The Impact of Ownership Structure on Firm Performance: Evidence from Pakistan

The Impact of Ownership Structure on Firm Performance: Evidence from Pakistan

Qaiser Rafique Yasser (University of Malaysia Sarawak, Kota Samarahan, Malaysia) and Abdullah Al Mamun (Newcastle Business School, University of Newcastle, Australia)
Copyright: © 2016 |Pages: 19
DOI: 10.4018/IJCFA.2016010103
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The connection between ownership structure and firm performance has attracted much attention, especially in emerging markets, yet yielded many inconsistent empirical results. This paper presents an analysis of the association between eight categories of ownership, HHI Index, GINI index and firm performance in Pakistan. Some researchers argue that ownership concentration can improve firm performance by making the owners more willing or able to monitor agents. In contrast, others argue that in the presence of efficient markets, market monitoring will discipline the managers. The author's results show that there is significant positive association with ownership structure and market based performance measure and economic profit. The ownership proportion of the institutional shareholding and foreign shareholding are also positively associated with firm performance. JEL Code: G32.
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1. Introduction

The relationship between ownership structure and corporation performance is one that has received considerable attention in finance literature (Jiang, 2004). For a few decades, considerable energy has been devoted to trying to explain differing corporate ownership structures in different countries and its effect on financial performance. La Porta et al. (1999) and Durnev and Kim (2006) find that the quality of legal protection of shareholders help to determine ownership concentration, in countries with relatively poor legal protection of investors; publicly listed companies are likely to have large blockholders. Roe (2000) puts a counter argument to explain ownership differences in terms of politics. In particular, those publicly listed companies in emerging democracies are more likely to have concentrated ownership than their counterparts in the developed countries.

The effective control of the large shareholding enables them to influence the key decision making regarding how companies are run and also decisions on corporate policies. However, as stated by Holderness (2003), the role of large shareholders is not well developed in the ownership literature, especially the role of the largest shareholder. The largest shareholder is a unique group of shareholder, as their holding can be associated with benefits and costs, especially the under investment costs (Claessens et al., 2002; Truong and Heaney, 2007).

Conversely, studies on the relationship among ownership blockholding (top 1, 2, 3, 5, and 10), institutional ownership, associated company ownership and foreign ownership and firm performance are largely conducted in developed countries and a few emerging economies. However, the relationship may be different in different countries (Konijn, Kräussl and Lucas, 2011). This means that these relationships in emerging markets may not only differ with those in developed markets, but also among emerging markets. Besides, corporate ownership in emerging market becomes an interesting issue in recent years (Borisova et al., 2012).

Ownership structure has two implications; i.e. the structure of ownership (share percents of state, legal or institutional, domestic individual holders) and ownership concentration (share percents of top one, two three, five or ten shareholders). The typical achievers among ownership structure and firm performance researches are the results of Jensen and Meckling (1976), who divided shareholders into internal (investors with management right) and external shareholders (investors without ballot right). The conclusion of their research was that the value of a firm depends on the internal shareholder’s share, which is called ownership structure.

Theoretically, the more the internal shareholder’s share the higher the firm value. The researchers also defined firm value as a function of ownership structure. Because the ownership structure has links to corporate governance, it can have both positive and negative effects on corporate governance (Jiang, 2004).

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