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Ownership Structure and Corporate Performance

Name of Student

(Name of Institute)

(Name of Degree)

July 2020
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The Influence of Ownership Structure on Performance Ratios for ASX Companies

Abstract

Prior researches of ownership structure primarily focused on how insider ownership impacts

the firm's productivity. Nevertheless, the findings from these do not offer consistent proof of

whether ownership type impacts on firm’s performance or not. The underlying research

bridges the gap by categorizing varying shareholder types (institutional shareholders and

individual shareholders), and how they impact the performance of an organization

respectively. To add on, there is a mix of concave or convex relationships among ownership

structures and performance (as measured by underlying ratios). The conflicting results show

that there is inadequate comprehension of the behavioral influences that unique firm

ownership structures have towards company performance values. This research investigates

the way that varying firm ownership structures impact a firm’s performance as depicted by

the key financial ratios. The research has used three crucial measures of performance

valuation, efficiency, and profitability ratios. The research endeavors to elucidate how

varying levels of firm ownership structure impact on the performance-based ratios of a firm.

Our research shows that (to be completed at the end) FINDINGS

1.0 Introduction

The underlying research will assess the implications of varying firm ownership

structures on the firm’s performance ratios. Governments around the world have cited that

there are certain inefficiencies linked with firms, therefore they go for changing their

ownership structure, thereby arriving at the most suitable ownership structure for efficiency

maximization that is crucial for a firm's success. According to Alqatan, Chbib, and Hussainey

(2019) “over the last four decades, companies across the world have been dealing with

financial scandals.” There are many recent cases of scandals involving financial aspects in

high profile companies, as a result of poor ownership structures including the case of Toshiba
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Corporation, Tyco International Plc, Cadbury Nigeria Plc, and Parmalat Food Company.

Accordingly, this has prompted into conducting more detailed research on the features and

characteristics of competent corporate structures that suit the requirement of the firm. The

dependent variables that will be used in this research are performance ratios including

valuation, efficiency, and profitability ratios. There are a large number of logics on what

constitutes the most appropriate ownership structure and how this structure impacts on the

firm’s performance in an annual time.

The discussion is as yet continuous on what contains an ideal ownership structure and

sees whether there is an association among ownership structures and performance of an

organization. Thus, the underlying exploration will survey whether there should be any

distinction in structures of ownership among ASX companies and how this reflects on their

performance ratios. Considering this, the study will assess how varying ownership structure

impacts the ratios of performance of an underlying firm. The discussion is as yet progressing

on what becomes an ideal ownership structure. Subsequently, the underlying exploration

tends to evaluate that there should be a distinction in the underlying ownership structure. In

this examination, performance measures include ratios of “profitability, efficiency, and

valuation”. The task tends to see how various degrees of ownership structures impact in a

given firm’s performance in an annual period. The investigation will archive the impacts that

distinctive ownership structures/holdings have on different organization’s annual

performance.

Besides, in the underlying paper, performance measures include ratios of

"profitability, efficiency, and valuation". The investigation will archive the impacts that

distinctive ownership structures/holdings have on different organization's annual

performance. Governments are citing how the inefficiencies linked with organizations is the

prime reason for changing their ownership structure, thereby finding out the most suitable

structure of ownership and prioritizing the strategies of efficiency maximization is crucial for
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the success of any structural change project. Therefore, the underlying research will focus on

answering the following research questions:

Does company ownership structure influence various company financial performance ratios?

1.1 Background

Businesses have a lot of stakeholders, people (and groups) who are in a relationship

with the business. The only true owners are shareholders (shareholders in the case of

corporations, or partners, members, or other terms that may be used for different types of

business entities). They have an interest in the business itself — their ownership is an asset

they can hold or transfer. If the business becomes more valuable they can sell their interest

for a profit; if it becomes less valuable they may lose some or all of their asset value; and if

the company disbands they get a share of what's left after the company has settled all its

debts. Shareholdings get divided up in a lot of ways: different types of shares, derivatives like

options to purchase shares in the future, and so on. The attributes of share ownership are: (1)

an interest in the company's financial outcomes - both income, and capital value; (2) a right to

vote on certain key company decisions like choosing the Board of Directors or deciding

whether to sell the company and in some types of organizations a right to participate in

management decision-making; and (3) certain rights to information from the company. These

too can be divided up in several ways.

Business is institutionalized through the structure. Before that, it has a core value and

vision. Then we develop clarity on objectives that lead to the delivery model. It has financial

wealth creation as the backdrop. Then to ensure the delivery model in such a way that

excellence becomes natural is where structure comes in. It is formed from the process model

of delivery. The structure should be appropriate to the strategic process. Bad or good is

decided by appropriateness. The organizational structure is extremely important during

business operations. It helps managers manage human resources issues and problems. It

allows managers and other executives to deal with the way employees are treated in
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organization workplaces. It also helps employees understand what their positions are in the

organization, to which they refer, and to whom they report. It helps create a hierarchy within

the business. Without a corporate structure, it would be extremely difficult to access who is

responsible for what. A well-organized organizational structure can provide a direction for

employee progress within the organization that helps employees increase their performance

and thus achieve their goals.

On the other hand, the ownership structures also vary. The ownership structure that is

private refers to the property and/or business owned by an individual or groups of

individuals, or a ‘special’ individual called a corporation. On the other hand, community

ownership is a variety of collective ownership where the property and/or business is

purchased by a community organization and runs for the benefit of the community. E.g. a

local conservation area where locals have free/near free use rights, or a store that everyone in

the community owns a share in (a municipal co-op).

1.2 Research Questions

“Is the relationship between the ownership structure and the performance ratios of ASX

companies concave or convex in nature?”

1.3 Aims and Objectives

The underlying rationale behind this study is assessing whether there is any link between the

varying ownership structure of a firm and its corporate performance among ASX Companies.

The performance will be measured using the performance ratios including valuation,

efficiency, and profitability ratios. The research objective is given below:

 To assess whether there is a relationship between ownership structure and company

performance in ASX companies.

1.4 Research Hypothesis

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H1: There is no relationship between ownership structure and company performance ratios in

ASX companies.

H0: There is a strong relationship between ownership structure and company performance

ratios in ASX companies.

1.5 Problem Statement

Governments are citing how the inefficiencies linked with organization is the prime reason

for changing their ownership structure, thereby finding out the most suitable structure of

ownership prioritizing the strategies of efficiency maximization is crucial for the success of

any structural change project. The underlying research bridges the gap by categorizing

varying shareholder types (institutional shareholders and individual shareholders and how the

impact on the firm's performance respectively. The research has used three crucial measures

of performance valuation, efficiency, and profitability ratios. The research endeavors to

elucidate how varying levels of firm ownership structure impact on the performance-based

ratios of a firm.

1.6 Significance of the Study

As of late, numerous scholars have studied the implication of ownership structure on

firm’s dynamics, be that as it may, the outcomes acquired are uncertain (Ozgur, Mehmet, and

Cihan, 2010). Consequently, this exploration will give extra proof of the association among

the firm's ownership structure and performance utilizing ongoing information. Moreover,

most exact explorations examining the same relationships have used information from past

examination and it gives blended outcomes (Fauzi and Locke, 2012).

The underlying research bridges the gap by categorizing varying shareholder types

(institutional shareholders and individual shareholders) and how they impact the performance

of an organization respectively. To add on, there is a mix of concave or convex relationships

among ownership structures and performance (as measured by underlying ratios). The
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conflicting results show that there is inadequate comprehension of the behavioral influences

that unique firm ownership structures have towards company performance values. This

research investigates the way that varying firm ownership structures impact a firm's

performance as depicted by the key financial ratios. The research has used three crucial

measures of performance valuation, efficiency, and profitability ratios. The research

endeavors to elucidate how varying levels of firm ownership structure impact on the

performance-based ratios of a firm. Consequently, this examination is essential to

academicians, financial specialists, and shareholders and it will help guarantee that ideal

ownership structure is consistently set up in associations as this will assist with improving the

profitability possibilities of the firm.

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2.0 Literature Review

As indicated by Jensen and Meckling (1976), "the costs of deviation from value

maximization decline as managerial ownership rises, which is the convergence-of-interest

hypothesis.". At the end of the day, the constructive outcome of ownership by managers on

corporate worth will be cleared out as greater control is paced in managers hand since they

have a sufficiently higher capacity to vote and impact the organization’s corporate strategy

and decisions benefiting their interests, and Morck et al. (1988) have discussed this idea in

the Theory of entrenchment.

It is surely known that ownership structures have significant ramifications for the

firm's performance and governance. Considering the early 1932s, Means and Berle examined

the contention among shareholders and managers. They contend that external investors are

too diffuse to even think about monitoring administrators, and in this manner, corporate

assets are frequently used to fulfill the manager’s interests as opposed to maximizing the

wealth of shareholders. To elaborate, Jensen and Meckling (1976) added that “the idea of

partner ownership and control to organization costs, and that agency costs can be alleviated

by adjusting outside ownership and managerial ownership”.

In another instance, Jensen and Meckling (1976) stressed that “the costs of deviation

from value maximization decline as managerial ownership rises, which is the convergence-

of-interest hypothesis." In any case, Stulz (1988), McConnell (1990), and Morck et al. (1988)

bring up that there is a degree of internal ownership that has the capability of expanding the

firm’s value and performance. At the end of the day, the constructive outcome of ownership

by managers on corporate worth will be cleared out as greater control is paced in managers

hand since they have a sufficiently higher capacity to vote and impact the organization’s

corporate strategy and decisions benefiting their interests, and Morck et al. (1988) have

discussed this idea in the Theory of entrenchment.

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Besides, McConnell (1990) “utilizes a sample of 1,093 firms for 1986 and 1,173 firms

for 1976 and locate that ownership by managers improves the value of firm until it comes to

roughly 40% to half and afterward slants somewhat descending”. Morck et al. (1988) also

presented comparative outcomes, whereby the linear regression was applied respectively and

discovered the breaking point of ownership by managers at five percent. Conversely,

ownership by managers is adversely identified with the value of the firm after that. These

Demsetz (2001) reprimanded these subsequent researches by contending that the “ownership

structure of a firm ought to be considered as an endogenous result of choices that mirror the

impact of investors and shares trading” (Himmelberg et al. 1999). Also, both scholars locate

no noteworthy link between corporate value and insider ownership.

While impressive work centers around the connection between firm performance and

insider ownership, not many examinations, up until now, talk about whether the kind of

ownership fundamentally influences the performance of a firm. Institutional investors, the

greater part of which are Block-holders, are continually looking for venture openings, and

have proficient knowledge. Contrasted with other external investors, Block-holders are bound

to have the power of bargaining against the management and assume a functioning role in the

firm’s monitoring function.

In contrast, Pound (1988) presented dual theories considering institutional investors'

conceivable unfavorable contribution to the firm’s performance through Strategic-coalition

behavior and conflict-of-interest behavior. The scholar proposes that institutional investors

represent their conflicts and incentives, and, in this way, they deviate from the enthusiasm of

different investors. They likewise hurt the enterprise if they are not prone to challenge the

management for keeping up their cordial business relations.

Besides, the observational outcomes for the impact of institutional ownership are

blended. Han and Suk (1998) and McConnell (1990) support the hypothesis of cost-effective

monitoring. To add on, McConnell (1990) incorporates all out institutional shareholder’s
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share proportion in the value regression of ownership-firm and presents a noteworthy positive

association with the Tobin Q of the firms. Hand and Suk (1998) utilize the five years (1988-

1992) geometric average return to be as a proxy for the performance of the firm and “find

that the value of the geometric return is linked positively with institutional ownership” (Hand

and Suk, 1998). Be that as it may, they cannot present the effect in a long-term manner as

they are only testing the effect from a cross-sectional perspective.

Hardly any examinations have measured the undesirable impact institutional investors

might have on the enterprise. To elaborate, Iturriaga and Crisotomo (2010) and Chen and

Blenman (2008) have “tried both the conflict-of-interest and efficient-monitoring effects by

incorporating a quadratic term in the model and locating a nonlinear association of

ownership concentration in firm value and institutional shareholders”. In any case, they just

think about the top institutional investor ownership, instead of utilizing complete equity of

the institutional investors. This restriction can come about because of overlooking the

conceivable impact forced by varying levels of institutional investors the firm’s performance.

2.1 Insider Ownership

As per Berle and Means (1932) “the issues of agency emerge from the intrinsic

conflict-of-interests present between shareholders and managers”. To elaborate, the managers

try to seek after their goals and interest at the corporate shareholder’s expense, along these

lines augmenting their utility instead of shareholder wealth maximization. They may even

renounce ventures and different decisions advantaging the firm, that advantage the

partnership, in this manner diminishing the value of the firm.

As per Jensen and Meckling (1976) “the idea of linking control and ownership to

agency costs is recommended". An entirely owned corporation is operational to maximize the

non-pecuniary and pecuniary benefits of owners, which incorporates profits produced using

the firm's operations, and other utility created by activities of entrepreneurship. If the owner
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just possesses a small amount of the corporation, he will amplify his utility possibly at an

expense to different investors. For this situation, the firm's worth decreases because of the

director fulfilling his circumstances is not exactly the advantages he could get from seizing

firm assets. As the administrative value decays, how much a chief can dispossess

organization assets increments. It is significant, in any case, that as minority investors own

more offers, they are all the more ready to spend assets to screen administrative conduct. In

general, Jensen and Meckling (1976) proposed that a “hypothesis adjusting administrative

and untouchable ownership to moderate the organization costs emerging from the detachment

of ownership and control”.

Numerous other papers followed the footsteps of Jensen and Meckling (1976) by

creating models of insider ownership impacting on the value of a firm. Most investigations

examine how the degree of insider ownership influences the director's dynamic and in this

manner impacts the level of administrative exertion to augment investors' advantages and

corporate performance. Accordingly, Stulz brings up that “there exists a degree of insider

ownership which can augment the estimation of the firm”. In any case, Stulz accepts that the

irreconcilable situation among investors and administrators emerges just from the way that an

effective takeover consistently benefits investors however hurt managers, which is restricted.

Furthermore, he likewise disregards the beneficial outcome of huge administrative ownership

on firm an incentive as worried by Jensen and Meckling (1976).

To add on, Morck, Shleifer, and Vishny (1988) led an experimental trial on the

relationship between administrative ownership and firm’s worth. Dissimilar to Stulz (1988),

the authors consider a diverse degree of insider ownership and state “Low degree of 0%-5%,

Medium degree of 25%-half and essentially elevated level of over half” (Morck, Shleifer, and

Vishny, 1988). The outcomes tend to report a favorable connection among “ownership and

Tobin Q in the scope of 0% to 5% ownership, at that point a negative connection between 5%

to 25%, and a further positive connection past 25%” (Morck, Shleifer, and Vishny, 1988). As

directors own an ever-increasing number of offers, it's conceivable that they seize corporate
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assets; in any case, the lessening or increment in firm worth relies upon which impact,

assembly of-interests, or entrenchment, overwhelms after 25% administrative ownership.

McConell (1990) contrasted with Morck, Shleifer, and Vishny (1988) and examined

“the connection of how ownership structure impacts on corporate worth” in a progressively

adaptable manner. The outcome is like Stulz (1988), as the authors “locate a curvilinear

connection and that managers could augment the corporate worth when practically half of the

offers are amassed in their grasp, with the intonation point somewhere in the range of 40%

and a half”. At that point, McConnell et al. (2008) inspect “the effect of ownership structure

by watching the connection between changes in ownership and changes in stock costs inside

the 6 days after the declaration of offer buys by insiders”.

2.2 Other Block-holders Ownership

The underlying researches and literature concentrating on insider or administrative

ownership, as a rule, expect that the supervisory group has generally solid force and

opportunity in utilizing association's assets and in impacting strategy. Enormous quantities of

shareholders are diffused and these little financial specialists have a minimal motivating force

to screen the executives. Based on the undeniably dynamic interest in the firm’s

administration by various sorts of shareholders nowadays, ongoing writing has broadened the

territory of insider or administrative ownership to incorporate huge ownership by

shareholders (Demsetz and Lehn, 1985). On the other hand, the majority of outside

shareholders can't practice genuine capacity to supervise administrative performance in

present-day corporations (Thomsen and Pedersen, 2000), they despite everything can teach

chiefs' conduct in different manners. Edmans and Manso (2011) contend that Block-holders

can lead chiefs to act following other shareholders' advantage.

A Block-holder is characterized as an investor with a particularly huge sum or

estimation of stock. There's still no severe meaning of what number of offers ought to be

characterized as a square. Edmans and Manso (2011) propose that Block-holders administer
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supervisory crew in a corporation through exchanging and mediation. Gillan and Starks

(2003), Chen, Harford, and Li (2007), and Admati, Pfleiderer, and Zechner (1994) give proof

of administration through exchanging. The impact of Block-holder ownership has

additionally concentrated “in the takeover setting, where it infers that square exchanges

advantage both objective and acquirer firms” (Mikkelson and Rudback, 1985). On the other

hand, few scholars discover favorable unusual returns related to starting declarations when

the objective firm gets 5% or greater venture earlier a takeover. Barclay and Holderness

(1990) further reported that “the comparative outcomes, where they discover positive

overabundance returns around declaration date when pariahs gain enormous value positions

and they likewise locate the stock-cost increments are bigger as control goes to new Block-

holders” when the board doesn't avoid the Block-holder's push to impact corporate

arrangement.

Earlier writing has indicated that enormous shareholders improve the association's

market performance because contrasted with little shareholders; they screen and control

chiefs to act in light of a legitimate concern for outside shareholders. Be that as it may,

regardless of whether the beneficial outcome is reliable for all degrees of huge investor

ownership despite everything needs conversation. It is further contended by La Porta et al.

(1997) that the “impact of ownership structure relies upon the institutional and legitimate

setting. Minority shareholders' advantages may not be secured if ownership is excessively

moved in the possession of a few huge Block-holders”.

This hypothesis is gotten from Jensen and Meckling (1976) along with combining it

with findings from Morck et al. (1988). Despite everything that can be applied to

investigating the impact of Block-holders and institutional financial specialists. At the point

when enormous shareholders don't have a sufficiently high level of offers, they can't extricate

private advantages and might want to co-work with different shareholders to teach

supervisory group; be that as it may, the chance of entrenchment emerges after the limit of

ownership is reached, and they would now be able to seek after their responsibility at the
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expense of minority shareholders. Furthermore, Iturriaga and Crisotomo (2010) “tested the

impact of Block-holder ownership on corporate incentive with a test of Brazilian

organizations where ownership concentration is estimated as the level of ownership

possessed by the biggest investor”.

2.3 Institutional Shareholders

The greater part of the Block-holders is institutional financial specialists, which have

enormous assets and mastery and are continually looking for speculation openings in North

America. The Iturriaga and Crisotomo (2010) reason that “expanded institutional ownership

can profit corporate administration and moderate the irreconcilable circumstance emerging

from the separation of ownership and control”. The paper presents 3 positive aspects:

Institutional financial specialists, in the wake of claiming a huge portion of the organization,

think that it's more expensive to sell their situation than to meditate on the off chance that

they feel the chiefs are not augmenting investor esteem; they screen the executive's conduct

and choices and moderate the contention of the board and different.

Aside from the benefits of expanding institutional ownership, two speculations

against the effective checking hypothesis were presented by Pound (1988). As per the key

partnerships’ speculation, institutional speculators feel that they advantage more if they adjust

their inclinations to the officeholder the board than if they rival the supervisory crew. The

irreconcilable circumstance theory proposes that institutional financial specialists are slanted

to decide in favor of the board. As per Cornett et al. (2004), “where he demonstrates that to

acquire new or keep up existing business associations with firms, institutional financial

specialists are less ready to challenge the executive’s choices”.

Numerous observational tests have been completed to check the various theories and

hypotheses studying whether an expansion in institutional ownership can profit or mischief

firms. It is further added by McConnell (1990) “incorporates complete institutional

shareholders share ratio in the ownership-firm worth relapse and reports a huge positive
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relationship with firms' Tobin Q”, which is against Pound's (1988) philosophy. To add on,

other scholars such as, Hand and Suk (1998), and Clay (2001) likewise locate a favorable

connection among the value of a firm and the institutional ownership, which additionally

proposes that such type of connection uncovers productive checking by institutional financial

specialists. Rather than utilizing Tobin Q Hand and Suk (1998) quantified corporate worth,

utilize the geometric normal return for five years (1988-1992) to intermediary for firm

performance.

Be that as it may, both McConnell (1990) and Clay (2001) can't finish up the drawn-

out beneficial outcome of “institutional ownership on improving corporate performance as

they just test the cross-sectional impact”. The constraint in the vast majority of the writing

additionally emerges because they disregard the negative impact that a higher concentration

of enormous shareholders ownership may force on the firm. Thinking about how conceivable

it is that the supervisor of a top foundation looks to set up an extraordinary relationship with

the administration in the contributed firm along these lines hurting firm performance. It is

further speculated by Chen and Blenman (2008) that “the top ownership is adversely

identified with firm worth”. In any case, various institutional shareholders can benefit the

firm since they tend to screen each other to forestall the likelihood that anyone among them

dispossesses the assets of the firm at an expense to other people, and they can screen

administrative conduct all the more effectively since they have enough capacity to impact

administrative conduct and power them to act in light of a legitimate concern for

shareholders.

Chen and Blenman (2008) studied in their research using “two institutional ownership

factors; the level of offers claimed by the biggest institutional speculator, and the aggregate

of top 5 establishment's offer ratio”. To add on, the idea is reinstated by Chen and Blenman

(2008) “utilizing an example of firms from 2000-2003 yet they didn't address the

autoregressive issue in board information relapse”. In any case, they run yearly relapse and

locate that every huge variable.

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Furthermore, Iturriaga and Crisotomo (2010) consider both “the productive observing

and irreconcilable situation impact of institutional ownership by remembering the quadratic

term for the model”. Similarly, Iturriaga and Crisotomo (2010) and Chen and Blenman

(2008), utilized the extent of offers possessed by the biggest investor to gauge the

concentration of ownership and square it to test an ownership concentration of potential

nonlinear relationship. The outcomes affirm this curvilinear impact: expanding biggest

ownership benefits the firm's worth, however this impact level off when biggest investor

claims sufficiently high offers in a firm and they separate advantages to the inconvenience of

little shareholders. The outcome is in part reliable with Chen and Blenman (2008) which

highlights the negative impacts inflicted by shareholders. To add on, Charfeddine and

Elmarzougui (2010), Lowenstein (1991), and Chaganti and Damanpour (1991) discovered

little proof that “institutional ownership is connected with the firm performance”. With

everything taken into account, “tests on ownership – performance types ordinarily are done

on ownership concentration” (Berle and Means (1932).

The two connections, insider ownership, and institutional ownership have been

extensively investigated in numerous papers; in any case, the outcomes are blended. Plus,

researchers will in general look at these two connections independently. Even though

McConnell (1990) incorporates “institutional ownership into the relapse of insider ownership

on corporate worth and finds a positive effect of institutional shareholders”, they will in

general disregard the negative impact forced by the Block-holders with adequately high

offers ratio. Institutional investors are fund managers and they hold huge amounts of money

such as pension funds and mutual funds. When they buy into a stock, they have to push huge

amounts into it driving it up. As indicated by the irreconcilable situation and proficient

observing speculations, it's accepted that all various forms of ownership ("Block-holder

ownership, institutional ownership, and insider ownership”) can associate together to impact

corporate worth and it merits contemplating the shared impact of this ownership. Chaganti

and Damanpour (1991) additionally provide a reason to feel ambiguous about “whether the
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stock holding of family proprietors and corporate administrators adjust the connection

between institutional shareholdings and firm performance”.

2.4 Empirical Review

A few examinations have been led around there of study and the discoveries are as yet

uncertain, to be progressively explicit as Ramaswamy (2010) portrays them as ambiguous. As

per Ramaswamy (2010) “it is in the mid-80s to the mid-90s that we saw a huge influx of

deregulation and privatization of most government utilities in Europe”. Consequently, most

examination articles and information accumulated concerning this theme occurred during that

time. The examinations directed by Ng, Yuce, and Chen (2009) “used information of 4315

firms recorded on the Shanghai (SHSE) and Shenzhen (SZSE) stock trades, this information

was assembled for the years 1996-2003”. To add on, Wei, Xie, and Zhang (2005) utilized an

enormous information test of 5484 firm long stretches of China's incompletely privatized

firms from 1991–2001.

While McConnell and Servaes (1990) directed a comparable report on the markets of

America. The authors further found that there is a curved connection among organizational

performances and structures, though Wei et al. (2005) found “a curved connection between

ownership structure and friends performance." Furthermore, Sparrow, Morin, and Nderitu

(2000) endeavored to build up some ideal privatization plans for the vertically coordinated

state elements. The models presented by these scholars amassed in dissecting the parting of

those coordinated utilities into some "ideal numbers" of organizations. None of the models

appeared to have endeavored to handle the difficult part which is the ideal privatization plan

for a characteristic monopolistic portion of those vertically incorporated utilities (Wen and

Yuan, 2010). The models concentrated on the ideal number of organizations that should have

been shaped through privatization (Katz and Owen, 1995).

The genuine test lays with the advancement of an ideal privatization plan for a

characteristic monopolistic section of any vertically coordinated utility. Characteristic

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imposing business models perform better as a solitary organization, the main reasonable

privatization plan of such substances spins around the rebuilding of the ownership structure

while keeping up that portion as one organization. Newbery (1997) recorded the difficulty

related to privatizing the imposing business models. He outlined that an imposing business

model, for instance, a countrywide rail needs a significant level of coordination which isn't

probably the best attribute related to decentralized markets.

Among his proposed approaches, he sets that monopolistic rivalry systems should be

deliberately evolved, taking note of that free monopolistic rivalry procedures are probably

going to come up short as prove in Britain. These enhancement models are just centered

around the upstream and downstream fragments of the vertically incorporated elements.

Privatization of the upstream and downstream sections doesn't present a very remarkable test

for the deregulation specialists to deal with, though privatization of the characteristic

monopolistic segments of such coordinated utilities is perplexing and needs some explicitly

custom-fitted enhancement models as proposed by Newbery (1997).

To add on, Newbery (1997) started their investigation conversation by underscoring

that privatization of utilities implies a move of ownership structure, legitimately from the

administration to private/open. Even though Sun et al. (2002) used an example of

organizations recorded over a brief period from 1994-1997, it is their technique and power of

their model that gives their work a decent standing, they attempted some broad testing of

their models and information. Their thinking for using information with a brief timeframe

range was because of most organizations in China have been in part privatized during 1996

and 1997. Then again, Newbery (1997) doesn't follow the equivalent customary exploration

design, he is remarkable in that he takes a gander at the writing and hypothetical desires for

the advantages related with new ownership structure (privatization) (Sun, Tong and Jing,

2002).
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He proposes that initiating rivalry into a formerly monopolistic controlled system is

key for the privatization task to be effective. Notwithstanding, he doesn't intricate further on

how this could be accomplished. Even though he recommended that opposition could be

affected by the innovative progression and gifts of the business, and he warily calls attention

to this doesn't mean it's conceivable in all conditions. He recorded the difficulties of

privatizing characteristic syndications and experienced various situations on the best way to

manage this interesting arrangement, and somewhat, he recommended that restraining

infrastructure probably won't be that awful after all as it would even forestall wasteful

duplication (Katz and Owen, 1995).

As of now examined, a definitive yield of this examination venture is the

documentation of an ideal privatization plan that joins differing ownership structures to

expand performance for a characteristic monopolistic element. Wen and Yuan (2010)

endeavored to build up some hypothetical enhancement models. Those models other than

missing the genuine test were increasingly hypothetical in their inclination not perfect for an

administrative instrument, they came up short on some component of practicability and

pertinence. With this exploration venture, the purpose is to build up a model that is

increasingly down to earth in nature and progressively slanted to applied the examination

worldview. As effectively-recognized, the issue related to this region of examination is its

ambiguous discoveries. These inconsistencies roused the like of Ramaswamy (2010) to

advance the examinations. He proposed that these questionable discoveries were expected for

the most part to the under-determination of the models and he presented a serious contention

variable in his model, and his discoveries uncovered that the connection between the factors

to be in a curved manner molded.

As per Yu (2013), there are mixed results about the link between firm performance

and state ownership, however, the author concludes that "a higher level of state ownership is

superior to a dispersed ownership structure due to the benefits of government support and

political connections". While Sun et al. (2002) base their research on Chinese firms and
OWNERSHIP STRUCTURES 20

conclude that ownership of state equity and market performance depicts a concave or U-

shaped relationship. On the other hand, Phung, and Mishra (2016) studied “how firm

performance is impacted by ownership structure based on firms listed in Vietnamese stock

exchange”. The authors found a non-linear relationship between research variables and

further state that the relationship is convex in shape.

As of now, most states in Australia are experiencing privatization forms and the

techniques to be received are as yet being bantered in parliament. This undertaking will give

some inside and out understanding on the most proficient method to move toward the

privatization of monopolistic utilities. The undertaking expects to illuminate policymakers

about the best ownership structure/holdings to be embraced by the ideal performance ratios

that the administration plans to see organized after the privatization. Blended outcomes on the

association between ownership structure and performance of a firm have been gotten from

the above writing survey. The blended discoveries make it difficult to have a complete end.

Accordingly, extra proof from ASX Companies will be gathered to help make an end.
OWNERSHIP STRUCTURES 1

3.0 Methodology

3.1 Research Design

The research will be using multiple methods of research data analysis and a

methodology following the paradigm of mixed-method research. Considering the desired

output, the underlying research will be adopting a triangular and pragmatic design approach.

The project will be based on certain interviews from varying stakeholders for understanding

their perceptions towards the maximization of various performance measures/ratios. Online

databases will be used for gathering quantitative data.

3.2 Data Collection

A cross-sectional sample of ASX listed companies will be used for revealing the

interesting relationship between ownership structure and company performance. Cross-

sectional sampling is selected to see the performance of firms at one point in the year 2019.

To add on, Wei et al. (2005) and Ng et al. (2009) and utilized a list of Shanghai and Shenzhen

Stock Exchange-listed companies for their analysis, while Morck et al. (1988) utilized a

sample set of Fortune 327 firms. The underlying study will be carrying out a complete

analysis of the listed firm on ASX exchange. Just like other studies, for example, Morck et al.

(1988) used cross-sectional data sets, this project will be utilizing some cross-sectional data

sets to capture the impact. This should reveal the relational effects that existed ten years prior,

and also after the major restructurings. The study will be utilizing these databases

extensively.
OWNERSHIP STRUCTURES 2

3.3 Data Analysis

At first, the study will be using the technique of Multivariate Analysis of Variance

(MANOVA) for understanding and determining if different categorical levels of ownership

structures have any significant influence on performance ratios. The utilization of the

MANOVA technique is ideal and powerful for such kind of analysis and statistical tests.

Likewise, the adoption of this technique in this project is expected to test for some statistical

significance of differentials in the means of the performance ratios associated with different

levels of ownership structures. Besides, for testing and capturing the non-linearity

relationship between these variables, an additional variable which is the squared value of the

ownership variable will be included in this model. This improvisation of including a squared

value of ownership was adopted by Ng et al. (2009) and Wei et al. (2005).

3.4 Limitations of the Study

The research only uses a Sample of companies from the ASX exchange and

companies from other nations are not sued. As a result, it is not easy to generalize the

findings of this research on other nations as there are numerous factors involved.

Furthermore, the sample size of this research is also limited owing to the restricted time and

scope of research.

3.5 Ethical Considerations

The main ethical consideration that will be observed in this research is giving credit to

authors whose works/research will be used in the current study through citation. This will

help avoid plagiarism ad possible copyright issues.

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4.0 Data Analysis and Findings

4.1 Case Summaries

EBIT Return on Price/Book Bloc Share Dir Share

Industry Type Margin Asset Value Held Held
Consumer Discretionary Mean.1299440 .079691 2.2638 .2036 .1694
N 84 87 87 87 87
Consumer Staples Mean.0914435 .065343 1.6670 .2243 .0935
N 23 23 23 23 23
Materials Mean.1411897 .069437 1.3239 .3237 .0597
N 29 38 38 38 38
Utilities Mean.2402727 .054338 1.1462 .3254 .0615
N 11 13 13 13 13
Industrials Mean.1058907 .068818 1.6116 .3396 .0882
N 54 57 57 57 57
Health Care Mean.1256919 .085974 3.0736 .1767 .1244
N 37 39 39 39 39
Telecommunication Mean.1843917 .095642 2.8058 .2433 .0908
Services N 12 12 12 12 12
Information Technology Mean.1273167 .092858 3.4837 .2229 .1703
N 36 38 38 38 38
Energy Mean.1768625 .066480 1.4275 .2085 .0360
N 16 20 20 20 20
Total Mean.1316245 .076644 2.1616 .2483 .1166
N 302 327 327 327 327
As per the database of Morningstar the block holders are seen as any shareholder who

own at least 5% outstanding shares of the firm. The Table 1 shown above denotes the final

sample of 327 companies that are selected for the research and all these companies are listed

on ASX. On average the ROA of all companies across the board is 7.6% or (0.07), while the
OWNERSHIP STRUCTURES 4

average Margin of EBIT of all companies across the board is 13.1% or (0.131), and the

average valuation ratio across the board is 2.16. In addition, across the industry the average

block-holding ownership is around 24.83%, and on the other hand the insider ownership is at

11.66%.

4.2 Results

The below shown Tables 2.a, 2.b and 2.c depict the MANOVA analysis of how

varying ownership structure impact on the performance ratios of a given firm. The Dir Share

Portions II is the categorised different levels of directors’ shareholding in the company. As

per the results, the 6%-25% category is where the directors own between 6% and 25 %; the

1% - 5% category is for directors who holds between 1% and 5% of the company’s shares;

and 0% denotes firms having no director holdings. In addition, the mean averages of all

performance ratios are depicted by Table 2.a including all categories of the ownerships

structure, along with the number of firms falling under each category.

Table 2.a MANOVA OUTPUT (Insider holdings)

Descriptive Statistics
Direct Share Holding
Categories Mean Std. Deviation N
EBIT Margin 0% .1743975 .13282007 80
1%-5% .1192360 .08868941 86
6%-25% .1062304 .09139125 79
>25% .1254789 .10656233 57
Total .1316245 .10878822 302
Return on Asset 0% .074244 .0392556 80
1%-5% .073850 .0514641 86
6%-25% .078038 .0527115 79
OWNERSHIP STRUCTURES 5

>25% .087281 .0592568 57

Total .077585 .0505022 302
Price/Book Value 0% 2.2026 1.84310 80
1%-5% 1.9045 1.44287 86
6%-25% 2.4129 1.79737 79
>25% 2.3495 2.25142 57
Total 2.2005 1.81680 302

Table 2.b Box’s Test of Equality of Covariance Matrices

Box's Test of Equality of Covariance Matricesa

Box's M 64.683
F 3.526
df1 18
df2 253262.754
Sig. .000
Tests the null hypothesis that the observed covariance matrices of the dependent variables are
equal across groups.
a. Design: Intercept + DirSharePortionsII
OWNERSHIP STRUCTURES 6

Table 2.c Multivariate Testsd

Effect Value F Hypothesis Error df Sig.

df
Intercept Pillai's Trace .756 305.097b 3.000 296.000 .000
Wilks' Lambda .244 305.097b 3.000 296.000 .000
Hotelling's Trace 3.092 305.097b 3.000 296.000 .000
Roy's Largest 3.092 305.097b 3.000 296.000 .000

Root
DirSharesPortionI Pillai's Trace .096 3.291 9.000 894.000 .001
Wilks' Lambda .905 3.338 9.000 720.537 .001
I Hotelling's Trace .103 3.366 9.000 884.000 .000
Roy's Largest .083 8.289c 3.000 298.000 .000

Root
a. Design: Intercept + DirSharesPortionII
b. Exact statistic
c. The statistic is an upper bound on F that yields a lower bound on the significance level.
d. Tables 2.b and 2.c represents the multivariate tests.

The Box’s test of equality of Covariance Matrices is significant. The multivariate

tests are all significant. This is strong evidence that different levels of insider holdings have

influences/prioritise on the performance ratios of the firm. The relationships of those

ownership structures to the EBIT Margin and Price/Book Value are evidently curvilinear in

shape. To test this non-linear relationship further, the study conducted some regression

analysis, regressing the EBIT Margin against directors’ holdings (non-categorised values). To

capture for that non-linear relationship the study included a squared value of the directors’

share holdings.

Table 2.d

Coefficientsa
OWNERSHIP STRUCTURES 7

Model Unstandardized Standardized t Sig. Collinearity

Coefficients Coefficients Statistics
B Std. Beta Tolerance VIF
Error
1 (Constant) .204 .019 10.982 .000
Dir Share Held .160 .059 .254 2.703 .007 .358 2.795
DirSharesHeld2 -.019 .005 -.379 -4.026 .000 .358 2.795
a. Dependent Variable: EBIT Margin

The model can be written as follows: Y = 0.204 - 0.019x2 + 0.160x + ɛ. Where Y is

the EBIT Margin, x is director share holdings and ɛ is the error term. This is a convex shaped

relationship. The model is statistically significant with t values above +1.96 and the P-values

are highly significant for all the coefficients (< 0.05). The relationship between directors’

level of holdings and Price/Book Value is evidently non-linear and is concave shaped .

A regression analysis output Table 2.e demonstrates this relationship. Though it is not as

statistically significant as the output of Table 2.d. Looking at the outputs on Tables 2.a and

2.e it is apparently clear that the relationship is concavely shaped.

Table 2.e

Coefficientsa
Model Unstandardized Standardized t Sig. Collinearity
Coefficients Coefficients Statistics
B Std. Beta Tolerance VIF
Error
1 (Constant) 2.293 .305 7.519 .000
Dir Share Held 1.715 1.004 .158 1.709 .088 .359 2.786
DirSharesHeld2 -.070 .079 -.082 -.889 .375 .359 2.786
a. Dependent Variable: Price/Book Value

The model can be written as follows: Y = 2.293 – 0.070x2 + 1.715x + ɛ. Whereas the

relationship between the directors’ holdings and ROA ratio is linear and is positively related.
OWNERSHIP STRUCTURES 8

The study also conducted similar analyses on the performance measures utilising

different levels of block holdings as the independent variable as shown on the Appendix A.

We can see a convex relationship between Block holding levels and the ROA values, and a

concave relationship between the Price/Book Value ratio and levels of block holdings. The

assumption (Box's Test of Equality of Covariance Matrices) that the observed covariance

matrices of the dependent variables are equal across groups is not holding (Appendix B),

hence the explanation of the insignificant multivariate tests (Appendix C) and the associated

regression analysis models. Most studies have documented block holdings to have some

significant monitoring influences in the operations of their companies. It can be argued that

whatever the block holdings’ wishes might be, the end results lays with the directors, who are

the true drivers of the companies, hence their needs (directors) will always be meet over the

needs of the shareholders, this is the well-known agency problem documented by Fama and

Jensen (1983).

4.3 Insider Holdings vs. Performance Ratios

Table 2.a illustrates the levels of insider holdings and their interactive influence on the

performance ratios.

EBIT Margin:

At levels of 1%-5% insider holdings the average EBIT Margin is 11.9%, at 6%-25%

holdings it is 10.6% and at holdings above 25% the average EBIT Margin rises to 12.5%. The

regression model for this relationship is represented by Table 2.d and the corresponding

function is Y = 0.204 - 0.019x2 + .160x + ɛ, where Y is the EBIT margin and x is insiders

holdings and ɛ is the error term of the model. The curve portrays a convex relationship

between insider holdings levels and the EBIT Margin values.

OWNERSHIP STRUCTURES 9

Price/Book Value:

Table 2.e is the regression analysis model output for the Price/Book value ratio vs.

insiders’ holdings. The model is Y = 2.293 - 0.070x2 + 1.715 + ɛ, where Y is the Price/Book

value ratio and x is percentage of insiders’ holdings and ɛ is the error term of the model. The

function portrays a concave relationship between insider holdings and Price/Book Value

ratio.

ROA:

Table 2.a portrays a positive linear relationship between the levels of insider holdings

and the ROA ratio. Lower levels of insider holdings portrays lower ROA ratios, as the level

of insider holdings increases so does the average ROA ratios. This is a positive linear

relationship, which is different to the relationship posed between the other performance

measures and the levels of insider holdings, which are concavely and convexly shaped.

Tables 2.b and 2.c represents the multivariate tests. The Box’s test of equality of

Covariance Matrices and the multivariate tests are all significant. This is strong evidence that

different levels of insider holdings have crucial interactive influences on the performance

ratios. The relationships of those ownership structures to the EBIT Margin and Price/Book

Value are evidently curvilinear in shape. To test these non-linear relationships, the study

conducted some regression analysis, regressing the performance measures against directors’

holdings levels (non-categorised values). To capture for the non-linearity effects the study

included a squared value of the directors’ share holdings. The regression models were

statistically significant, and portrayed the convexity and concavity relations.

4.4 Block Holdings vs. Performance Ratios:

EBIT Margin:
OWNERSHIP STRUCTURES 10

Appendix A portrays a negative linear relationship between EBIT Margin and the

levels of Block Holdings. As the levels of block holdings increase the average EBIT Margin

decreases.

ROA:

Appendix A portrays a convex relationship between the level of Block Holdings and

the ROA ratio. At 6% - 25% holdings the average ROA is 7.6%, at holding levels between

26% – 50% the average ROA value drops to an average of 7.21%, while at holdings above

50% the average ROA ratio rises to an average of 7.48%. Appendix D is the regression

analysis output model and it portrays and supports this convex relationship: The function can

be written as Y = 0.091 - 0.004x2 + 0.011x + ɛ, where Y is ROA and x is percentage levels of

block holdings and ɛ is the error term of the model.

Price/Book Value Ratio:

The relationship between the Price/Book Value and the level of Block holdings

portrays a weak concave shaped attribute. The 6%-25% level of holdings portrays an average

Price/Book Value ratio of 2.1995, 26%-50% level of holdings portrays an average ratio of

2.2849 while the holdings above 50% portrays a drop in the average ratio to 1.6862.

Appendices C and D presents the multivariate tests of the relationship between the

block holdings levels and performance measures. The assumption that the observed

covariance matrices of the dependent variables are equal across group does not hold for this

tests. With this assumption failing the results are expected to be spurious. All the multivariate

tests are insignificant, hence the notion that different levels of block holdings have some

influential variance on performance ratios’ mean fails. The Roy's Largest Root test seems to

be less insignificant compared to the other tests. Unlike the groupings in the Directors’
OWNERSHIP STRUCTURES 11

holdings tests which were more or less of the same size, the groups’ sizes for the Block

holdings are very different and this could have affected the robustness of the data, for

MANOVA works well when the groups are more of the equal size.

4.5 Discussion

It is clearly apparent that varying shareholding levels have varying implications of

various performance ratios and their linked maximisation strategies. If the firm has profit

maximisation strategy, it can be seen that the ratio of focus is EBIT margin and the target is

profit maximization. If the firm has efficiency maximisation strategy, it can be seen that the

ratio of focus is higher ROA and the target is efficiency maximization. If the firm has

shareholder/capital value maximisation, it can be seen that the ratio of focus is Price/Book

Value ratio and the target is shareholder/capital value maximisation. After assessing the

baeviours linked with insider holding levels, its interpretated that when levels of holdings is

low the EBIT Margin is quite high, explaining how insiders (managers/directors) aim at profit

maximisation.

When insiders are evaluated and rewarded for making profit for the company, their

priorities will be focused at maximising profits more than other performance ratios. This is to

the advantage of the insiders and at the expense of the majority shareholders, this the famous

agent problem documented by Fama and Jensen (1983). As their shareholdings increase the

profit maximisation strategy becomes of less value and preference shifts as they focus on

maximising capital gains on their shares and also increasing the efficiency of the company for

future cash flows. As their holdings increase from 5% to 25% the insiders shifts their

priorities to maximise the value of the shares, and the efficiency of the company (ROA) ratio

increases as well. Though at higher levels it seems the EBIT Margin increases and the

Price/Book value ratios goes down, but the efficiency ratio still increases. Logically it would
OWNERSHIP STRUCTURES 12

be expected that as the insider holdings increases the Price/Book Value ratio will increase

continuously, but this data does support that view and the study cannot explain that

behaviour. The effects of insider holdings’ levels on performance ratios was more statistical

significant than the effects portrayed by the levels of block holdings. The block holding

levels are negatively related to the EBIT Margin ratio. It could be argued that as the holdings

of the block increases the short sighted profit maximisation strategy is replaced by the value

maximisation strategy. It seems block holders would prefer to maximise the share price rather

than to endorse the directors’ profit maximisation strategies. As the levels of block holdings

increase so does the Price/Book Value ratio until the holdings reaches 50% and the ratio’s

value start to gradual decrease and but ROA ratio begins to increase. This is evident that at

high levels of block holdings, the strategy shift to maximising the efficiencies. This is

understandable given the large capital injections hence the monitoring levels increases as the

block holders protect their investments.

So why are these different levels of ownership structures and their relations to performance

ratios of any relevance? The answer lays with the privatisation strategies that most

governments need to adopt to either maximise the efficiency, profitability or value of the

organisations that are lined up for privatisation. If the government decides to privatise a

utility that cannot be split into numerous competing companies, the best approach is to

sell/split it into different share holdings/ ownership structures. If the intent of the government

is to maximise the efficiencies it might help to adopt as revealed by this study a 6%-25% or >

50% of Block holdings structure, as those levels are associated with a high-level of efficiency

ratios (e.g. ROA) and are synonymous with the efficiency maximisation strategies. Also

higher levels of insider holdings (>25%) seem to portray high levels of the efficiency ratios

(ROA). Also if the government intends to maintain a stake in the organisation it can sell 25%
OWNERSHIP STRUCTURES 13

to block holders and 25% to insiders. This level of ownership structure according to this

study seem to have a propensity and is synonymous with higher levels of efficiencies. If

profit maximisation is the agenda of the government, it can adopt either very low or high

levels of insider holdings, and a very low block holdings levels. Basically, the knowledge of

the relationships between different levels of ownership structures and different levels of

performance ratios is crucial in developing strategies for the restructuring/privatisation of

companies and organisations.

The study sample of 327 ASX listed companies suggests that it’s neither the under

specification of models as suggested by Ramaswamy (2010) nor the different backgrounds

where the studies were conducted that contributes to the equivocal findings in this topic. The

study does indicate that different types and levels of ownership structures have different

priorities on different performance ratios to maximise. Hence the resultant of the relational

effects documented by these various researchers are largely influenced by the levels of the

dominant ownership structure holding that will be prevalent in the data used. For example

according to this study a sample of data with a structure that is dominated by a miniature

block holdings will prioritise profit maximisation and neglect efficiency maximisation.

Theoretical this could be explained by the notion that directors/managers’ rewards are pinned

on their performance which is measured by profit making. Also the results seem to indicate

that as directors’ holdings increase the profit maximisation strategies begin to decline and

value maximisation strategies become prevalent. Block holders tend to be more concerned

about their capital investments hence they are more inclined to investing in the projects that

will generate enough cash flows in the future and increasing the returns on assets (ROA).

Thus they are more interested in adopting the efficiency maximisation strategies. A random

mixing of these ratios as performance measures without paying due attention on the prevalent
OWNERSHIP STRUCTURES 14

ownership structure types could lead to spurious findings which are currently synonymous in

this area of research. Most of the studies were conducted on uniquely different markets,

endowed with unique ownership structures. The Chinese firms are still evolving from largely

government control/ownership through partial privatisation, while on the other hand

Australian companies are evolving from single ownership to the initial public offering

(IPOs). It can be proved that evolving from one large single owner (founder) to listing on the

stock exchange has the same effect on firm performance as firms progressing from

government ownership to privatisation. Though what matters most is the structure of

ownership that those companies adopts on their evolution journey, for example a sudden big

change to a large block can influence the change from one maximisation strategy to a

different maximisation strategy.

OWNERSHIP STRUCTURES 1

5.0 Conclusion

Most researchers assumed that the relationships between different company

ownership structures should have the same directional relationship to performance ratios.

They neglected the fact that different types of ownership structures have different agendas

and priorities. This study reveals that different relationships are to be expected between

different types and levels of different ownership holdings and different performance ratios.

Our regression analysis outputs demonstrates the nature and size of those relations. Likewise

much can be learned from identifying different types of insider holdings. As for the insider

holdings, the split and identification of different types of insider holdings would reveal some

more information on this area of study. For example insider holdings could be split into those

who are founders of the company and those such as the directors, managers and employees.

All the behaviours and attitudes of these different insiders’ holdings will vary, and their

influences could shade more light into the literature on this topic. To develop an optimal

ownership structure that will maximise the company’s performance measure, firstly there is a

need to precise document the effects that different levels of ownership structures have on

different performance ratios. This study could not find any statistical significance of the

influence that block holdings levels have on performance ratios’ mean. This calls for a

detailed study on how block holdings behaviours interactively influences the performance

ratios. The behaviour of single block holding would ideally be different to the behaviours of

combined different block holders. The study did reveal that the MANOVA OUTPUT

functions do reveal the maxima points that can achieve the highest value of the relevant

performance measures of interest. With regards to these finding, further research is required

to develop a model that can optimise company financial performance by structuring and

combining various ownership structures.