Ownership structure and its impact on the financial performance of a bank

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Many organizations’ financial performance has been primarily linked overtime to their

ownership structure, as it provides support through the owner's equity. All business organizations

are normally burdened with the responsibility to make yields. This responsibility is essential

because a company's ability to earn returns on the competitive market will determine its ability to

withstand in the future to a large extent. According to (Jensen & Meckling, 1976), financial

performance is defined as an instrument that analyzes how well a company uses its resources to

generate profit, making it a vital tool for several stakeholders in a company. Consequently,

financial performance is crucial for the survival and continuous patronage of any business

organization in the business world by investors, potential investors, creditors and other

stakeholders.

The form of ownership structures a company acquires, however, are engineered by the

company's vision. According to (Jensen & Meckling, 1976), The ownership structure is defined

by the distribution of the voting and capital equity, as well as the identity of the owners of the

investment. Hence, any company's ownership structure has been a severe factor for the financial

performance of the company. In the existing literature, the effect of managerial, institutional, and

concentrated ownership on the financial performance of a firm measured by Book value per

share has been issued to the researcher with mixed results. This has been widely addressed in

developed climates, and more recently in emerging economies, but has been less discussed in the

context of Ghana.
 Ownership structure and its impact on the financial performance of a bank

The ownership structure is one of the key dimensions of corporate governance and is clearly seen

by country-level corporate governance features such as stock market growth and business

involvement and regulation (La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1998). Corporate

ownership systems around the world are very complicated but two distinct groups tend to exist

(La Porta, Lopez-de-Silanes, & Vishny, Corporate ownership around the world., 1999). Most of

the shares are broadly held or diffuse in the Anglo-Saxon countries, but shares are concentrated

in the hands of a few large shareholders in the European countries. When ownership is diffuse,

problems with agencies rise because of conflicts of interest between managers and shareholders (

(Jensen & Meckling, 1976); and (Roe, 1994)). As the concentration of ownership rises to a point

where an owner gets effective control over the company, the essence of agency problems shifts

away from manager-shareholder disputes to conflicts between the controlling owner and

minority shareholders (Shleifer and Vishny 1997).

(La Porta R. , Lopez-de-Silanes, Shleifer, & Vishny, 2000) opines that, the countries with a weak

legal environment have shown that the original owners are trying to maintain high positions in

their corporations, resulting in ownership concentration. Insider ownership of equities will match

insider interests with those of shareholders, resulting in higher firm valuation. (Klapper & Love,

2002). In underdeveloped countries, besides weak legal enforcement reasons, due to the

undeveloped nature of financial markets, which would require limited access to external

financing and contribute to the predominance of family businesses (La Porta et al., 1997, 1998).

Ownership structure determines the profitability of the firm, which is enjoyed by various

stakeholders. The ownership structure is a useful tool for decreasing the agency costs associated

with ownership separation and management, which can be used to protect the company's

property rights (Barbosa & Louri, 2002). With the development of corporate governance, many
 Ownership structure and its impact on the financial performance of a bank

corporations that own shareholders disperse and are controlled by the hire manager. As a result,

incorporated companies whose owners are dispersed and each owns a small fraction of the total

outstanding shares, tend to underperform as Berle and Means (2004) indicated.

Corporate governance has become an obverse issue and the centre of the plan for business

leaders as well as regulators around the world. Shareholders are always seen as corporate

owners, while directors are agents or shareholder representatives who are supposed to allocate

business resources in a manner that increases their wealth. Many shareholders ' motivation for

investing in companies is not profit control (Kadivar, 2006). Corporate governance principles

include issues such as management measurement, level of power, and how the large and small

shareholders interact.

Ownership structure varies from individual to collective; this causes new financial resource

management challenges. Berl and Moses (2004) considered it an agency problem. According to

(Morey, Gottesman, Baker, & Godridge, 2008), this may cause a conflict of interest and agency

problem. A variable of corporate governance, thus shareholders structure, and the relationship

between shareholders’ structure as well as the performance of firms is an essential and continued

subject in the field of financial management (Ezazi, Sadeghisharif, Alipour, & Amjadi, 2011) To

evaluate this relationship, various elements of the ownership structure are regarded up to now,

for example, as managerial or non-managerial shareholders, concentration or dispersion of

shareholders, as whole or retail, as internal (domestic) or as international shareholders, as

institutional or individual shareholders.

Several types of research on managerial shareholding and company performance used various

methodologies and mixed results, for example, some found positive relationships between

managerial shareholding and company progress, (Oswarld & Jahera, 1991); (Mehran, 1995);
 Ownership structure and its impact on the financial performance of a bank

(Houlhthausen and larker, 1996); (Cole and Mehran, 1998); whereas others found negative

relationships (Jarell & Poulsen, 1988)

Organized shareholding is also vital, and plays a crucial role in the management of the company

that moves from good to great. “Banks, mutual funds, insurance companies, clubs, societies,

churches, and mosque may be institutional shareholders”. Some studies have attempted to assess

the connection between institutional ownership and firm performance. Its results, however, are

mixed. For example, some studies show not one correlation (Agrawal and Knoeber, 1996),

(Craswell et al., 1997), (Loderer and Martin, 1997), (New Zealand, Navissi, and Naiker, 2006).

Conversely, some find a supportive correlation between institutional ownership and organization

performance (Hartzell and Starks, 2003).

In Ghana, it has not been proven as to whether or not there exists a link between ownership

structure and financial performance of banks in Ghana; for this reason, the drive of this research

is to ascertain the impact of Ownership structure on financial performance.

1.2 Statement of the problem

The study will examine the implications of ownership structures on banks' financial performance

in Ghana. Numerous research has been done to examine trend impacts of ownership structure on

company performance worldwide. The ownership structure is an essential factor affecting the

movement of a company particularly its health (Zeitun & Tian, 2007).

The ownership structure is seen as having the most significant effect on corporate governance

structures (Solomon, 2011) as well as firm performance. Developed countries have dominated

the majority of studies examining the impact of the ownership structure on firm results (Decassy

& Guyot, 2017). To the researcher's knowledge, there is limited research in African countries

dealing with firm results, particularly Ghana. Ghana thus provides an excellent case for
 Ownership structure and its impact on the financial performance of a bank

investigating the relationship between the structure of ownership and firm performance,

specifically financial performance.

Within modern corporations, the conflict of interests between principals and agents has long

fascinated economists. To minimize this issue, significant studies in the theory of agencies like

(Jensen & Meckling, 1976) propose that the company's equity holdings should be used instead of

cash compensation to align the interests of managers and shareholders better. Given the

theoretical and practical significance, it has been difficult to persuade empirical evidence and

consequently, there is an absence of agreement about whether ownership structure matters for

firms’ progress.

Nevertheless, the relative studies on the impact of ownership structure in developing countries,

especially in Ghana, are still low, scarce and rare (Al-Haddad, Alzurqan, & Al_Sufy, 2011).

Previous studies defined the structure of ownership as the distribution of shares among owners

(Gisbert & Navallas, 2013). This research contains new variables that relate to the structure of

firm ownership, namely, family ownership, foreign ownership. Due to its significance for an

emerging market, financial, managerial and international ownership is an added dimension.

Additional to the study is family ownership to investigate an important aspect of ownership

structure in Ghana's cultural environment (Zureigat, 2015).

1.3 Objectives of the study

The first drive of the study is to examine the impact of ownership structure on the financial

performance of banks.

Specific objectives

1. To examine the various components of the ownership structure in the Ghanaian banking

sector.
 Ownership structure and its impact on the financial performance of a bank

2. To examine the relationship between ownership structure and the financial performance

of Ghanaian banks.

3. To compare and analyze ownership structure in private-owned, state-owned and foreign

banks.

1.4 Research questions

1. What are the components of the ownership structure in the Ghanaian banking sector?

2. What is the relationship between ownership structure and the financial performance of

Ghanaian banks?

3. How is ownership structure in the private-owned, state-owned and foreign banks?

1.5 Research Hypothesis

HI: The type of ownership structure of a bank determines its financial performance.

H2: Ownership structure plays an essential role in banks’ financial performance.

1.6 Significance of the study

This research is an evaluation of how well a company, taking into account its ownership

structure, will do financially. How it can use assets from its primary business model, and

generate income. The financial performance of a company is a general indicator of the overall

financial health of a business over a given period and may be used to compare similar companies

in a related business or to compare industries or sectors in aggregate (Fauzi, 2007). (Boubakri,

Cosset, & Guedhami, 2005) founded arguments that favour state-owned banks that private banks

are exposed to a crisis have limited access to finance and that the government is better equipped

to allocate investment capital. Some of the theory of development views government ownership

as a necessary means to trigger economic and financial growth, especially for countries that have

weak economic institutions and fund projects with social benefits from government financing.
 Ownership structure and its impact on the financial performance of a bank

In this regard, it puts the study in a more excellent position to know that, in the context of

ownership structure, it advises various banks on how it affects their financial performance and

how to manage it. Again, this study would be especially useful to academics, potential

researchers working around the subject.

1.7 Scope and Limitations of the study

The research focuses on various banks (private, state-owned and foreign) in Accra, Ghana as its

case study. However, broad as the topic is, it requires a lot of in-depth research into various

banks, both private-owned, state-owned and foreign, to seek for information but for some

reasons, the study was being limited to few banks. This was due to financial constraints. The

cost of printing additional Questionnaires to seek information and the cost of transportation to

get to the organization as well as limited the study. For this reason, the researcher focused on

only one organization to cut down cost. Conversely, it must be plainly specified that the

limitations described above did not hinder the reliability of this research work.

1.8 Definition of terms

Corporate Governance: The system of rules and practices under which a board of directors

guarantees responsibility, equity and openness in the relationship between a corporation and all

its stakeholders.

Financial performance: A subjective measure of how well a company can exploit assets from

its primary business model and generate revenues. Also, the term is used as a general measure

of the overall financial health of a firm over a given period.

Ownership structure: relates to the internal management of a corporate enterprise and the

rights and duties of individuals with a legitimate or equal interest in that business.
 Ownership structure and its impact on the financial performance of a bank

Bank: A financial institution which accepts public deposits and creates credit and also, lending

can be carried out either directly or indirectly via capital markets. Because of their importance

on a country's financial stability, banks in most countries are highly regulated.

Private-owned bank: A bank, owned either by individuals or by a limited partner(s) in general.

State-owned bank:  Includes those financial institutions owned by citizens of the jurisdiction

and operated by their representative agencies. A public bank's geographical reach can extend

from local branch offices to international operations.

Foreign banks:  Foreign banks are banks with headquarters outside the country they are located

in.