Vasundhra, Ghaziabad, India
Corporate Governance. The findings indicate the presence of highly concentrated ownership structure in the Indian market. macro economic.Ownership Structure and Firm’s Performance: Evidence from India ABSTRACT This paper is an attempt to examine the relationship of ownership structure of the firm and its performance. which indicate that there might be other factors (Behavioral. The results of the regression analyses indicate that the dispersed ownership percentage influences certain dimensions of accounting performance indicators (i. contextual) affecting firms performance other than ownership structure. which constitute the bulk of trading.e. The findings of the study might be relevant for practitioners and investors for taking their financing and investment decisions. The 397 most actively listed companies on BSE 500 indices of Bombay Stock Exchange of India. KEYWORDS: Ownership Structure. political. ROA and ROE) but not stock market performance indicators (i. It investigates whether the ownership type affects some key accounting and market performance indicators of 397 listed firms on Bombay stock exchange of India. Tobin’s Q. were chosen to constitute the sample of the study as of end of 2009-10. India . P/E and P/BV ratios).e. Performance. Ordinary least square (OLS) is used to examine the relationship between the ownership structure and financial performance of the firms.
and consequently cannot be certain that the management team represents their interests. Many solutions to this problem have been advanced. In other words. holders of a majority of the voting shares in a corporation.Ownership Structure and Firm’s Performance: Evidence from India 1. the positive incentive effects of the management shareholding stake and the benefits of large monitoring shareholders. as stated before i. Shareholders of publicly held corporations are so numerous and small that they are not able to effectively control the decisions of the management team. management's misbehavior is a second order problem when such a large shareholder exists. the main problem becomes controlling the large shareholder's abuse of minority shareholders. the interests of group managing the company can vary from the interests of those that supply the capital to the firm. in practice. As a large controlling shareholder has both the incentives and the power to control the management team's actions. the disciplining effect of the takeover market. arises in firms with large controlling shareholders. Corporate governance literature has devoted a immense attention to the ownership structure and performance of the firms.e. who owns the firm’s equity and how does ownership affect firm value has been a topic investigated by researchers for decades. As an alternative. through their ability to elect and control a majority of the directors and to settle on the outcome of shareholders' votes on other matters. A different problem. INTRODUCTION Ownership structure of any company has been a serious agenda for corporate governance and that of performance of a firm. The modern organization emphasizes the separation of management and ownership. have tremendous power to . though. As a result.
Even in developed countries. Fama and Jensen (1983 a & b) addresses the agency problems and they explained that a major source of cost to shareholders is the separation of ownership and control in the modern corporation. shareholders’ activism. these agency problems continue to be sources of large costs to shareholders1. where both theoretical and empirical studies on previous works are looked into. In Indian context very few studies focused on this aspect. however. while section 5 concludes the study. In section 3. anti-takeover provisions. investor protection etc. The impact of ownership structure on firm performance has been extensively tackled in different developed markets and in recent times in emerging markets. LITERATURE REVIEW The firm’s equity and how does ownership affect firm value has been a topic investigated by researchers for decades.Demstez and Lehn (1985) argued . the type of owners as well as the distribution of ownership stakes will undoubtedly have an impact on the performance of firms. Empirical results and discussions are made in section 4. 2. most of the studies in this context are conducted outside of India. compensation. Thus. This paper is a moderate attempt to examine the relationship of ownership structure and performance of firms in India. The large portion of the empirical literature studying the link between corporate governance and firm performance usually concentrates on a particular aspect of governance. The study failed to document any relevant study on the topic in Indian context. such as board of directors. It also incorporates the corporate governance mechanism in India. The rest of the paper is organized as follows: Section 2 discusses on the literature review. the methodology of this study is considered.benefit themselves at the expense of minority shareholders.
. Morck. they cautioned. any regression of profitability on ownership patterns should yield insignificant results.both that the optimal corporate ownership structure was firm specific. Loderer and Martin (1997) analyzed the shareholding of insiders (i. and that market competition would derive firms toward that optimum. leaving shareholders as the residual claimants whose interests can adequately be protected only through the institutions of corporate governance (Shleifer and Vishny. Because ownership was endogenous to expected performance. and again a positive relation for the said ownership above 25%. director’s ownership) as a measure of ownership. a negative relation for board ownership ranging from 5% to 25%. 1997). Taking the said measure as endogenous variable and Tobin’s Q as performance measure. 1976). (1988) by taking percentage of shares held by the board of directors of the company as a measure of ownership concentration and holding both Tobin’s Q and accounting profit as performance measure of 500 Fortune companies and using piece-wise linear regression. they found (through simultaneous equation model) that ownership does not predict performance. found a positive relation between Tobin’s Q and board ownership ranging from 0% to 5%. According to their findings the positive marginal effect of ownership ties to financial institutions is stronger in the market-based . It is argued that the separation of ownership from control for a corporate firm creates an agency problem that results in conflicts between shareholders and managers (Jensen and Meckling. Steen Thomsen and Torben Pedersen (1997) examine the impact of ownership structure on company economic performance in the largest companies from 12 European nations. but performance is a negative predictor of ownership.e. The interests of other investors can generally be protected through contractual arrangements between the company and concerned stakeholders.
The evidence is consistent with the view that ownership structure . and (2) the high degree of ownership concentration seems to be a sub-optimal choice for many of the tightly held German corporations. Lins (2002) examined whether management ownership structures and large non-management block holders are related to firm value across a sample of 1433 firms from 18 emerging markets. Michael L Lemmon and Karl V Lins (2003) used a sample of 800 firms in eight East Asian countries to study the effect of ownership structure on value during the region’s financial crisis. Yoshiro Miwa and Mark Ramseyer (2001) in their study of 637 Japanese firms and confirmed the equilibrium mechanism behind DemstezLehn. Their results also imply ownership concentration to affect profitability significantly negatively. raising the incentives of controlling shareholders to expropriate minority investors. Cho (1998) found that firm performance affects ownership structure (signifying percentage of shares held by directors). Their empirical evidence suggests that representation of owners on the board of executive directors does not make a difference. Jürgen Weigand (2000) found that (1) the presence of large shareholders does not necessarily enhance profitability. He finds that large non-management control rights block holdings (having more control rights) are positively related to firm value measured by Tobin’s Q. but not vice versa. Demsetz and Villalonga (2001) examined the relation between the ownership structure and the performance (average Tobin’s Q for five years—1976-80) of the corporations if ownership is made multidimensional and also treated it as an endogenous variable.British system than in continental Europe. By using Ordinary Least Squares (OLS) and Two-stage Least Squares (2 SLS) regression model. The crisis negatively impacted firm’s investment opportunities. they found no significant systematic relation between the ownership structure and firm performance.
It shows that there might be other reasons that have affected the performance of the listed companies of BSE 500. The data set consists of detailed trading and financial information and indicators about the 397 most actively traded BSE 500 listed companies on the Bombay Stock Exchange of India (BSE) during 2009-2010. Beni Lauterbach and Efrat Tolkowsky (2004) find that Tobin's Q is maximized when control group vote reaches 67%. Metal. . This evidence is strong when ownership structure is treated as exogenous and weak when it is considered endogenous. Information Technology. Using a sample of 144 Israeli firms. The 397 companies cover a broad spectrum of sectors or industries totaling 18. Metal Products & Mining. He also provides evidence that large non management block holders can mitigate the valuation discounts associated with the expected agency problem. 3. which are: Finance. Oil & Gas. Using a data set of 245 Germen firms for the year 2003 they find evidence for a positive and significant relationship between corporate performance. P/E and P/B of listed firms. as measured by stock price performance as well as by Tobin’s Q.plays an important role in determining whether insiders expropriate minority shareholders. DATA AND METHODOLOGY The study aims to explore the effect of ownership structure on performance of a firm. other than ownership structure. Kapopoulos and Lazaretou (2007) tried the model of Demsetz and Villalonga (2001) for 175 Greek firms for the year 2000 and found that higher firm profitability requires less diffused ownership structure . Christoph Kaserer and Benjamin Moldenhauer (2005) address the question whether there is any empirical relationship between corporate performance and insider ownership. It investigates whether the ownership type affects some key accounting measures ROE and ROA and market performance indicators Tobin’s Q. and insider ownership.
Power.j and xfp. Telecom. Miscellaneous.j + xdph. j + xde. Finally.Capital Goods. xde. return on assets. Transport Equipments. market price as well as some calculated ratios using both CMIE PROWESS database as well as items reported in financial statements of sample companies such as debt to equity ratio. The main financial indicators obtained from the companies financial statements included Total Revenues or Turnover.j : represents the debt to equity ratio for company j. j : represents the percentage of free float in company j capital structure. Healthcare. The following formula was used for modeling: Yij = α + xff. Net Income or Earnings After Taxes. Q. return on equity. Tourism and Agriculture.j + xfp.j : represents the domestic promoter and foreign promoter holding in the company . xdph. σ2) Yij : i corresponds to ROE. Transport Services. number of transactions. Price-Earning Ratio (P/E) and Price to Book Value (P/BV) – representing stock market performance measures. Housing Related. separately as dependent variables. Current Assets.representing accounting performance measures. FMCG. the third subset consists of companies’ stock performance indicators obtained from CMIE PROWESS database including value traded. Media & Publishing. price earnings ratio and price to book value. Diversified. Gross Profit.j + xnpi. Fixed Assets. Chemical & Petrochemical. The empirical investigation is conducted using known Ordinary Least Square Estimation methodology using both Return on Equity (ROE) and Return on Asset (ROA) variables . Long Term Debt and Shareholders Equity.j + xnpni. market capitalization. P/E or P/B for company j (j=1…397) xff. and Tobin’s Q. ROI. volume traded.j + ε ……………………(i) Where ε ~ ND (0.
The coefficient of skewness for ownership structure is positive. i. <INSERT TABLE 1(a)> <INSERT TABLE 1(a)> Table 2 shows the descriptive statistics of the sampled data. <INSERT TABLE 2> . The results suggests that promoter’s holding ranges from 0 per cent to 99. implying that the distribution has a long right tail.j : represents non promoter institutional and non promoter non institutional holding of the company.0 per cent.33 per cent around a mean of 51. (Indian and Foreign promoters’ holding) and the fraction of shares owned by a non promoters (including all institutional and non institutional promoters).e. Debt to Equity ratio (D/E) and four variables representing promoters and non promoters stake representing the ownership structure in sampled companies.xnpi.25 per cent. To obtain a symmetric distribution.67 per cent to 100 per cent around a mean of 47.j and xnpni. the raw data are converted to log values using the logistic transformation. RESULTS AND ANALYSIS Inspection of ownership data reveals that the concentration of equity ownership in sampled 397 listed Indian firms of Bombay stock exchange of India Two measures of the structure of corporate ownership are used: the fraction of shares owned by a firm’s promoters. The independent variables are represented by the percentage of Free Floated shares (FF). non promoter share holding ranges from 0. The distributions of these two variables are skewed. log[percentage ownership/(100-percentage ownership)].62. Table 1(a) and 1(b) lists the frequency distribution of these measures of corporate ownership. 4.
<INSERT TABLE 3> Tables 4a and 4b show the analysis of variance (ANOVA) of the variables. 6.97 (sig 0. With Fvalues of 3. ROE and ROA and 3.96.Table 3 gives the correlation matrix of the sampled data.00) for P/E and P/B as performance proxies respectively. But non promoters’ holding and debt equity ratio has negative coefficient for Q and ROE this indicates a negative relationship between these variables with Q and . non promoters’ and promoters’ holding of the sampled Indian firms.80 (sig 0. The markets measures of the firm performance P/E and P/B are also not significantly related with the ownership structure of the Indian firms.48 (sig 0. it clearly shows that there is a strong relationship between all the performance measures with ownership structure of the company. The results suggest that accounting measures of firm’s performance are significantly correlated with free float. This negative value indicates that many of the important shareholders are not defined as management shareholders since they have representation on corporate boards.36 (sig 0. the correlation between the two measures of ownership concentration is -0. The findings of the study clearly depicts that all accounting as well as market measures of the performance are significantly related with ownership structure of the Indian firms.03) for dependent variable Q.01). The coefficient of free float and promotors holding has positive relation with all the performance measures used in the study. <INSERT TABLE 4(a)> <INSERT TABLE 4(b)> Table 5(a) and 5(b) shows the results of the coefficient estimates.00) and 2. In our sample. However the capital structure of the firms is not significantly correlated with any performance measure of the Indian firms.
due to more focus on fundamental factors rather than speculative market related factors. its financial indicators such as (ROA and ROE) are the most important factors used by investors in India to assess company’s performance.ROE. Furthermore. irrespective of earnings. due to the fact that the Indian firms are largely closely held family owned business houses. sometimes. CONCLUSION The significance of ownership characteristics and accounting performance measures i. the focus is more on the fundamentals of the firm rather than the market measures. The clearly depict that as the Indian firms are more dominated by promoters shareholder group and family owned business. the type of ownership had an insignificant impact on stock market . For that reason. Thus the study did not consider dividend yield in the stock market indicators since it will be a distorted measure since issuers in India always pay a high dividends yield. the dividends yields paid by Indian companies are always very high compared to other emerging and developed markets. In India.e. these promoters groups always favored payment of dividends rather than stock price appreciation. since they are valued by investors according to dividends not price appreciation. Furthermore. ROA and ROE could be explained by the fact that the fundamental evaluation of companies. <INSERT TABLE 5> 5. not stock market indicators. The findings clearly depicts that all accounting measures of performance ROE and ROA of sampled firm are significantly related with ownership structure of the form while the market measures of firm’s performance are not significantly related with the ownership structure of the firm. measured by. although earlier investors have culturally placed more emphasis on accounting performance measures.
. The study finally concludes that there is a significant relationship of accounting performance of the Indian firms with ownership structure of firms but market measures of the firm are not significantly with ownership structure of the Indian firms. Therefore the accounting measures of performance of firms can directly be related with ownership structure of the firm than market measures. the results of this study could also be related to the market inefficiency of the Indian stock market and improper stock market valuation. which might imply that the stock performance was mainly affected by either economic and market conditions or speculative factors rather than ownership concentration. In addition. The study concludes that certain time due to large foreign institutional investments and high liquidity the stock market performance measures may not be reliable.performance measures.
pp. Equity Ownership and Firm Value in Emerging Markets. 103121. 305360. No. No. Erik Lehmann en Jurgen Weigand. Journal of Financial Economics. 47. 3. Discussion Paper No. Separation of ownership and control. pp. Working paper.Evidence from Germany”. pp. 93. W. Corporate Governance: An International Review. 1155-1177 Demsetz H and Villalonga B (2001). Working Paper”. Journal of Political Economy. European Finance Review. no. No.Vol. 7. and ownership structure. 2000. 6. Kaserer Christoph. agency costs. Working Paper. 4. Vol. Kapopoulas P and Lazaretou S (2007). . 8200 Cho M H (1998). Investment. Journal of Financial Economics 3. 1983b. and the Corporate Value: An Empirical Analysis”. and Jürgen Weigand. 1976. Jensen. pp. “Insider Ownership and Corporate Performance . 144-158. “The Structure of Corporate Ownership: Causes and Consequences”. Fama. Department of Economics. 15. 2. Center for Entrepreneurial and Financial Studies (CEFS) and Department for Financial Management and Capital Market Lehmann Erik. “Ownership Structure and Corporate Performance”. Does the governed corporation perform better? Governance structures and corporate performance in Germany. “Ownership Structure. 209-233. Vol. “Does the Governed Corporation Perform Better? Governance Structures and Corporate Performance in Germany”. University of Utah. 2000. 157–195.REFERENCES • Beni Lauterbach. Journal of Law & Economics 26. “Market Value Maximizing Ownership Structure when Investor Protection is Weak”. E and Jensen. K. University of Konstanz • • • • • • • • • • Lins. p. 2000. M and Meckling. Theory of the firm: managerial behavior. and Efrat Tolkowsky. Vol. and Benjamin Moldenhauer. 1983a. M. “Corporate Ownership Structure and Firm Performance: Evidence from Greek Firms”. 301-325 and 327-349. Demsetz H and Lehn K (1985). 1. No. 2005. 2004. Journal of Corporate Finance.
and Vishny. R. A and Vishny. pp. No. Shleifer. Pedersen. and Karl V Lins. Journal of International Business Studies. A survey of corporate governance. 1997. A. 45. University of Tokyo Morck.• Loderer C and Martin K (1997). 2. 595612. 2001. Management Ownership and Market Valuation: An Empirical Analysis. Michael L Lemmon. 293-315. 2003. Journal of Financial Economics. “Ownership Structure. • • • • • . Journal of Finance 52. 4. “Executive Stock Ownership and Performance Tracking Faint Traces”. Vol LVIII No. August 2004 Miwa Yoshiro. R.T and Thompson. European Patterns of Corporate Ownership: A twelve country study. 759-778 Shleifer. Vol. R. 737-783. 1997. S. “Does ownership matter?” Discussion Paper. and Mark Ramseyer. Journal of Financial Economic 20. Corporate Governance and Firm Value: Evidence from the East Asian Financial Crisis” The Journal of Finance. 1988.
14 3.44 0.75 0.88% 25.04 0.27 152.15 7.83 101.49% 90.54 101.45 0.91% 54.00 397 ROCE 10.80 -40.55 51.00 0.00 397 RONW 14.00 19.53 27.28 -3212.34% 81.39 397 NPH 47.79 112.72 98.43 397 Table 3: Correlation Matrix .93 16.11% 19.25 Maximum 99.33 Observations 404 404 PROMOTERS_HOLDING____ NON_PROMOTERS_HOLDING___ Table 2: Descriptive Statistics Mean Median Maximum Minimum Std.06 0.63 81.51 7.00 397 FF 0.71% 11.90 18. Dev.11 0.63% 4.02 -0.13 0.24% 4.93% 93.12 99.73% Cumulative 2.21 -6.15 2.67 18.10% 96.33 100.61% 6.80% 20.78 0.00 0.00 397 P_B 3.32% 33.59% 21.78% 98.02% 100.55 -363.82 0.69 3535.95% 76.48% 1.56% 98.53% 13.62 47.17% 14.68 155.22 -6.19% 18.00 397 P_E 31.33 0.47 0.59% 11.29 10. Skewness Kurtosis Probability Observation s Q 2.05 0.65 9.00% Table 1(b): Summary Statistics (%) Mean 51.06 134.51 5.31 397 PH 51.27% 100.99% 45.Table 1(a): Frequency Distribution Measure of Ownership Structure Promoters Holdings Range 0-10% 10-20% 20-30% 30-40% 40-50% 50-60% 60-70% 70-80% 80-90% 90-100% Frequency 10 5 33 57 80 83 63 47 19 7 Percentage 2.00% Non Promoters Holdings Frequency 5 20 49 63 85 87 55 27 5 8 Percentage 1.70% 1.00 0.04% 21.24% 8.67 Std.07 2.24% 6.48% 3.95% 12.24% 1.00 Minimum 0.32 23.30 48.84 1.94 -322.98% Cumulative 1.13% 15.50 1.46 118.65 19.36 282. 18.79% 66. Dev.48 -8.84 2.50 100.18 0.68% 1.54% 15.17 3.
00 0.02 0.02 -0.16** * 0.17** * 0. ROE and ROA as Dependent Variable) Tobin’s Q as Dependent Variable F Value 3.20** * 0.22** * 1.14 0.01 0.00 -0.87** * 0.00 0.15** * 0.38** * 0.Tobin's Q Tobin's Q ROE ROA P/E P/B FF PH NPH D/E 1.00 0.48*** ROA as Dependent Variable F Value 2.38* 1.02 -0.18** * 0.03 -0.33** * -0.16** * -0.36** * 0.04 0.01 0.05* 0.02 0.96** * 1.18** * D/E -0.24** * ROA 0.05 -0.17** * 0.06 1.15** * 1.01 0.00 0.02 ROE 0.80 Significant at ***1% **5% and *10% level Table 4 (b): ANOVA Table (P/E and P/B as Dependent Variables) P/E as Dependent Variable P/B as Dependent Variable F Value Significance F Value Significance 0.97 0.22** * 0.05 0.00 Significant at ***1% **5% and *10% level .36** * 0.00 -0.24*** -0.03 -0.00 0.00 -0.02 0.05 0.04 PH 0.16** * 0.04 -0.00 P/B 0.04** * 0.97 3.16** * 0.11** 0.87** * -0.87** * 1.20** * 0.33** * 1.06 NPH 0.96** * 0.36*** ROE as Dependent Variable F Value 6.01 -0.00 0.09* -0.07 0.00 0.31** * 0.05 -0.06 -0.07 P/E 0.02 1.02* 0.09* FF 0.06 Significant at ***1% **5% and *10% level Table 4 (a): ANOVA Table (Q.18** * -0.11** 0.05 0.87** * 0.00 0.02 -0.02** * 0.31** * -0.00 -0.18** * 0.
01 0. ROE and ROA as Dependent Variable) Independent Variable FF PH NPH D/E Tobin’s Q Beta 0.25*** **5% and *10% level ROA Beta -0.09 0.03 Significant at ***1% ROE Beta 0.07 -0.17 -0.09** -0.07 Table 5 (b): Coefficient estimates ((P/E and P/B) Independent Variable FF PH NPH D/E P/E Beta 0.05** 0.37** -0.01 -0.001* Significant at ***1% **5% and *10% level P/B Beta 0.06 0.01 0.37** 0.10 .08 0.01** 0.12 -0.02** -0.Table 5 (a): Coefficient estimates ((Q.
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