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Ownership structure and corporate Ownership

structure on
financial performance in an firm financial
performance
emerging market: a dynamic panel
data analysis 1973
Shahab Ud Din Received 18 March 2019
Revised 28 July 2019
Department of Business Management, 4 January 2020
Karakoram International University Gilgit-Baltistant, 20 September 2020
Accepted 13 January 2021
Gilgit, Pakistan
Muhammad Arshad Khan
Department of Economics, COMSATS University Islamabad,
Islamabad, Pakistan, and
Majid Jamal Khan and Muhammad Yar Khan
Management Sciences, COMSATS University Islamabad – Wah Campus,
Wah Cantt, Pakistan

Abstract
Purpose – This study examines the impact of ownership structure on firm financial performance, for 146
manufacturing firms listed at the Pakistan Stock Exchange (PSX) for the period 2003–2012.
Design/methodology/approach – The theoretical background of the present study is based on the agency
theory. Ownership structure is measured by institutional shareholdings, insider shareholdings, foreign
shareholders and government shareholdings, while return on assets (ROA), return on equity (ROE), market-to-
book ratio (MBR) and Tobin’s Q (TQ) are used as proxies of corporate financial performance. The dynamic
panel generalized method of moments (GMM) method is employed to cater for the issue of endogeneity.
Findings – We find that institutional ownership exerts a significant positive impact on ROE and MBR, which
suggests that institutional investors play a significant role in improving the financial performance of the
sample Pakistani. Furthermore, the results reveal a significant positive relationship of insider ownership with
ROA, ROE, MBR and TQ, which is consistent with the prediction of agency theory that concentration of insider
ownership aligns the interest of shareholders with those of the managers and hence improves performance. A
significant positive association of government shareholdings with ROA and ROE was also found. Therefore,
policymakers may encourage government ownership in firms, which can help to improve corporate financial
performance.
Originality/value – The present study contributes to the existing literature on ownership structure and
corporate financial performance in an emerging market like Pakistan. It is worth mentioning that the
institutional setup and corporate governance structure in Pakistan is yet at an evolving stage. Findings of this
study may provide useful insights to corporate managers and investors about the relationship between
ownership structure and financial performance of firms from the manufacturing sector in Pakistan.
Keywords Pakistan, Corporate governance, Ownership structure, Institutional ownership, Insider ownership,
Foreign ownership, Government ownership, Corporate financial performance, PSX, Dynamic GMM
Paper type Research paper

1. Introduction
Due to a number of recent corporate scandals and financial crises [1], the need for having
strong corporate governance mechanism at firm level is being strongly felt across the globe in
International Journal of Emerging
Markets
Vol. 17 No. 8, 2022
pp. 1973-1997
The authors would like to thank Editor in Chief, Associate Editor, and the anonymous referees for their © Emerald Publishing Limited
1746-8809
valuable comments. DOI 10.1108/IJOEM-03-2019-0220
IJOEM general and in the emerging markets in particular. Corporate governance encompasses the
17,8 interaction among different stakeholders such as the board members, shareholders,
company’s management and other stakeholders in a business [2]. The composition and
other various aspects of the ownership of a firm have a pivotal role in ensuring a strong
corporate governance system. For example, traditional agency theory claims that as opposed
to a dispersed ownership structure, a more concentrated ownership would enhance the ability
of shareholders to monitor management of the company, preventing it from taking self-
1974 serving decisions. However, a more concentrated ownership may also lead to conflict of
interest between the majority and minority shareholders. This complex nature of the
association of ownership structure to various aspects of the firm policies makes it an
important element of corporate governance and an area of interest for the researchers.
Given its importance in corporate governance, the relationship of firm’s ownership
structure to various firm policies, and in particular to firm performance has been an area
widely researched in previous studies. Most of these studies on ownership structure have
been carried out in advanced countries and the USA with a main focus on the conflict of
interest between unmonitored management and dispersed owners. However, firms in the
emerging economies are mostly characterized by a rather concentrated ownership structure,
often giving rise to a conflict of interest between the minority and majority shareholders that
may ultimately affect the firm performance. Moreover, another complexity is added to this
relationship by the various types of owners that may be having conflicting interests in the
firm. Some commonly studied of these aspects of ownership include managerial and insider
ownership, institutional ownership, family ownership, government ownership and foreign
ownership. The existing literature on the relationship of these various types of ownerships to
firm performance and firm value has mostly come up with mixed findings. For example,
regarding managerial ownership and firm performance some found a positive relationship
(Kumar, 2004; Severin, 2001), while others found it is opposite (Demsetz and Villalonga, 2001;
Lang and So, 2002; Rowe and Davidson, 2002). Some studies support the view that family
ownership is accompanied by severe governance issues (Perrini et al., 2008) while others
found a positive association between family control and firm performance (Anderson and
Reeb, 2003). Similarly, in the US market Morck et al. (1988) found a nonmonotonic relationship
between insider ownership and firm value in the US market. Others having found such mixed
findings include Beiner et al. (2006); Perrini et al. (2008); Shahveisi et al. (2017). Besides these
mixed outcomes, most of these studies are done in developed markets where the laws and
dynamics of corporate governance are completely different and relatively stronger as
compared to those in emerging markets.
The current study is an attempt to revisit the relationship of various ownership types to
firm performance in a sample of Pakistani firms. Pakistan is a representative emerging
market country, where some major corporate failures, i.e. Taj Company Ltd., Sarah Textile
and Mehran Bank Ltd., strengthened the opinion to modernize corporate governance in the
country. The Government of Pakistan (GoP) therefore made significant efforts to reform the
corporate governance system and incentivize the development of institutional investors,
including opening of stock markets to foreign institutional investors. In addition, to
strengthen the process of capital market liberalization and the implementation of the codes of
corporate governance, the Securities and Exchange Commission of Pakistan (SECP) was
established in 1997. In March 2002, the SECP, jointly with the Institute of Chartered
Accountants of Pakistan (ICAP), issued the country’s first code of corporate governance
(henceforth CCG, 2002) for publicly listed companies–a milestone in corporate governance
reforms in Pakistan.
The requirements of the code of corporate governance in Pakistan are influenced to a great
extent by the corporate governance regulations of the United Kingdom (UK) and the United
States (US). However, there is a significant difference between the corporate governance
practices in Pakistan and developed countries. Corporations in developed countries, such as Ownership
in the UK, US, Japan and Australia, are relatively larger in size with dispersed ownerships, as structure on
compared to those in Pakistan. In Pakistan, a majority of the listed companies are owned
either by the government or by families and large business groups. Around more than 64% of
firm financial
the listed companies in Pakistan, are family-owned [3]. In these family-owned businesses, the performance
family patriarch is usually the dominant shareholder who acts as manager, whereas the
immediate and distant family members are operating various firms within that business
group. Besides this, the corporations in Pakistan use cross-shareholdings and interlocking 1975
directorships to gain control over the business [4]. All this makes Pakistani firms an ideal
natural setup for observing the impact of various ownership structures on corporate
performance in emerging markets.
The present study examines the impact of various ownership structures, i.e. institutional
shareholding, insider shareholding, foreign shareholding and government shareholding on
corporate financial performance in a panel of 146 manufacturing Pakistani firms over the
period 2003–2012. Our contribution to the existing literature is multifold. First, we investigate
the relationship between various ownership structures and firm performance while
simultaneously considering firm size, leverage, firm’s sales growth, profit margin and
dividend payout ratio. This study is also timely because the government of Pakistan has
exerted tremendous efforts to promote institutional ownership during our sample period.
Second, this study will shed light on the various types of ownerships on firm performance and
hence provide a detailed empirical support to the existing theoretical claims. Our findings on
the relationship between various ownership structures and firm performance may help
managers and investors to formulate strategies based on their investment horizons. Third,
this study econometrically caters for the problem of endogeneity in the relationship between
ownership structure and firm financial performance by using dynamic panel generalized
method of moments (GMM) methodology. The GMM is useful because it allows not only for
correlation between the independent variables and the error terms, heteroscedasticity and
contemporaneous correlation across the residuals but also for the autocorrelation in residuals
(Lin and Fu, 2017).
The rest of the paper is organized as follows: Section 2 presents the literature review and
develops the hypotheses. Data and econometric methodology is discussed in Section 3.
Section 4 describes the empirical results, while Section 5 provides conclusion and policy
implications.

2. Literature review and hypotheses development

The theoretical link between ownership structure and firm performance is rooted in Jensen
and Meckling’s (1976) agency theory. Shleifer and Vishny (1997) assert that the separation of
ownership and control for a firm creates agency problem that results in conflicts between
shareholders and managers. Investors attempt to maintain ownership structure by
concentrating ownership in a group of people to supervise the actions of managers to
reduce agency problem, which in turn improves firm performance (Colpan and Yoshikawa,
2012). Several studies document that the agency problem may be shifted from owners-to-
manager to owners-to-owners when a particular group of owners attempt to control the
operations and management of the company (Shleifer and Vishny, 1997; Yeh, 2019). Firms
with highly dispersed ownership are controlled by managers, which may eventually
adversely affect prospective investors (Claessens et al., 2002).
Numerous empirical studies have investigated the relationship between ownership
structure and firm performance in developed and developing countries, such as Morck et al.
(1988), Dwivedi and Jain (2005), Elyasiani and Jia (2008) and Madiwe (2014). However, the
findings have been mostly mixed. For example, Patterson (2000) reports mixed results for the
IJOEM relationship between ownership structure and corporate performance. Carlin and Mayer
17,8 (2002) conclude that the mixed and inconsistent results are due to different institutional and
cultural orientations across countries. Dwivedi and Jain (2005) find a nonlinear and negative
relationship between directors’ ownership, insiders’ ownership and firm value. Similarly,
Kapopoulos and Lazaretou (2007) detect a significant positive association between
managerial shareholdings and Tobin’s Q. Further, Demsetz and Lehn (1985) argue that a
concentrated shareholding structure may have substantial economic incentives to diminish
1976 agency conflict and maximize the firm value. Abdallah and Ismail (2017) document that the
level of corporate governance is positively related to firm’s financial performance. They
further report a positive association between ownership concentration and performance.
Madiwe (2014) suggests that ownership structure is an endogenous variable that is not
related to firm performance noting a weak relationship between insider ownership and firm
performance. Bekiris (2013) finds that board size of firms with higher external block holdings
is negatively correlated with managerial ownership and board independence. A number of
earlier studies inter alia by Elyasiani and Jia (2010), Ongore (2011), Ellili (2011) and Al-Tamimi
and Hassan (2012) conclude weak or negative relationship between institutional ownership
and firm financial performance, while some studies find insignificant relationship between
institutional ownership and firm performance (for example, Agrawal and Knoeber, 1996;
Karpoff et al., 1996). They conclude that institutional investors are not interested in
improving corporate governance and firm performance; they are interested in speculative
short-term trading profits based on information advantages to satisfy their portfolio needs.
Agrawal and Knoeber (1996) and Duggal and Millar (1999) report no relationship between
institutional investor and firm performance. On the other hand, Alfaraih et al. (2012) find a
significant positive relationship between institutional ownership and financial performance,
while they observe negative relationship between state ownership and firm performance.
Smith (1996) and Cornett et al. (2007) explore a significant positive impact of institutional
ownership on firm performance. Elyasiani and Jia (2008) detect a positive impact of
institutional ownership on financial performance in a sample from the banking sector. Kang
et al. (2007) argue that institutional investors are often considered as active monitors, who put
efforts to maximize the value of their investments. The main reason of this phenomenon could
be that institutional investors moderate the principle–agent problem. Additionally,
institutional investors lower the incentive of unprofessional behavior of managers, which
improves firm performance. Based on the above cited literature, we developed the following
hypothesis.
H1. There is a positive relationship between institutional ownership and firm
performance.
Theoretical predictions with respect to the relationship between insider ownership and firm’s
performance are mixed. The agency theory proposes that managers have a tendency of
allocating firm’s financial resources for their personal interests; this self-tendency behavior is
exacerbated by the separation of ownership and control, creating conflicts among the owners
and the managers. In this regard, many empirical studies have found that insider managerial
ownership reduces the managerial myopia problem. For example, it has been found that high
managerial ownership is associated with the increase in innovation and productivity, which
eventually increases the value of the firm (Francis and Smith, 1995; Holthausen et al., 1995;
Palia and Lichtenberg, 1999). Several other studies (such as, Cheung and Wei, 2006; Gugler
et al., 2001; Iturralde et al., 2011; Shyu, 2013; Villalonga and Amit, 2006b) find a significant
positive relationship between insider shareholdings and firm performance. Anderson and
Reeb (2003) note that family firms outperform the nonfamily firms because family firms
operate in well-regulated and transparent environment, which in turn reduces agency costs.
They find that market-based financial performance of family firms is better than nonfamily
firms. Based on the univariate and multivariate analysis, they conclude that family firms Ownership
have higher Tobin’s Q than nonfamily firms. Corbetta and Salvato (2004), (Miller and Le structure on
Breton-Miller, 2006) and Kellermanns and Eddleston (2007) also conclude that family firms
sacrifice their own interests for the achievement of business goals, which would lead to
firm financial
suppression of agency costs. On the other hand, DeAngelo and DeAngelo (2000), Claessens performance
et al. (2002), Schulze et al. (2003) and Morck et al. (2005) find that family ownership enhances
agency problem and reduces firm performance. They document that family oligarchic
control; altruistic nepotism and pursuit of nonfinancial interests are the main factors behind 1977
the agency problems. Morck et al. (1988) evidence a nonmonotonic association between
managerial ownership and firm financial performance. They observe that Tobin’s Q
increases as managerial ownership increases from 0 to 5%, thereafter it decreases as
managerial ownership increases from 5 to 25%, while Tobin’s Q increases again when
ownership crosses 25% level. McConnell and Servaes (1990) find that firm financial
performance increases in a non-linear fashion until it reaches its maximum level of 40–50% of
insider ownership, and afterward firm performance gradually declines for higher level of
ownership. Din and Javid (2011) report significant positive relationship between insider
ownership and financial performance of Pakistani firms. They document an evidence that
manager’s ownership concentration has three threshold levels, namely low level (0–5%),
moderate level (5–25% and highly concentrated (above 25%). However, they observe that it is
only at low and moderate levels of ownership that firm performance is affected positively.
They also observe a negative association between ownership and firm financial performance
beyond the 25% ownership level. Shukeri et al. (2012) discovered an insignificant relationship
between insider ownership and firm performance. Shyu (2013) identified a U-shaped
relationship between insider ownership and firm financial performance which implies that
higher levels of insider ownership may be associated with better firm performance. Based on
the above literature, we formulated the following hypothesis:
H2. There is a positive relationship between insider ownership and corporate financial
performance.
The association between state ownership and firm performance has been widely studied,
though producing mixed empirical results. Previous studies (Aharoni, 1981; Estrin et al., 2016;
Lazzarini and Musacchio, 2018; Stan et al., 2014) argue that state ownership is an inefficient
form of ownership that reduces financial performance. Proponents of agency theory argue
that state ownership may reduce firm financial performance because the state-owned
enterprises (SoEs) pursue a multitude of social objectives, some of which create conflict with
other shareholders in the firm (Lazzarini and Musacchio, 2018). State ownership has a small
negative effect on firm financial performance, and there is a high heterogeneity across
countries in the size and direction of this effect (Aguilera et al., 2020). Further, state ownership
may impact a firm’s performance when there is misalignment of the goal of the state with
other shareowners (Phung and Mishra, 2016). Qi et al. (2000), De Andres and Vallelado (2008)
and Capobianco and Christiansen (2011) find a significant negative relationship between
government ownership and corporate financial performance. They argue that government
representatives in companies are involved in corruptions and pursue self-benefits instead of
state-benefits. They also argue that state ownership suffers from high agency costs because
of poor corporate governance. Along the same lines, Xu and Wang (1999) conclude that
government ownership reduces firm value because of political interference. Likewise, Boycko
et al. (1996) argue that the SoEs around the world have proved to be highly inefficient,
primarily because they pursue strategies, such as excess employment, that satisfy the
political objectives of politicians who control them. On the other hand, Borisova et al. (2012)
conclude a significant positive impact of state ownership on corporate financial performance.
Megginson et al. (1994) document that after the privatization of SoEs, firm’s real sales and
IJOEM profitability increases, their capital investment spending and operating efficiency also
17,8 improves. Furthermore, the privatized SoEs significantly increase their dividend payout with
lower debt levels. Firth et al. (2008) find that state ownership helps a firm to raise capital easily
from bank loans. Likewise, connection with the state helps firms to cope up with bureaucratic
requirements and obtain favor from the government. Some studies, inter alia by Sun et al.
(2002), Sun and Tong (2003), Delios and Wu (2005) and Kang and Kim (2012) identify a
nonliner relationship between government ownership and firm financial performance. Their
1978 results reveal that government ownership exerts a negative impact on firm financial
performance up to a certain threshold level, beyond that level the impact turns to be positive.
Yu (2013) finds that state ownership has a U-shaped relationship with firm performance.
Further, the study argues that state ownership initially has a negative impact; however, it
may accelerate firm’s financial performance when state ownership helps firms to gain
benefits from the government. Tian and Estrin (2005), Hess et al. (2010) and Hongxing and
Yu’na (2013) observe a convex-type relationship between government shareholdings and
firm financial performance, which indicates that firms gain more with substantial state
ownership. Phung and Mishra (2016) also conclude that state ownership has a convex
relationship with firm performance. Boubakri et al. (2020) find a nonlinear relationship
between government ownership and market valuations across publicly listed corporation in
East Asia. They reveal that government-owned firms exhibit higher market valuation than
nongovernment-owned firms. Additionally, the analysis suggests that the effect of
government ownership on valuations is influenced by financial market development,
quality of government and institutions and government involvement in the private sector. A
few studies (for instance, Phung and Hoang, 2013; Sun et al., 2002) even indicate an inverted
U-shaped relationship between government ownership and firm performance. This indicates
that state ownership may first increase the performance of a firm by its advantages. The
above-cited studies clearly reveal that government shareholding play a vital role in
enhancing corporate financial performance in emerging financial markets. Considering the
above literature, we hypothesize that:
H3. There is a positive relationship between government ownership and corporate
financial performance.
Regarding the foreign ownership, literature predicts positive relationship between foreign
ownership and firm financial performance. Foreign ownership tends to be more beneficial for
the financial performance of firms in developing countries. It not only increases return on
investment but also restore investor’s confidence. Besides prompt increase in portfolio
investments in the past few decades, active monitoring role of foreign shareholders has also
been observed in emerging markets (Baek et al., 2004; Heard and Sherman, 1987; Khanna and
Palepu, 1999). Many studies conclude a positive impact of foreign ownership on firms
financial performance (Uwuigbe and Olusanmi, 2012). Similarly, Kim et al. (2011) claimed that
foreign ownership helps the firms to reduce agency problems, which improves the firm
financial performance. The literature also reports a nonlinear relationship between foreign
ownership and firm’s financial performance. For instance, Nakano and Nguyen (2013) find
that the effect of foreign ownership on firm financial performance has been initially
insignificant, but it has started to show up strongly in the more recent periods. Azzam et al.
(2013) find that foreign ownership enhances firm financial performance up to a certain level,
and thereafter its effect decreases. Choi et al. (2012) show inverted U-shaped relationship
between foreign ownership and firm performance. They concluded that foreign ownership
enhances firm performance through activating independent monitoring, but when foreign
ownership becomes concentrated through control on board, firm performance drops.
Greenaway et al. (2014) also detect an inverted U-shaped relationship between foreign
ownership and firm performance. Particularly, they find that when foreign shareholdings
reach up to a threshold of 47–61%, firm performance increases afterward firm performance Ownership
slumps. Rashid (2020) finds a significant positive impact of foreign ownership and director structure on
ownership on both accounting and market-based firm’s performance. He observed that board
size and board independence partially mediate the relationship between ownership structure
firm financial
and firm performance. Based on the above literature, we formulate the following hypothesis: performance
H4. There is a positive relationship between foreign ownership and corporate financial
performance. 1979

3. Research design and methodology

3.1 Data sample
The Pakistan Stock Exchange (hereafter, PSX) [5] is one of the leading stock exchanges of the
world having an enviable record of being the best performing stock exchange in Asia. Its all
index growth was observed to be 26% during the year 2012–2017. Furthermore, PSX is at the
forefront of Pakistan’s economy, being the only major institution helping capital formation in
the country [6]. According to the State Bank of Pakistan’s (SBP) Financial Statements
Analysis of Joint Stock Companies for period 2007–2012, a total of 397 nonfinancial
companies were officially listed at the PSX with a growth of 12.73% in their assets during the
year 2012. Out of 397 companies, 387 are manufacturing companies and 10 are services
companies [7]. However, 128 financial companies were listed at PSX during the year 2012.
We exclude all financial companies and companies associated to services sector as their
pattern of ownership structure, listing requirements and the disclosure and accounts are not
comparable with those of nonfinancial manufacturing companies. We, therefore, started with
the nonfinancial listed manufacturing companies and then gradually shortlisted using the
following criteria to arrive at a final sample;
(1) We retained all the companies that were continuously listed and disclosed their
ownership structure patterns in annual reports over the study period.
(2) We required that the sample firms’ annual reports are available over the sample
period.
(3) We excluded companies with a null or negative value for cash dividend, equity and
profit margin for consecutive three years.
(4) We excluded companies that had a market capitalization of less than 70% relative to
the total market.
(5) Companies having incomplete financial data over the sample period were also
excluded.
After applying the above criteria, the final sample consisted of 146 manufacturing firms with
1,460 firm-year observations which are 37.72% of the total listed manufacturing firms at the
end of 2012. The selected sample is sufficiently heterogeneous that includes small as well as
large firms on the basis of market capitalization. Data pertaining to financial variables are
collected from the balance sheet analysis of joint-stock companies (various issues) published
by the State Bank of Pakistan (SBP, 2003–2007 and 2007–2012). Data on ownership structure
are gathered from the annual reports of the selected companies. Table 1 depicts a sector-wise
distribution of the sample.

3.2 Measurement of financial performance of firms

In line with the previous literature, financial performance of firms is classified into two
categories; accounting-based and market-based financial performance. Return on assets
IJOEM (ROA) and return on equity (ROE) are used to represent the accounting-based financial
17,8 performance, while market-to-book ratio (MBR) and Tobin’s Q (TQ) are considered as a
measures of market-based financial performance. Return on assets (ROAit ) is calculated as
net income divided by total assets of the firm. Similarly, return on equity (ROEit) is calculated
as net income divided by total equity of the firm. Data on these variables are extracted from
balance sheet analysis of joint-stock companies published by SBP. On the other hand, Tobin’s
Q (TQit ) is obtained as total borrowings plus market value of equity divided by total assets,
1980 while market-to-book ratio (MBRit ) is calculated as market capitalization of the firm on last
trading day of the year divided by book value of equity of the firm.

3.3 Measurement of ownership structure

Ownership structure is considered as a significant and one of the most cited aspect of
corporate governance. This study uses four types of ownership structures, namely,
government ownership (GO), institutional ownership (INSO), foreign ownership (FO) and
insider ownership (IO). Institutional ownership (INSOit ) is the percentage of the equity shares
held by financial institutions and government companies. Insider ownership (IOit ) is the
percentage of the equity shares held by directors, managers and executives of the firm.
Foreign ownership (FOit) is the percentage of the equity shares held by foreign companies,
individuals and foreign institutions. Finally, government ownership (GOit) is the percentage
of the equity shares held by the government or government agencies. The data on these types
of ownership are collected from the annual reports of selected companies.

3.4 Control variables

Several firm-specific characteristics may have either positive or negative association with
firm financial performance. In order to account for those factors and following the corporate
finance literature; this study incorporates sales growth, leverage, payout ratio, profit margin
and firm size as control variables. Profit margin (PMit) is calculated as net income divided by
total sales. Firm size (Sizeit ) is measured by the natural logarithm of the market capitalization
of the firm. Dividend payout ratio (Pratioit) is calculated as cash dividend paid to common
shareholders divided by net income of the company [8]. Leverage (Levit) is measured as the
) is the currentyear sales
ratio of the total debt to total assets, and finally, sales growth (SGit

t − Salest−1
minus previous year sales divided by previous year sales, that is, SalesSales t−1
.

3.5 Model specification

To examine the impact of ownership structure on firm financial performance, the following
empirical model is specified:
FPit ¼ α þ β1 OWNit þ β2 Zit þ ηi þ εit (1)

Sectors No. of sample firms

Chemical sector 24
Cement sector 10
Food sector 11
Engineering sector 28
Sugar sector 15
Table 1. Tobacco sector 2
Sector-wise Textile sector 40
distribution of the Fuel and energy sector 16
sample firms Total 146
 εit ¼ μi þ eit (2)
Ownership
Eðμi Þ ¼ Eðeit Þ ¼ Eðμi eit Þ ¼ 0 (3) structure on
firm financial
where FPit is the firm financial performance, measured either by ROAit ; ROEit ; MBRit or
TQit , at a time. OWNit is the ownership structure that constitutes government ownership performance
(GOit ), institutional ownership (INSOit), foreign ownership (FOit) and insiders ownership
(IOit ). Zit is the set of control variables such as firm size (Sizeit ), profit margin (PMit), payout
ratio (Pratioit), leverage (Levit) and sales growth (SGit ), while i is the index for firms
1981
(i ¼ 1; 2; ::::::::; N) and t is the index for time (t ¼ 1; 2; ::::::::; T). The term ηi is unobserved
time variant firm-effect and εitis the composite error term, μi is firm-specific effect, while eit is
error term.

3.6 Methodology
The present study uses panel data of 146 manufacturing sector firms over the period of
2002–2012. It can be argued that empirical studies on corporate governance often suffer from
endogeneity because ownership is an endogenous variable (Demsetz and Villalonga, 2011).
Therefore, we use the dynamic panel GMM estimator to alleviate the endogeneity problem
caused by the ownership variable as in the studies by (Antoniou et al., 2008; Demsetz and
Villalonga, 2001; Flannery and Hankins, 2013; Nakano and Nguyen, 2012; Nguyen et al., 2014;
Wintoki et al., 2012) [9]. In dynamic GMM, one-year lag of dependent variable (FPit−1) is
included in the model as independent variable to capture the dynamics of adjustment and to
control for endogeneity problem (Udin et al., 2017). Eqn (1) now takes the following form;
FPit ¼ α þ γFPit−1 þ β1 OWNSit þ β2 Zit þ ηi þ εit (4)

where FPit−1 is the financial performance of firm i at time t − 1: After the inclusion of
ownership types and control variables, Eqn (4) can be rewritten as:
FPit ¼ α þ γFPit−1 þ β1 INSOit þ β2 IOit þ β3 FOit þ β4 GOit þ β5 Sizit þ β6 PMit þ β7 Pratioit
Xn
þ β8 Levit þ β9 SGit þ YDUM þ ηi þ εit
i¼1

(5)

where, YDUM is a set of nine dummies for the ten sample years.

4. Data analysis, results and discussion

4.1 Descriptive analysis
Table 2 presents the sample descriptive statistics. The table shows that the mean value of
sales in Pakistan rupee (PKR) was PKR. 13954.99 million with a median of PKR. 2926.85
million. Sales of the sample firms vary between PKR.13.37 million to PKR. 820530.4 million.
Similarly, average market capitalization was PKR. 10,788 million, varying between PKR. 0.00
million and PKR. 828401.80 million. The standard deviation of market capitalization was
49010.21. Similarly, the mean value of total assets is PKR. 8971.00 million, with a standard
deviation of 6049.60. Total assets vary between PKR. 23.18 million and PKR. 127004.50
million.
The mean value of dividend payout in the sample is PKR. 232 million and varies
between PKR. 0.00 million to PKR. 8279.11 million. The minimum value of dividend
payout is PKR. 0.00 million which indicates that some of the selected firms are not paying
dividends to shareholders or even may not be generating enough profits. The average of
 17,8

1982

statistics
Table 2.
IJOEM

Sample descriptive
Variables Mean Median Max Min Std. Dev. Skewness Kurtosis Obs

Debt (millions of PKR) 5028 1530.98 96144.9 10.26 9502.1 4.24 26.8 1448
Dividend (millions of PKR) 232 10.4 8279.11 0.00 720.44 5.6 41.53 1448
Equity (millions of PKR) 3942 1057.15 98225.7 3672.9 8996.8 5.81 47.71 1448
Sales (millions of PKR) 13955 2926.85 820530.4 13.3727 46571.8 10.41 146.2 1448
Total assets (millions of PKR) 8971 2994.61 127004.5 23.18 16049.6 3.59 18.46 1448
Market cap. (millions of PKR) 10788 912.1 828401.8 0.00 49010.21 10.61 138.16 1448
Foreign ownership (in %) 0.039 0.00 0.847 0.00 0.111 4.566 25.927 1458
Government ownership (in %) 0.031 0.00 0.95 0.00 0.144 5.159 29.247 1458
Institutional ownership (in %) 0.128 0.107 0.632 0.00 0.105 1.085 4.215 1458
Insider ownership (in %) 0.262 0.182 0.983 0.006 0.215 1.309 4.05 1458
Return on asset (in %) 0.091 0.05 3.033 0.004 0.183 7.97 97.2 1458
Return on equity (in %) 0.27 0.12 7.6 0.005 0.65 6.53 55.23 1458
Market to book ratio (in %) 2.243 0.924 63.366 4.43 5.275 6.257 51.962 1458
Tobin’s Q (in %) 0.63 0.35 6.84 0 0.88 3.32 16.81 1458
Leverage (in %) 0.603 0.615 2.31 0.002 0.249 1.118 9.005 1458
Sales growth (in %) 0.178 0.164 2.739 0.84 0.326 1.422 11.478 1458
Profit margin (in %) 0.078 0.04 0.913 0.00 0.117 3.226 16.484 1458
shareholder’s equity and debt in the sample are PKR. 3,942 million and PKR. 5,028 million, Ownership
respectively. structure on
Table 2 further shows that the average value of foreign ownership (FO) in the sample is
3.9%, with a median value of 0.00%, indicating that foreign shareholding is relatively low in
firm financial
manufacturing companies for the period 2003–2012. The main reason of low foreign performance
shareholding could be a lack of investor’s protection, low quality corporate governance and
social and political problems of the country (Udin et al., 2017). As compared to other
neighboring countries, the average value of foreign ownership in Pakistan is less than that in 1983
India and greater than Bangladesh [10]. The maximum value of foreign ownership is 85%,
which indicates that foreign entities have concentrated ownership like domestic companies.
The foreign listed companies at the PSX have the same ownership pattern like domestic listed
companies and their shares are not dispersed among the investors and other stakeholders.
With regard to the government ownership, the average value is 3.1%, which is less than
foreign ownership (that is, 3.9%). The maximum and minimum value of government
shareholding is 95 and 0.00%, respectively. The maximum value of 95% reveals that, like the
foreign and family-owned enterprises, government-owned companies also have a
concentrated ownership structure with a majority of the shares held by the government
institutions and government officials. One reason of this closed shareholding could be the
requirement of a 50% majority in shareholder’s meetings on most of the decisions and super
majority vote of 75% for the strategic decisions. Thus, the rights of minority investors are
controlled when ownership exceeds 75%. However, as also indicated in Table 2, both foreign
and government companies in our sample have a maximum ownership of more than 75%,
and thus reduces the possibility of contribution of minority shareholders in firm’s
extraordinary decisions.
With regard to the institutional and insider ownerships, Table 2 shows that the average value
of institutional ownership and insider ownership in the sample is 12.8 and 26.2%, respectively
[11]. The maximum shareholding of institutional investors is 63.2%, while maximum
shareholding of insiders is 98.3% [12]. This indicates that average percentage of insider
shareholding is higher than government shareholding, foreign shareholding and institutional
shareholding, respectively. The trend of high concentration of insider ownership strengthens the
view of family-controlled business in the country. Moreover, the insider ownership concentration
in listed companies at the PSX is also much higher than in the Indian and Bangladeshi listed
companies. The insider shareholding in India varies from 15.4% to 17.29% (see Hu and Kumar,
2004; Sarkar and Sarkar, 2000) and from 0% to 62% in Bangladesh (Imam and Malik, 2007). The
standard deviation of institutional and insider ownership is 10.5 and 21.5%, respectively.
Among the firm financial performance measures in our sample firms, the mean values of ROA,
ROE, MBR and TQ are 0.09, 0.27, 2.24 and 0.63, respectively. Among all the financial performance
indicators, the mean of MBR is relatively high, which demonstrates a fairly high market
capitalization of listed firms. The mean value of MBR is greater than 1, implying that stocks of
listed companies are overvalued on the average, indicating positive sentiments about the listed
companies.
With respect to the control variables, Table 2 shows that the average value of leverage is 0.603,
which indicates that listed firms use 60.3% of debt as source of financing. The standard deviation
of leverage is 0.249 indicating a lower variation in leverage. The mean value of profit margin is
relatively small, showing a low profitability of sample companies, while some firms have high
profit margin and earn up to 0.913% profit.

4.2 Correlation analysis

The results of our correlation analysis between ownership structure, financial performance
and control variables are presented in Table A1. The analysis finds a positive correlation
IJOEM between INSO, ROA, ROE, MBR and TQ. Insider ownership is positively correlated with
17,8 ROA, MBR and TQ with correlation coefficients of 0.14, 0.06 and 0.13, respectively. This
implies a weak correlation between insider ownership, ROA, MBR and TQ. However, we
observed a negative and weak correlation between insider ownership and ROE with a
correlation coefficient of 0.061. Similarly, foreign ownership is negatively correlated with
ROA, ROE and TQ. The government ownership has a positive correlation with ROA, MBR
and TQ with correlation coefficients of 0.27, 0.040 and 0.046, respectively. It is evident that the
1984 correlations among the explanatory variables are below 70% which indicates that our data
does not suffer from any issue of multicollinearity. The variance inflation factor (VIF) of the
independent variables is also less than 10 in all cases, confirming the absence of
multicollinearity problem (see Table A1).

5. Empirical results
Ownership structure is one the most important factor in shaping the corporate governance
system of a country (Zhuang, 1999). This is because the nature of agency conflict can be
defined on the basis of ownership structure. Through a study of the ownership structure, we
can identify conflict between managers and shareholders and controlling of the minority
shareholders. We use four types of ownership structures including institutional ownership
(INSOit ), insiders ownership (IOit), foreign ownership (FOit ) and government ownership (GOit)
to examine the impact of various ownership structures on firm’s financial performance. To
cater for the issue of endogeneity, we employ the dynamic panel GMM estimator. The results
are reported in Table 3.
It can be seen from Table 3 that ROEit−1 and TQit−1 are positively and statistically
significant at the 1% level of significance, validating the dynamic nature of the estimated
model. The presence of lagged dependent variables in the model indicates that the
relationship is short-run (Baltagi et al., 2009) [13]. It is evident from Table 3 that institutional
ownership exerts a positive and significant impact on firm’s financial performance when
ROE, MBR and TQ as measure of firm financial performance are considered. The magnitude
of the coefficient indicates that a 1% increase in INSO would increase ROE by 26.03%, MBR
by 5.05% and TQ by 3.59%, respectively. This implies that institutional shareholders play an
effective role in mitigating information asymmetry and agency problems, thereby improving
accounting and market-based performance of firms. This reveals that institutional
shareholders in Pakistan encourage earning per share (EPS), market share price and
market capitalization of listed companies. This further indicates that institutional investors
actively monitor management, induce changes, and promote better governance and a more
efficient investment. This finding is in line with Pound (1988) who argued that institutional
ownership has positive effect on firm financial performance, when institutional investors are
more active to monitor management activities than individual investors.
The results in Table 3 also indicate that insider shareholding have a significant positive
association with ROA, ROE, MBR and TQ. Thus, we may deduce that in the presence of
institutional shareholding, managers pursue the financial goals of the company rather than
their personal goals. This finding confirms the prediction of agency theory that insider
ownership concentration may be considered as a tool to align the interests of the managers
with those of the managers to improve firm performance. This finding is similar to Zahra et al.
(2018) who found in a sample of Pakistani firms that a 1% rise in managerial ownership
reduces the firm’s probability of financial distress by 17%. Other studies inter alia by, Mueller
(2001), Cheung and Wei (2006), Yanming (2007), Iturralde et al. (2011) and Shyu (2013) also
found similar results.
With regard to the impact of foreign ownership, the literature reveals that foreign ownership
can improve the financial performance of firms and corporate governance systems [14].
Foreign investors construct portfolios in companies having good corporate governance Ownership
practices and strengthen governance process through more active monitoring of the structure on
management activities. Foreign portfolio investment contributes to financing of domestic
firms in the financial markets, enhances liquidity of the local stock markets and strengthens
firm financial
local financial infrastructure. With the increase in international portfolio investment in the past performance
few years, an active monitoring role of foreign shareholders has also been observed in emerging
markets (Baek et al., 2004; Heard and Sherman, 1987; Khanna and Palepu, 1999). It is evident
from the results reported in Table 3 that foreign ownership has insignificant association with 1985
ROA, MBR and TQ, while a significant positive association with ROE which is in line with
predictions of agency theory. This finding implies that foreign ownership activates the
monitoring role and impacts firm performance by aligning manager’s behavior with the wealth
maximization goals of shareholders. Foreign ownership also offers benefits from managerial
skill and experience from foreign institutional investors. Moreover, foreign ownership may
assist firms in gaining access to other capital market and to advanced technologies; all of these
avenues ultimately increase firm performance. Previous empirical literature has documented a
positive and significant association between foreign ownership and firm financial performance.
Studies such as Oxelheim and Randoy (2003), Mitton (2002), Lemmon and Lins (2003),
Patibandla (2002), Douma et al. (2006), Ongore (2011) and Kim et al. (2011) found a positive and
significant impact of foreign ownership on corporate performance.
However, we observed insignificant association of foreign shareholding with ROA,
MBR and TQ, which could be due to the nature of data of the sampled companies. Since, in
our case majority of the firms have no foreign ownership or least foreign investors which is
also evident by the mean and median values of foreign shareholding in our sample firms (i.e.
3.9 and 0.00% respectively, see Table 2). The main reason of low foreign equity
participation in Pakistani companies could be a lack of transparent and conducive
macroeconomic environment for foreign investment. Second, as Greenaway et al. (2014)
argue that foreign ownership and performance are linked through an inverted U-shaped
relationship. Specifically, firm performance increases as foreign participation rises up to a
certain level and declines thereafter. This suggests that low degree of foreign ownership is
not meaningful to ensure optimal performance as is also the case in Pakistan.
Hai et al. (2018) found that foreign shareholdings could have both positive and negative
impacts on firm financial performance and equity cost. Overall, our findings regarding the
impact of foreign ownership on firm performance suggest that in Pakistani firms the impact
is negligible.
As far as government ownership is concerned, the results in Table 3 indicate
significant positive association of government shareholding with ROA and ROE. This
suggests that state ownership plays an important role in enhancing accounting-based
performance of firms in Pakistan. One reason of this finding may be the high
concentration of state ownership which helps to improve firm’s financial performance
because of its strong connection with the state (Borisova et al., 2012; Yu, 2013) [15]. The
other reason could be the institutional advantage to state ownership, such as resources,
power and authority as compared to other types of ownership (Borisova et al., 2012). For
example, government can easily raise funds and introduce legislation that exerts a
favorable impact on firms’ financial performance. Borisova et al. (2012) argued that state
ownership has adequate advantages such as plenty of resources and power, as compared
to other types of ownerships. However, on the other hand, Table 3 also shows that in our
sample the government ownership exerts a negative impact on MBR and TQ,
respectively. The main reason of this finding could be that the goals of state owners
are different from those of other shareholders. Negative relationship between state
ownership and firm financial performance confirms that government involvement in
companies reduces firm performance in Pakistan. This finding is consistent with
IJOEM Accounting-based financial performance Market-based financial performance
17,8 Variables ROAit ROEit MBRit TQit

ROAit−1 0.038 (1.257) – – –

ROEit−1 – 0.278*** (20.84) – –
MBRit−1 – – 0.0050 (0.437) –
TQit−1 – – – 0.285*** (7.99)
1986 INSOit 0.0904 (0.432) 26.03*** (5.27) 5.053*** (5.2) 3.585*** (0.48)
IOit 0.760*** (4.113) 39.30*** (6.07) 5.78*** (2.59) 10.31*** (3.62)
FOit 0.1401 (0.446) 34.85*** (4.18) 0.143 (0.24) 8.815 (1.50)
GOit 4.845*** (2.311) 76.76*** (4.10) 16.67* (1.92) 37.17* (1.74)
Sizeit 0.0114 (1.013) 0.988*** (5.60) 0.083*** (6.25) 1.99*** (8.71)
Levit 0.2677*** (10.41) 0.657 (0.788) 0.483*** (6.75) 0.194 (0.32)
SGit 0.0136*** (3.463) 0.153* (1.74) 7.34*** (8.50) 0.98*** (12.43)
PMit 0.0051 (3.36) 0.064 (1.11) 0.073* (8.50) 0.014 (0.34)
Pratioit 0.00192 (0.908) 0.134*** (3.208) 0.0027* (1.81) 0.0198 (0.92)
Year Dummies Yes Yes Yes Yes
J − statistic 52.086 [0.10] 27.63 [0.64] 44.28 [0.57] 65.82 [0.26]
Instrument rank 49 49 49 49
Table 3. Observations 1460 1460 1460 1460
Ownership structure Note(s): *, ** and *** denotes significant at the 10%, 5% and 1% level respectively. One-year lagged
* ** ***
and corporate financial explanatory variables are used as instruments. , and denotes significant at the 10%, 5% and 1% level;
performance t-values are presented in parenthesis, while [ ] are p-values

Brouthers et al. (2007) and Wei (2007) who report a negative relationship between
government ownership and firm performance.
It is worthwhile here to note that our findings regarding the impact of government
ownership on firm performance are different in case of accounting based performance
measures (i.e. positive in case of ROA and ROE) than those in case of market based measures
(i.e. negative in case of MBR and TQ). This is an interesting finding and points toward the fact
that in developing countries the governments may be more interested in profitability of the
firms they own and keeping them afloat than in their market performance and growth. The
measures of MBR and TQ also proxy for the firms growth opportunities and are frequently
used for this purpose in literature (Balasubramanian et al., 2010). Thus, the negative effect of
government ownership on these measures (MBR and TQ) in our study may be reflecting the
government’s lack of concern in the growth of the firms it owns, while the positive association
of government ownership with ROA and ROE may be due to its concern for profitability and
survival.
Among the control variables, firm size is found to be exerting a positive and significant
impact on all firm performance measures except for ROA. This implies that with the
expansion of firm size, financial performance of the firm increases. The coefficient of firm size
is 0.998 for ROE, 0.083 for MBR and 1.99 for TQ indicating that a 1% increase in firm size
would increases ROE by 0.998%, MBR by 0.083% and TQ by 1.99%. Table 3 also shows that
leverage has a significant negative impact on ROA in our sample, implying that an increase in
debt burden reduces firm financial performance due to increase in financial risk and an
enhanced cost of debt. In contrast, a significant positive relationship between leverage and
MBR was observed, which is consistent with the predictions of signaling theory. The
signaling theory hypothesized that a high level of leverage signals an optimistic view of a
firm’s future investment opportunities and opportunities of high-quality business as
compared to low performing business [16]. This result is consistent with the findings of
Manawaduge and De Zoysa (2013). Additionally, the significant positive relationship
between leverage and firm performance measured by MBR also implies that firms may be Ownership
using leverage to reduce agency costs, which in turn enhances firms’ market-based financial structure on
performance. Furthermore, sales growth in our sample firms has a significant positive impact
on ROA and ROE, while a significant negative impact on MBR and TQ. The significant
firm financial
negative impact of firm’s sales growth on MBR and TQ supports the view that when firms performance
seek investment opportunities, they suppress dividend payments which increases the risk on
investments. Moreover, Table 3 shows that profit margin exerts a significant positive impact
on ROA and MBR in our sample firms. This finding indicates that high profits may create 1987
more income and thus improve firm performance. Finally, a significant positive relationship
between dividend payout ratio ROE and MBR is observed, while dividend payout ratio exerts
an insignificant impact on ROA and TQ.
As indicated in Table 3, the insignificance of first-order autocorrelation AR (1) and second
order autocorrelation, AR (2), indicates no evidence of autocorrelation in the estimated model.
The p-values of J-statistics for all the estimated models are greater than 0.05, which supports
the validity of the instruments used.

6. Conclusion and policy implications

This study examined the relationship between ownership structure and firm financial
performance in a panel of 146 nonfinancial firms listed at PSX for the period of 2003–2012
using the dynamic panel GMM estimation method. The findings reveal the significant
positive impact of institutional ownership on firm performance, which confirms the effective
monitoring role of institutional investors in the capital market in Pakistan. Furthermore,
institutional investors have expertise, resources and opportunities to actively monitor the
manager’s decisions. This reduces self-interest behavior of corporate managers and aligns
their interests with external shareholders which in turn enhances the financial performance
of firms. The study further finds a significant positive association between insider ownership
and firm performance, implying that insider ownership may improve firm performance. This
finding confirms the agency theory’s implication that a reduction in the separation of
ownership and control may reduce the conflict of interest between managers and
shareholders and hence improve firm performance. Furthermore, foreign ownership was
found to have no impact on firm performance in case of ROA, MBR and TQ which may be due
to relatively small foreign shareholdings. Low foreign shareholding limits foreign portfolio
investment inflows to Pakistan due to the lack of a transparent and enabling business
environment. On the other hand, in case of government ownership, we found a positive and
significant impact on accounting-based performance while a negative impact on
market-based performance of the firm. This suggests that government owners can raise
funds relatively easily through governments support and political connections, whereas
investors also show more confidence on SoEs. The government also injects capital in the form
of subsidies to weak financial corporations and introduces new legislations to improve their
financial performance. The negative association in our sample between government
ownership and market-based measures of performance may point toward a lack of
government concern for growth than profitability. This finding is interesting as this is a
phenomenon more common to the firms in emerging markets and may need further empirical
investigation. Overall, our findings reveal that all the major four types of ownership
structures exert significant impact on firm financial performance in Pakistan. Among the
control variables, firm size, sales growth, dividend payout ratio and profit margin show a
significant positive impact on firm performance, while leverage produces a negative impact
on firm performance.
The above results have several implications for future studies, policymakers, managers
and investors: First, the significant positive relationship between institutional ownership and
IJOEM firm performance indicates that institutional investors may be actively monitoring the
17,8 activities of managers in emerging markets, particularly in Pakistan. Therefore, there is a
need to further strengthen institutional ownership so as to stimulate firm financial
performance. Second, the insignificant association between foreign shareholdings and
corporate performance could be the result of low foreign equity participation in Pakistan’s
capital market. Therefore, there is a need to regulate capital market and encourage foreign
investors, especially foreign institutional investors to invest in Pakistan’s stock market.
1988 Third, with regard to government ownership in companies in Pakistan, the result shows that
government ownership has a negative impact on market-based firm performance. This may
point toward a lack of government concern for growth than profitability. This phenomenon is
quite expectable in emerging markets and may open doors for further empirical
investigations.
Although, our study contributes to the understanding of the relationship between
ownership structure and firm performance and the results may provide deeper insights for
strengthening corporate governance practices in Pakistan. However, the present study
focused only on one aspect of corporate governance, that is, ownership structure. In future, the
researchers may consider other aspects of corporate governance such as board composition,
board meetings, board diversity and compensation of directors with financial performance.

Notes
1. For example, China Aviation, WorldCom, Royal Dutch Shell, Tyco, Adecco, Adelphi, Seibu, Global
Crossing, Merrill Lynch, and Enron.
2. Shleifer and Vishny (1997, pp. 737–738) defined corporate governance as the “ways in which
suppliers of finance to corporations assure themselves of getting a return on their investment and
legal institutions that can be altered through the political process.” Likewise, La Porta et al. (1999,
p. 4) defined corporate governance as “set of mechanisms through which outside investors protect
themselves against expropriation by insider.” Thus, the corporate governance is array of
regulations for board directors, corporate managers, shareholders, auditors, regulatory bodies and
all other stakeholders of the entity, which help to monitor the performance of financial entity.
3. Family control is common among publicly listed companies across the globe. La Porta et al. (2000)
reported that approximately 30% of firms across the world are family-owned. In the United States,
family firms account for 33% and 46% of the Standard and Poor (S&P) 500 and 1500 index
companies, respectively (Anderson and Reeb, 2003). Likewise, more than 44% of large companies
are family-controlled in Western Europe, while family firms go up to two-third in East Asia
(Claessens et al., 2000; Faccio and Lang, 2002). Empirical literature revealed mixed findings with
respect to the family ownership and firm performance. Some studies, inter alia by Anderson and
Reeb (2003), Villalonga and Amit (2006a), Sraer and Thesmar (2007) reported a positive relationship
between family ownership and firm performance, and concluded that family firms outperform
nonfamily firms. Others (for example, G
omez-Mej
ıa et al., 2007; Maury, 2006) concluded that family
controls may harm minority shareholders due to the risk of expropriation when transparency is low.
Divergence in findings could be attributed to differences in family firms (Villalonga and Amit,
2006a), degree of shareholder protection (Maury, 2006), family involved in governance, sampling
techniques and methodologies applied (Miller et al., 2007). In Asian countries, including Pakistan,
majority of large-sized publicly traded firms will have a board of directors consisting of family
members and close friends, helping the firm to generate better returns and reduce agency cost due to
stewardship effects.
4. In Pakistan, cross shareholdings among various group and affiliated companies are more common.
The ownership structure of these affiliated firms and shareholders is motivated to extend control
over firms’ strategic decisions. Furthermore, cross-directorateship and pyramids shareholdings are
the other controlling tools in emerging markets like Pakistan. More than one-third of the listed
companies around the globe constitutes as pyramids share holdings (La Porta et al., 1999) and this is
more common in case of Pakistan (for example, Ikram and Naqvi, 2005; Ullah et al., 2017).
 5. Formerly Karachi Stock Exchange (KSE). Ownership
6. https://www.psx.com.pk/psx/exchange/profile/about-us structure on
7. Manufacturing sector is the 3rd largest sector of Pakistan’s economy, its contribution to the firm financial
country’s gross domestic product (GDP) was 13.5%, while it is contributing 14% to the total performance
employment.
8. Dividend payout is the dividend payment ratio of the firm. This ratio reveals how much of a firm’s
earnings are paid to shareholders. High dividend payout indicates that firm retain less for 1989
reinvestment and vice versa. An increase in dividend payouts may imply an expectation of high
profitability in the future. Empirical literature predicted positive relationship between dividend
payout and firm performance (Osman et al., 2010; Salawu et al., 2012). However, Phung and Mishra
(2016) found an insignificant negative impact of dividend payout on firm performance. Hunjra
(2018) show that dividend policy fully mediates the corporate social responsibility stakeholder’s
interests and financial performance.
9. The GMM was developed by Arellano and Bond (1991) and Blundell and Bond (1998).
10. Kumar (2004) reports an average of 16.64% foreign ownership in Indian listed companies. Imam and
Malik (2007) reports an average of 3.07% foreign ownership in Bangladeshi firms.
11. Institutional ownership includes percentage of shares held by financial institutions, banks, National
Investment Trust (NIT) and Investment Corporation of Pakistan.
12. There is extreme variation in the ownership data. All components of ownership have maximum
value greater than 50% and minimum value of 0.00%. The more extreme case is insider ownership
with maximum values of 98.3% indicating nonlinearites in ownership–firm performance
relationship. Additionally, majority ownership has different effect on firm performance as
compared to minority ownership. This point is identified by anonymous reviewer of this paper and
we are indebted. We left this valuable suggestion for future study.
13. The long-run effect can be obtained by computing by 1 −β γ, where βi is the coefficient of independent
variables, while γ is the coefficient of lagged dependent variable.
14. Foreign shareholdings are the percentage of equity shares held by foreign investors that includes
foreign collaboration, foreign financial institutions and foreign nationals.
15. Due to political connection, companies can get favor or subsidies from the government.
16. Ross (1977) and Leland and Pyle (1977) introduced signaling theory of capital structure under the
assumption of asymmetric information. This theory asserts that due to acquiring debt (issuing
bond) the capital market gives positive signals that the firms has higher future profits (Ghosh and
Van Tassel, 2011, p. 8).

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Oliker, O., Crane, K., Schwartz, L.H. and Yusupov, C. (2009), Russian Foreign Policy: Sources and
Implications, Rand Corporation, Santa Monica, California.

Corresponding author
Shahab Ud Din can be contacted at: shahabuddin@kiu.edu.pk
 Appendix

Return on Return on Tobin’s Market to book Sales Payout Profit Institutional Insider Foreign Government
Variables asset equity Q ratio Leverage growth Firm size ratio margin ownership ownership ownership ownership

Return on asset 1
Return on equity 0.139** 1
Tobin’s Q 0.120** 0.047 1
Market to book 0.030 0.036 0.817** 1
ratio
Leverage 0.195** 0.009 0.090** 0.038 1
Sales growth 0.086** 0.003 0.096** 0.005 0.016 1
** ** **
Firm size 0.282 0.039 0.291 0.137 0.268** 0.059* 1
Payout ratio 0.071** 0.029 0.032 0.027 0.055* 0.006 0.105** 1
Profit margin 0.081** 0.005 0.014 0.002 0.108** 0.059* 0.059* 0.012 1
Institutional 0.426** 0.030 0.069** 0.035 0.002 0.002 0.048 0.035 0.000 1
ownership
Insider ownership 0.121** 0.079** 0.124** 0.059* 0.210** 0.005 0.229** 0.078** 0.036 0.137** 1
Foreign ownership 0.072** 0.009 0.077** 0.024 0.037 0.011 0.233** 0.052* 0.003 0.072** 0.079** 1
Government 0.190** 0.001 0.046 0.005 0.122** 0.009 0.350** 0.004 0.020 0.082** 0.209** 0.031 1
ownership
VIF 1.003 1.00330 1.0033 1.00330 1.00330 1.0033 1.003 1.0033 1.0033 1.19784 1.06112 1.09793 1.09793
TOL 0.83483 0.834836 0.8348 0.834836 0.834836 0.8348 0.834 0.8348 0.8348 0.834836 0.834836 0.834836 0.834836

Note(s): ***, ** and * denotes significant at the 1%, 5% and 10% level, respectively
performance

1997
structure on
Ownership
firm financial

Table A1.

performance
and corporate financial
ownership structure
Correlation matrix: