The Impact of Ownership Concentration on Firm Performance: Evidence from an Emerging Market

Abstract

The connection between ownership structure and firm performance has attracted significant attention especially in emerging markets, yet empirical evidence remains inconsistent. This article presents an analysis of the association among eight categories of ownership, Hirschman–Herfindahl index (HHI) index, Gini index, and firm performance in the emerging market of 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. Our results show that there is a significant positive association between ownership structure and both market-based performance measures and also economic profit. The ownership proportion of the institutional shareholding and foreign shareholding is also positively associated with firm performance.

Keywords

Corporate governance ownership structure firm performance

Introduction

The ownership structure of firms might play a crucial role in their corporate performances and thus an array of literature studied the relationship between these two (Ezazi, Sadeghi, & Amjadi, 2011; Khan, Muttakin, & Siddiqui, 2013). In recent studies, there have been notable works analyzing the impact of different ownership structures on corporate performance and whether that relationship holds for all economies. The ownership concentration is largely driven by the nature of legal protection given to shareholders, and the listed public companies tend to have higher concentration in shareholdings in those countries where the legal protection is weaker (Durnev & Kim, 2005).

The effective control of large shareholders enables them to influence key decision-making and affect corporate policies (Balla & Rose, 2014). However, as stated, the role of large shareholders is not well understood in the ownership literature (Holderness, 2003), especially the role of a single dominant shareholder (i.e., as their holding can be associated with both benefits and costs, especially underinvestment costs) (Heyden, Oehemichen, Nichting, & Volberda, 2015; Truong & Heaney, 2007).

Aside from studies on the relationship among blockholder shareholding (e.g., Himmelberg, Hubbard, & Palia, 1999; Lehmann & Weigand, 2000; Morck, Shleifer, & Vishny, 1988), institutional ownership and foreign ownership with firm performance are largely conducted in developed countries with few studies focusing on emerging economies (e.g., Abdullah, Mohamad, & Mokhtar, 2011; Attig, El Ghoul, & Guedhami, 2009; Haji, 2013; Khan et al., 2013). These relationships may differ not only within developed markets but also among different emerging markets (Konijn, Kräussl, & Lucas, 2011). This analysis is significant due to the increasing importance of emerging markets in recent years (Borisova et al., 2012).

Emerging markets are institutionally diverse compared to firms in developed economies. Developing economy firms have shown to have greater ownership concentration (Dam & Scholtens, 2013), family dominance (Castellaneta & Gottschalg, 2014), weaker regulatory environments (Herrera, Roman, & Alarilla, 2010), greater government ownership (Abdullah et al., 2011), more varied shareholder profiles (Zhao, 2012), and autocratic leadership (Du, Swaen, Lindgreen, & Sen, 2013). Such distinguishing characteristics of emerging markets make them unique in nature and open up new research avenue.

Furthermore, there are a number of predictions made regarding the South Asian emerging countries’ (Table 1) prospects by World Bank, Asian Development Bank, as well as by various economic scholars. Such as, most of the countries will enter into the group of middle-income countries by 2021. The above prediction is perceptible from a recent report published by the United Nations (UN) .

Table 1.

South Asian Rates of Growth of Real GDP

Country	2009	2010	2011	2012 ^a	2013 ^b	2014 ^b
South Asia	7.0	8.3	5.8	4.4	5.0	5.7
Bangladesh	5.7	6.1	6.7	6.2	6.3	6.4
India	8.2	9.6	6.9	5.5	6.1	6.5
Iran	4.0	5.9	2.0	−1.9	−0.9	1.5
Nepal	4.5	4.8	3.9	4.0	3.7	4.0
Pakistan	3.6	3.5	3.0	3.8	4.2	4.4
Sri Lanka	3.5	8.0	8.3	6.5	6.7	6.4

Source: UN/DESA, United Nations Statistics Division and individual national source.

Notes: ^aParty estimated; ^bBaseline scenario forecast and the UN/DESA World Economic Forecasting Model.

With the above-mentioned prospects, emerging countries’ growth certainly indicated that they can utilize their assets properly in reaching the predicted milestone. In response to the mentioned issue, this study answers the basic question of whether there have been significant changes in the patterns of ownership structure among public listed companies and their impact on firm performance in an emerging market. In order to address this question, we have built corporate ownership data set by collecting data from Karachi Stock Exchange (KSE) and using economic value added (EVA) as one of the performance measure.

These tools are appropriate because as modern value-based performance measures have gained their popularity since the late 1980s (Madden, 1999) and the value-based measurement approach has become increasingly popular both as a decision-making tool and as an incentive compensation system (Knight, 1998) such as EVA. Likewise, a significant number of researchers have conducted research on EVA in the developed portion of the world including the UK, Australia, Canada, Germany, and France (e.g., Ferguson et al., 1997; Worthington & West, 2001), since it is claimed to depict true economic profit.

In answering our research question, this study contributes to the literature in three different ways: first, by combining market-based and standard accounting financial indicators as measures of firm performance, we test the predictions of agency theory in the context of emerging markets. Second, the study provides novel empirical evidence on the effect of ownership concentration on firm’s financial performance in an emerging stock market. Finally, we build upon Abdullah et al. (2011) agency theory by providing further evidence on the possibility of coexistence of the opportunistic and informative institutional and blockholders’ ownership, and their differential association with performance of a firm.

Literature Review and Hypotheses Development

There has been an array of studies that examined the impact of ownership structure and concentration on firm performance, as well as the link between executives and stockholders. The empirical corporate governance literature offers no plain response to the costs and benefits of concentrated ownership. Some researchers found a positive association of ownership concentration with corporate performance (Gorton & Schmid, 2000; Mitton, 2002), others a negative association (Demsetz & Villalonga, 2001), and still others a curvilinear relationship (Morck et al., 1988). Theoretically, compelling arguments can be furnished in favor of each finding (e.g., Daily, Dalton, & Cannella, 2003).

Ownership concentration structure is, though, recently grounded on institutional-based view (Khan et al., 2013); agency theory parades this issue whether large shareholdings influence the performance through controlling the decision-making process (Jensen, 1993; Jensen & Meckling, 1979). The agency problem arises when one party (principals) makes a contract with another party (agents) aiming to make decisions on behalf of the principals (Jensen & Meckling, 1979). When the management (agent) interest is low, there is a greater likelihood that the management involves itself in value decreasing activities. An agency problem occurs as agents tend to hide information from the principals and take actions in order to achieve their own interest. However, when majority shareholding is vested on a small group of entity, it tends to impose and control the management. Such behavior leads to negatively influenced performance, since the independent decision-making is compromised (Khan et al., 2013). Alternatively, when the ownership structure is more diverse, agency conflict tends to be insignificant due to lesser extent of dominance (Jensen, 1993); since managers are able to utilize their cognitive resources (e.g., knowledge, experience, expertise), to such extent diverse shareholdings can lead to enhanced firm performance. Although research states that schema based upon developed countries cannot simply be wholesale applied to developing nations, a review of the literature is appropriate because it provides a foundation in which to foster a framework in order to examine developing countries. The following section reviews the major studies that define our current body of knowledge that is ownership.

Current Theory in Ownership

Current literature regarding ownership has yet to develop a concrete paradigm for the effects of ownership on shareholder interests. According to Leech and Leahy (1991), the ownership structure essentially defines distribution of voting power and the control among shareholders and thereby restrains managerial decisions to divert from shareholders’ interests. Thomsen and Pedersen (2000) explained that ownership concentration determines the power distribution between principals (shareholders) and agents (managers) and that it is positively related to firm value. However, evidence shows that higher ownership concentration strengthens block shareholding that has a negative impact on firm value. Even there is reasonable doubt about the impact the efficiency of ownership structure and the nature of business environment on firm performance (Khan et al., 2013).

Even though concentrated owners have superiority to direct executives to work in their interests, those might not match up with the interests of the minority shareholders. There have been a number of research works of corporate governance that centered on the consequences of differing interests of managers and shareholders (Fama & Jensen, 1983b; Jensen & Meckling, 1979). Nonetheless, the researchers have mainly focused on the attempts of large shareholders to expropriate small shareholders (Bae, Kang, & Kim, 2002; Bertrand, Mehta, & Mullainathan, 2000).

During crisis periods, the firm assets are used up by the block shareholders to pay off their creditors, while losing firms call upon their better-performing counterparts to “bail them out” (Gedajlovic & Shapiro, 2002). Generally, channeling becomes easier for firms where a prime shareholder is also in the board of directors. In such cases, the legal authority of making managerial decisions about corporate transactions paves the way of damage to minority shareholders, thereby resulting in the shareholder–manager and shareholder–shareholder agency problems.

Dominant shareholders might expropriate resources from the principal firm to other firms through related party transactions or personal dealing (Djankov, La Porta, Lopez-de-Silanes, & Shleifer, 2008). Second, controlling shareholders can raise their stake in the firms through transactions that do not involve asset transfer but might be disadvantageous to minority shareholders, such as minority freeze-outs or dilutive share issuance (La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 2000). Third, the controlling director-shareholders can appropriate funds of minority shareholders through receiving non-performance-oriented compensation package well above market standards. Furthermore, Daily et al. (2003) enunciated that the two major variables regarding the impact of concentrated ownership on firm performance were not found to be statistically significant.

Hence, these findings suggest that, at the end, the benefits of concentrated ownership might be wiped out by the related costs. Although it never indicates that ownership concentration is insignificant across all cases, since evidence recommends varying impact of ownership structure on firm performance (Demsetz & Villalonga, 2001; McConnell & Servaes, 1990; Morck et al., 1988), and that they vary with the size of the concentrated ownership. A similar non-monotonic relationship between degree of ownership concentration and firm profitability was also stated by Morck et al. (1988).

Likewise, ownership concentration showed a positive relation up to a certain level, beyond which it exhibited a negative effect (Thomsen & Pedersen, 2000). Non-linear association (Ahmed, Ahmed, Khan, Pasha, & Rehman, 2012; Bhabra, 2007; Chen & Steiner, 1999; Cronqvist & Nilsson, 2003; Leech & Leahy, 1991) is mostly exhibited with large or heavy shareholdings, which is due to their dominating attitude. One result of ownership concentration and family dominance is to focus conflicts of interest not just between owners and managers but also between major shareholders and minorities (Chen & Steiner, 1999; Vafeas, 1999). This is further compounded when these majority shareholders adopt management roles or appoint family to the executive (Chtourou, Bedard, & Courteau, 2001). Furthermore, majority shareholdings and family appointments to the board undervalue skill and competence (Haji, 2013; Khan et al., 2013; Safi & Ramay, 2013; Sufian & Zahan, 2013). This negatively affects not only the promotion of firm performance but also expropriation of the level of influence of minority shareholders and other stakeholders (Cheung & Chan, 2004). In other words, the self-driven interest of large shareholders may lead to the negatively influenced performance (Ahmed et al., 2012; Bhabra, 2007; Chen & Steiner, 1999; Claessens & Yurtoglu, 2013; Fama & Jensen, 1983a). Therefore, the following hypothesis is proposed:

Hypothesis 1a: The degree of ownership concentration is negatively related to firm performance.

Alternatively, several studies have shown a more consistent, direct relationship between ownership concentration and firm performance (Alfaraih, Alanezi, & Almujamed, 2012; Douma, George, & Kabir, 2006; Gedajlovic & Shapiro, 2002; Gürbüz, Aybars, & Kutlu, 2010; Huang & Shiu, 2009; Kim & Lu, 2011; Morck et al., 1988; Ongore, 2011; Romalis, 2011; Thomsen & Pedersen, 2000). This can be supported as the interest of owners and managers is aligned and tend to mitigate the agency conflict (Jensen & Meckling, 1979). Moreover, foreign ownership and political motivation rather than market influence help reducing agency problem and leading to increased firm value (Alfaraih et al., 2012; Kim & Lu, 2011). The profit margin and net assets growth rate is relatively higher when the ownership is more dispersed (Alfaraih et al., 2012; Ongore, 2011), since based on nature of control, the dispersed blockholders are less likely to have influence on managerial decision-making. Claims are also inhibited in family and large shareholdings controlled firms dominated ownership which is often also associated with negative political influence and corruption (Abdullah et al., 2011; Haji, 2013) leading to enhanced firm performance.

The widespread research works, therefore, show that the prevalence of dispersed ownership is much less than expected and have been replaced rather by concentrated ownership (La Porta et al., 2000). Subsequently, the potential exploitation of minority shareholders by controlling owners has become a matter of prime concern (Faccio, Lang, & Young, 2001; La Porta et al., 2000; Lehmann & Weigand, 2000).

Accordingly, in an invariable environment, ownership structure affects firm performance because different owners have different objectives (Douma et al., 2006). Large shareholders may be detrimental to firm performance as their objectives clash with small shareholder (i.e., who are opened to expropriation). In addition, due to different ownership structures and operating conditions across countries, the relationships in governance–performance also vary (Klein, Shapiro, & Young, 2005). Hence, different classes of ownership can motivate or even enforce the management directive to work in their best concerns. Besides, major shareholders can improve managerial and organizational competencies by using their prior experiences and knowledge (Carney & Gedajlovic, 2001; Weidenbaum, 1996). The presence of a large, wealthy, concentrated owner can assist firms in crisis period through transferring their personal assets into the firm to avoid cash flow shortage or credit default issues. Firms can sustain temporary fall in performance when owners bring in their personal cash today to reserve the option to acquire legitimate profits in future, a phenomenon also known as “propping” (Friedman, Johnson, & Mitton, 2003). Therefore, we might expect a positive relationship between ownership concentration and firm performance. Based on the stated studies, we have the following hypothesis:

Hypothesis 1b: The degree of ownership concentration is positively related to firm performance.

Methodology

Sample

In jurisdictions with dispersed ownership, in which principals are typically both unwilling and unable to act as effective monitors of publicly listed firms, the markets for corporate control, equity capital, and executive aptitude are therefore the primary disciplinary forces that hold managers in check (Gillan, 2006; Walsh & Seward, 1990). However, where such markets are underdeveloped, as is often the cases in emerging markets and most often in Asia, investors have no choice but to accept their role as firm monitors, which they can only exercise effectively by concentrating their equity holdings. Concentrated ownership gives them both more powerful incentives to become involved in governance, as well as a means to influence managers by means of direct access strategies and the threat of using their concentrated voting rights (Jensen, 1993).

Large concentrated shareholdings are common among emerging economies (Cheema, Bari, & Saddique, 2003; La Porta et al., 2000), which provide a valid environment in which to test whether the link between concentration type of ownership and performance is relevant in emerging economies. Corporate governance system in emerging economies is possibly less evolved than those in developed countries such as the Anglo-American countries, Germany, or Japan. Emerging markets as a whole differ substantially from developed countries in their institutional, regulatory, and legal environments (Prowse, 1992).

Although the development of corporate governance mechanisms (institutional, regulatory, or legal) depends on the political, cultural, and historical characteristics of a country (Prowse, 1992), emerging economies, such as Pakistan, are increasingly adopting governance “best-practices” based on Western insights without questioning the contextual validity of the underlying assumptions (Abdullah, 2004). As the corporate structures change, culture is expected to change as well; although if a culture is deeply rooted in the society such that it is adaptable to many institutions, it will not change even if it disrupts the objectives of an institution (Yasser, Entebang, & Mansor, 2011). In case of Pakistan, only if the regulatory authority grants, there can be a change in cultural traits.

Furthermore, Pakistan was chosen to represent emerging markets because majority of leading companies in Pakistan are owned by families. Such family dominance is also represented in most of the emerging economies such as Bangladesh (Khan et al., 2013), Turkey (Ararat & Ugur, 2003), and Malaysia (Abdullah et al., 2011). Majority of the companies are controlled by either families or large shareholders in Pakistan. In such family-dominated boards, management is mere extension. The very common features include institutional weaknesses, concentrated ownership structure, lack of shareholder activism, saturated capital market, poor legal system, and absence of second-order institutions; the economy adopts western corporate governance model like other emerging economies. Therefore, Pakistan is uniquely qualified as representative of emerging economies in this study; as such a developing body of research regarding examination of ownership in this and related countries exists.

The selected sample consists of companies listed under KSE-100 index during the period 2009–2013. The companies, for which the annual reports are unavailable and/or there are some missing data, were excluded from the sample. Table 2 presents the brief summary of the sample with the aspects of two panels. The summary of panel A contains sample companies with the positive and negative performance, while panel B contains sample companies with the industrial identification.

Table 2.

Summary of Sample Selection

Panel A		Panel B
KSE 100 indexed companies (100 × 5)	500	Sample Categories	Companies
		Financial sector	195
		Automobile and engineering	30
Less:		Food and household products	70
				Oil and gas	35
				Chemical and pharmaceutics	45
Missing data	(25)	Services sector	5
Available sample	475	Industrial products	15
		Textile	55
High performers	177	Construction and materials	25
Low performers	298	Total	475

Source: Authors’ own.

The initial sample consisted of 100 firms from KSE-100, but the final sample was of 95 firms due to unavailability of data, for which there were complete data set for the 5-year period resulting in a total of 475 firm-years. Table 3 represents the data of sample companies on the basis of positive and negative performance as well as yearly basis. The required data on the essential variables were collected from secondary sources. The data on internal corporate governance mechanisms were gathered from reports of compliance with the code of corporate governance, company information, directors’ report to shareholders, director profiles, and shareholding patterns. For the financial part of the research, the data have been collected from the financial statements of audited annual reports. Finally, the stock price data of the selected firms have been collected from the KSE website.

Table 3.

Yearly Sample on Performance Basis

Year	Positive EVA		Negative EVA		Total
Year	Number of Firms	Percentage	Number of Firms	Percentage
2009	70	74	25	26	95
2010	62	65	33	35	95
2011	11	12	84	88	95
2012	16	17	79	83	95
2013	18	19	77	81	95
			Total		475

Source: Authors’ own.

Measurement of the Ownership Concentration

In the literature, there is not much discussion on the effect of ownership concentration on firm value, as in the modifying impact of various measures of ownership concentration has not been firmly established. A common way to measure ownership concentration is to take the share held by the largest shareholder (Thomsen & Pedersen, 2000) or the combined share held by a number of the largest owners (Demsetz & Villalonga, 2001; Gedajlovic & Shapiro, 2002; McConnell & Servaes, 1990). Other concentration measures include Herfindahl indices (Cubbin & Leech, 1983; Demsetz & Villalonga, 2001; Leech & Leahy, 1991) and measures based on game theory (Rajan & Zingales, 1995). The results differ among several of these studies.

Nevertheless, the ownership concentration is a difficult choice, and sometimes it is optimal to consider other available alternatives. The contradictory results of some empirical studies can be accounted for the diverse measures of ownership concentration (Earle, Kucsera, & Telegdy, 2005), while the link between several ownership patterns and firm value may be influenced by the relative size of the large shareholdings (Maury & Pajuste, 2005). In the meta-analysis of Maury and Pajuste (2005), 14 out of 27 studies measure the ownership concentration by the fractions of shares owned by the largest shareholders (top 1). A good number of studies focus only on a specific measure of ownership concentration, while some others (Earle et al., 2005; Warren & McFadyen, 2010) use both the top 1 and other ownership concentration measures (e.g., the percentage shareholding by the largest shareholders, such as top 2, top 3, etc.). It was evident that changes in the measures of ownership concentration have an effect (Earle et al., 2005), while Warren and McFadyen (2010) did not find any change in the significance of the coefficients estimates with changes in the measures of ownership concentration.

A controlling owner is an owner that holds at least 20 percent of the company. Below this, threshold firms are regarded to be under management control (Berle & Means, 1968). In a similar vein, many modern corporate governance studies use an arbitrarily chosen threshold, based on the largest shareholder, to determine whether there is a controlling owner or not. Most of these cut-offs are at the levels from 5 to 20 percent. However, a survey documents how such a threshold has varied only between 4 percent (Cubbin & Leech, 1983) and up to 80 percent (Kamerschen, 1968).

Certainly, with a simple majority rule, one could argue that an owner that holds 50 percent or more in a company is in control as he or she will be able to win any voting contest. However, even if this is indisputable, most corporate governance researchers would also admit that an owner may be able to exercise effective control with considerably smaller voting shares than 50 percent. The threshold is arguable, though. With a threshold of, for instance, 20 percent, it seems hard to explain why a shareholder holding 21 percent of the shares should be considered to be an owner with a larger degree of control than a shareholder with 19 percent in a corresponding firm, when at the same time the latter is not considered to exercise greater control than an owner holding only 5 percent in a third company. The simplest ownership concentration measure possible is the largest owner’s voting share (Thomsen & Pedersen, 2000). This measure is often accompanied by taxonomies such as in La Porta et al. (2000) in order to further define the owner. To allow for a non-linearity between ownership concentration and firm performance studies based on such measures, use squared terms (De Miguel, Pindado, & De La Torre, 2004) or piecewise linear specifications (Chen & Steiner, 1999).

A standard proxy for the degree of ownership concentration is the Hirschman–Herfindahl index (HHI), defined as the sum of the squared market shares of the firms within an industry (Demsetz & Villalonga, 2001). Although the past literature criticized the use of Hirschman Herfindahl Index (HHI) on a number of different reasons, i.e., excessively static, unfavourable weighting of smaller firms, gainsay with market definition, and inequitable distinctions, etc.. However, economic theory considers that investors decide the actions of the firms they invest their money on by solving a simple profit maximization problem for each firm. But if major investors own shares in multiple firms in the same industry, cross-ownership effects may merge the competitive interests of the firms and move the market equilibrium closer to the monopoly solution. In the presence of cross-ownership, the HHI fails to accurately reflect the true level of competition in the market (Demsetz & Villalonga, 2001).

Measurement Variables

The variables employed in our equations are described in Table 4.

Table 4.

Description of Variables

Governance Variables
One largest shareholder	Percentage of largest shareholder to the total equity
Two largest shareholders	Percentage of two largest shareholders to the total equity
Three largest shareholders	Percentage of three largest shareholders to the total equity
Five largest shareholders	Percentage of five largest shareholders to the total equity
Ten largest shareholders	Percentage of ten largest shareholders to the total equity
Institutional ownership	Percentage of institutional ownership to the total equity
Foreign ownership	Percentage of foreign ownership to the total equity
Associated company ownership	Percentage of associated company ownership to the total equity
Performance Variables
Return on assets	Net profit divided by total assets
Tobin’s Q	The book value of debt plus the market value of equity, divided by the book value of assets
Earnings per share	Earnings per share, as per annual reports
Economic value added (EVA)	Net operating profit after taxation (NOPAT)Weighted average cost of capital (WACC)Invested capital (IC)EVA = NOPAT − (WACC × IC)
Governance Index
HHI	Hirschman–Herfindahl index
Gini index	Gini index
Control Variables
Firm age	Industry dummies that take a value of 1 for companies belonging to the utilities and media, or 0 otherwise
Financial leverage	Total debt/total equity
Board independence	Percentage of non-executive directors on board
Firm size	Natural logarithm of total assets

Source: Authors’ own.

The variables employed for firm profitability were earnings per share (EPS), return on assets (ROA), Tobin’s Q, and economic value added (EVA). Economic value added measures the creation of shareholder wealth and was developed by management consulting firm Stern Stewart and Co. It requires the calculation of net operating profit after taxation (NOPAT), weighted average cost of capital (WACC), and total invested capital (TIC) and results in the following relation:

EVA = Net Operating Profit After Tax (NOPAT) − (WACC × TIC)

There are several studies measuring financial performance by the market measure proxy Tobin’s Q (Alfaraih et al., 2012). Besides, accounting-based performance measures are also used because the market stock price in emerging markets with weak shareholder protection can be biased (Claessens & Yurtoglu, 2013).

Return on assets measures how efficiently the management is using the assets to generate handsome amount of income relative to its assets. Return on assets is measured by dividing the net annual income or earnings of a company by the total asset of the company in a particular fiscal year, where the total is the sum of company’s total debt and total shareholders’ equity.

In this research, we used five variables precisely in relation to ownership concentration: percentage of single largest shareholders, the percentage of two largest shareholders, the percentage of the three largest shareholders, percentage of five largest shareholders, and ten largest shareholders.

In the model of ownership concentration, firm value is included to handle the probable issues of reverse causality. While ownership concentration might have an impact on firm performance, the ownership structure may itself be influenced by firm characteristics such as leverage. Depending on a firm’s leverage levels, the external monitoring may be increased, since the creditors would want to have a tighter monitoring to protect their interest (Chen & Jaggi, 2001; Hutchinson & Gul, 2004). Here, the leverage is measured as total debt over total assets (Konijn et al., 2011), and firm age is determined by the log of the number of years listed (Villalonga & Amit, 2006).

The empirical studies have shown that firm size is likely to have a negative relationship with ownership concentration (Demsetz & Villalonga, 2001; Himmelberg et al., 1999). Such result possibly implies concerns about risk diversification and wealth limitations. However, size can also affect ownership concentration positively in cases where size is considered a proxy for managerial discretion (Himmelberg et al., 1999). Potential shareholders can also view size as a proxy for reputation. In this current study, size is taken as the natural log of the firm’s assets.

Data Analysis

Table 5 presents the summary of the descriptive statistics of the selected variables. From the table, we can see that the largest shareholder holds on an average 41.2 percent of the total equity. The holding of top two and three largest shareholders’ grosses to be 57.3 percent and 66.3 percent, respectively, while the top ten shareholders hold 79 percent of the total equity. Also the associated company ownership is highest with 41.6 percent ahead of institutional and foreign holding.

Table 5.

Descriptive Statistics (N = 475)

Variables		Mean	SD	Min.	Max.
Single largest shareholding	Overall	0.412	0.245	0.01	0.99
	Between		0.241	0.08	0.99
	Within		0.049	0.11	0.67
Two largest shareholdings	Overall	0.573	0.799	0.01	0.17
	Between		0.393	0.12	0.03
	Within		0.697	−0.09	0.01
Three largest shareholdings	Overall	0.663	1.174	0.02	0.25
	Between		0.535	0.13	0.05
	Within		1.045	−0.04	0.21
Five largest shareholdings	Overall	0.783	1.943	0.03	0.42
	Between		0.861	0.16	0.08
	Within		1.744	−0.08	0.35
Ten largest shareholdings	Overall	0.788	0.172	0.07	0.99
	Between		0.164	0.20	0.99
	Within		0.053	0.23	0.98
Institutional ownership	Overall	0.109	0.107	0	0.59
	Between		0.098	0	0.36
	Within		0.044	−0.11	0.46
Foreign ownership	Overall	0.069	0.145	0	0.84
	Between		0.127	0	0.78
	Within		0.071	−0.49	0.51
Associated company ownership	Overall	0.416	0.315	0	0.99
	Between		0.300	0	0.99
	Within		0.099	−0.24	0.98

Source: Authors’ own.

Table 6 shows the correlation matrix of the variables under study. Looking at the table, it can be said that ownership concentration is somewhat negatively correlated with EVA. The single largest shareholding and top ten largest shareholdings are mostly positively correlated with all the performance variables. Furthermore, the top two largest and top three shareholdings are positively correlated with all performance measures, while the top three shareholdings and top five shareholdings are negatively correlated with EVA. The proportionate of five largest shareholdings is negatively correlated with EVA, ROA, and Tobin’s Q but positively correlated with the EPS. However, the EPS are positively correlated with two largest shareholdings, three largest shareholdings, and five largest shareholdings.

Table 6.

Correlation Coefficient Matrix

		M	SD	1		2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17
1	Single largest ownership	0.41	0.25
2	Two largest ownership	0.57	0.80	0.23
3	Three largest ownership	0.66	1.17	0.12		0.99
4	Five largest ownership	0.78	1.94	0.98	0.99
5	Ten largest ownership	0.79	0.17	0.62		0.19	0.12	0.06
6	HHI			0.91		0.23	0.12	0.03*	0.83
7	Gini index			0.29		0.07	0.04*	0.02*	0.48	0.42
8	Board independence			0.01*		0.06	0.05*	0.04*	−0.05	−0.03*	−0.21
9	Institutional ownership	0.11	0.11	−0.28		−0.11	−0.08	−0.05*	−0.39	−0.36	−0.28	0.12
10	Foreign ownership	0.07	0.15	−0.12		−0.01*	0.01*	0.02*	−0.03	−0.10	−0.06	0.04*	−0.09
11	Associated co. ownership	0.42	0.32	0.50		0.18	0.12	0.07	0.43	0.53	0.18	−0.06	−0.17	−0.33
12	Firm age			0.17		0.08	0.06	0.05*	0.07	0.15	0.31	−0.19	−0.05*	0.03*	−0.01*
13	Firm size			0.08		0.11	0.10	0.09	−0.02	0.06	0.06	0.26	0.05*	−0.05*	−0.06	0.05*
14	Financial leverage			0.07		0.01*	−0.00*	−0.01*	0.08	0.07	0.07	0.01*	−0.02*	−0.03*	−0.08	0.02*	−0.16
15	EVA			0.04*		0.01*	−0.02*	−0.03*	0.03	0.05*	0.00*	−0.02*	0.15	0.05*	0.01*	−0.00*	−0.22	−0.06
16	EPS			0.15		0.05*	0.03*	0.02*	0.13	0.16	−0.04*	−0.18	0.07	0.11	0.07	0.21	−0.11	0.07	0.23
17	ROA			0.16		0.03*	0.01*	−0.00*	0.09	0.14	0.01*	−0.03*	0.05*	0.06	0.08	0.06	−0.20	−0.12	0.38	0.34
18	Q			0.20		0.03*	0.01*	−0.01*	0.23	0.21	0.07	−0.07	−0.13	0.10	0.08	−0.00*	−0.36	0.21	0.24	0.20	0.31

Source: Authors’ own.

Note: *Correlation indicates significance at the 0.05 level (two-tailed).

Regression Analysis

The data used in this study form a panel data that are appropriate for treating unobserved heterogeneity problem that often appears in the cross-sectional data analysis. Thus, this study uses panel data method [fixed effect [FE] and random effect [RE]) to analyze the data. This research runs FE and RE method for a model in order to select an appropriate model between FE and RE. The results of FE and RE method are illustrated in Tables 7 and 8.

The dependent variable EVA reported positive coefficient with the control variable firm size. It can be concluded that the higher percentage of two largest shareholdings and institutional ownership have high economic profit. Other dependent variables, ROA, also reported positive coefficient at the 10 percent significance level with institutional ownership.

Table 7 shows the dependent variables EVA and EPS in relation to other independent and control variables. We can notice that EVA has a positive coefficient with the second largest shareholders of the sample companies. It indicates that a higher percentage of top two largest shareholders results in higher economic profit. We can see that the firm size is found to be negatively related to EVA and Tobin’s Q.

Table 7.

Regression Results (EVA and EPS)

	EVA		EPS
	FE	RE	FE	RE
Single largest shareholding	−1.82(0.07)	−1.46(0.14)	−0.72(0.47)	−0.78(0.43)
Two largest shareholdings	2.52(0.01)	2.53(0.01)	0.84(0.40)	0.49(0.62)
Three largest shareholdings	−0.22(0.83)	−0.70(0.48)	−0.68(0.49)	−1.33(0.18)
Five largest shareholdings	−1.04(0.29)	−0.48(0.63)	0.38(0.71)	1.14(0.26)
Ten largest shareholdings	0.18(0.86)	0.04(0.97)	0.95(0.34)	−0.38(0.71)
Institutional ownership	4.84(0.00)	4.59(0.00)	3.69(0.00)	0.98(0.33)
Foreign ownership	1.22(0.22)	0.80(0.42)	3.28(0.00)	0.52(0.60)
Associated company ownership	−1.01(0.31)	−0.80(0.42)	0.63(0.53)	0.37(0.71)
HHI	0.09(0.03)	0.12(0.00)	1.05(0.29)	1.38(0.17)
Gini index	1.42(0.15)	1.30(0.19)	−4.02(0.00)	−0.01(0.99)
Board independence	−0.06(0.95)	−0.03(0.97)	−3.75(0.00)	−0.99(0.32)
Firm size	−5.56(0.00)	−5.09(0.00)	−1.75(0.08)	0.37(0.71)
Firm age	−0.63(0.53)	−0.78(0.43)	4.89(0.00)	1.74(0.08)
Financial leverage	−1.19(0.24)	−1.10(0.27)	2.40(0.02)	2.30(0.02)
Prob. ? F	0.00		0.00
F	4.58		7.26
Prob.		0.00		0.34
R	12.23		18.09
Adjusted R²	9.56		15.60

Source: Authors’ own.

Notably, Gini index is negatively associated with the EPS. Meanwhile, the HHI reported positive association with the economic profit, EVA. Looking at the results, it can be said that Tobin’s Q, which is a market-based performance measure, has positive relationship with the single largest shareholders.

Table 8 indicates that the dependent variable reported positive coefficient on ROA with the institutional ownership and negatively associated with the firm size and financial leverage. These results are in line with the findings (Leech & Leahy, 1991; Lehmann & Weigand, 2000).

Table 8.

Regression Results (ROA and Tobin’s Q)

	ROA		Tobin’s Q
	FE	RE	FE	RE
Single largest shareholding	0.79(0.43)	0.88(0.38)	2.37(0.02)	1.42(0.16)
Two largest shareholdings	−0.01(0.99)	0.09(0.92)	−0.75(0.45)	−0.16(0.87)
Three largest shareholdings	0.90(0.37)	−0.44(0.66)	−0.26(0.79)	0.60(0.55)
Five largest shareholdings	−1.04(0.29)	0.44(0.66)	0.70(0.48)	−0.59(0.56)
Ten largest shareholdings	−0.13(0.89)	0.07(0.94)	1.12(0.26)	1.03(0.30)
Institutional ownership	2.62(0.00)	2.03(0.04)	−0.31(0.76)	0.50(0.61)
Foreign ownership	1.58(0.12)	1.02(0.31)	2.37(0.02)	1.58(0.11)
Associated company ownership	−0.32(0.75)	0.23(0.82)	−0.97(0.33)	−0.27(0.79)
HHI	−0.12(0.91)	0.37(0.71)	0.21(0.83)	−0.67(0.50)
GINI index	0.02(0.98)	−0.02(0.98)	−0.30(0.76)	0.50(0.62)
Board independence	−0.10(0.92)	−0.00(0.99)	1.05(0.29)	0.56(0.58)
Firm size	−4.68(0.00)	−2.78(0.00)	−8.97(0.00)	−6.85(0.00)
Firm age	0.38(0.70)	0.10(0.92)	0.20(0.84)	−0.07(0.94)
Financial leverage	−2.54(0.01)	−2.33(0.02)	5.18(0.00)	5.09(0.00)
Prob. > F	0.00		0.00
F	3.96		11.43
Prob. ? ²		0.03		0.00
R²	10.75		25.81
Adjusted R²	8.04		23.55

Source: Authors’ own.

The type of ownership concentration varies across firms according to the identity of large shareholders; the relationship between firm performance and ownership type depends on who are the large shareholders. Consequently, HHI and the Gini index did not report any association with market-based performance measure, Tobin’s Q, and accounting-based performance measure, ROA, as stated in Table 8.

However, firm leverage is negatively associated with EPS but has a positive relationship with firm size. Besides, Tobin’s Q is positively associated with the single largest ownership and financial leverage and firm size. While providing strong evidence that some forms of ownership concentration tend to increase firm performance, these results are inconsistent with the view that blockholders are easily able to form coalitions to monitor management effectively.

In principle, the reduction in the estimated effect could occur either because the additional blockholdings actually decrease performance or because adding them only introduces noise into the concentration measure, which would tend not only to diminish its coefficient but also to increase its standard error. The fact that the standard error does not increase suggests that the additional blockholders actually have a negative effect on performance.

Econometric Results

Some researchers point out that as ownership concentration gives the owners better control and motivation to monitor over the firm activities, it might result in mitigating agency problems. The results from the regression analysis show that the controlling shareholders do have a positive impact on the performances of Pakistani listed firms. Even though there happen to be agreements on the favor of the argument that large shareholders tend to expropriate firm assets, the observation from the current study shows that large shareholding ultimately affects positively on firm performance. Moreover, the second largest shareholdings also have a significant positive impact on company performance. This implies that the presence of other large shareholders motivates the largest shareholders to have good overall influence.

The HHI reported a positive association with the economic profit; however, the Gini index has a negative relationship with the EPS. Besides, all performance variables are correlated with concentrated ownership categories. The correlation and regression results reported that EVA is positively associated with the two largest shareholdings, which indicates the higher concentrated ownership effect positively on the profitability of the firms. Other performance variables do not have any correlation with ownership concentration at any level of ownership.

Tobin’s Q, the market-based performance measure, is found positively associated with the single largest ownership. Results also indicate that a higher percentage of institutional ownership has a positive association with both accounting- and value-based measures EPS, ROA, and EVA. Accordingly, higher percentage of foreign ownership is also positively associated with the EPS and Tobin’s Q. This result extends previous studies (Abdullah et al., 2011; Khan et al., 2013; Warren & McFadyen, 2010) in which authors urge that while foreign ownership becomes concentrated, these foreign investors would stimulate their monitoring and accountability role in organization. This connotes that firms in emerging economies may increase their corporate governance quality only by increasing foreign ownership to an appropriate level.

Overall, the results indicate that multiple large shareholders are associated with higher corporate value, consistent with previous empirical findings (Attig et al., 2009; Maury & Pajuste, 2005). Of the four control variables, the natural log of total assets (firm size) was positively associated with corporate value at the 1 percent level of significance in all regression models.

In order to establish the level and direction of regression analysis, Regression Analysis Matrix is an efficient tool variable of interest (Abdullah, 2004). This matrix attempts to provide insights on the hypothesis tests that the study intent to test. It can be observed that we accept the hypothesis that there is a significant positive relationship between ownership concentration and performance of firms at the KSE.

Conclusion

There has been an array of studies focusing on the probable relationship between ownership concentration and firm performance, where most results confirm the positive impact of the former on the latter. The relationship might not be linear, if the costs and benefits of ownership concentration vary with the level of concentration (Morck et al., 1988). The relationship might also show different dimensions with variations in quality of data, models of estimation, and heterogeneity among firms.

The present study aims to contribute to the existing literature by broadening the concept of ownership structure and firm performance in an Asian emerging economy. It is perhaps probable that ownership concentration be used as a relevant governance mechanism in Pakistan as a result of the ongoing governance reforms, since the other governance tools have failed to derive the expected improvement in monitoring function (Tam & Tan, 2007). Hence, this study will help the policymakers with improved guidance and concepts in designing efficient corporate governance features. Moreover, this will enhance researchers’ perceptions on the unique agency features of the Pakistani corporations.

Despite these theoretical contributions and practical implications, future research should mainly address two limitations of this study. First, ownership concentration is only one side of the coin in ownership pattern. An important research question in the future could be how insider and outsider interest in ownership becomes a driving force for firm performance. Second, since firm performance is a complex function of many factors, it deserves research attention to go a step further to explore specific channels through which concentrated ownership affects firm performance.

Footnotes

Authors’ Biography

Qaiser Rafique Yasser is an Assistant Professor of Business Administration (Department of Management Sciences), in Preston University, Islamabad campus, Pakistan. He is also affiliated with Suriya Nauman Rehan & Co. (Chartered Accountants) as Director Training and Research. Mr. Yasser holds a PhD from University Malaysia Sarawak, Malaysia, and his research interests include corporate governance, corporate social responsibility, financial reporting, and gender diversity in emerging economies. E-mail: qaiser_rafique1@hotmail.com

Abdullah Al Mamun is associated with Newcastle Business School, University of Newcastle, Newcastle, Australia.

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