Firm performance and the nature of agency problems in insiders-controlled firms: evidence from Pakistan.
Abdullah, Fahad ; Shah, Attaullah ; Khan, Safi Ullah 等
1. INTRODUCTION
More than two centuries ago, Adam Smith (1776) showed skepticism
about the efficiency of joint stock companies because of the separation
of management from ownership. He observed that managers of joint stock
companies cannot be expected to watch over the business with the same
anxious vigilance as owners in a partnership would. Adam Smith's
worry remained buried for a century and a half until Berle and Means
(1932) rekindled interest in this area when they hypothesised in their
book that dispersed shareholding is an inefficient form of ownership
structure. They argued that separation of ownership and management
control has changed the role of owner from being active to the passive
agent. Dispersed shareholders lack incentives to monitor self-interested
managers who possess only a small fraction of the total shareholdings.
The propositions by Adam Smith (1776) and Berle and Means (1932)
received some support when Jensen and Meckling (1976) tied together the
elements of property rights, agency costs, and finance to develop a
theory of ownership structure of a firm. Jensen and Meckling asserted
that agency costs are real, which the owner can reduce either by
increasing ownership stake of the agent in the firm or by incurring
monitoring and bonding costs. In early tests, several research studies
supported the views of Jensen and Meckling. However, these studies did
not account for endogeneity problem.
A significant turn in the direction of research in this area was
observed when Demsetz (1983) questioned the views held by Berle and
Means (1932). Demsetz proposed that the ownership structure of the firm
is optimally determined based on the principle of profit maximisation.
Owners of a closely held firm will sell shares only when they expect
that doing so will increase the firm's performance. Similarly,
owners of a widely held corporation will sell their shares in a takeover
situation when they expect that doing so is optimal. Existing and
potential shareholders choose concentrated or diffused ownership
structure for a firm so that optimal performance level is reached. This
implies that there is no systematic relationship between the level of
ownership concentration in a firm and the firm performance. Allowing for
endogenous determination of ownership structure and firm value, several
studies including Demsetz and Lehn (1985), Demsetz and Villalonga (2001)
show support for Demstez (2003)'s argument.
The nature of interaction between different stakeholders, and hence
its implication for firm value, is different in developing economies.
Claessens, Djankov, Fan, Lang, and Fomento (1999) maintain that many of
the East Asian economies are characterised by weak property and
investors' rights, poor judicial efficiency, and corruption. These
features make it easier for influential parties to exploit weaker ones.
Moreover, many developing countries including Pakistan have family- and
group-controlled businesses where substantial portion of shareholdings
lie with family members or associated companies. Large shareholders such
as these have significant powers to redistribute wealth in ways that
might not coincide with the interests of other stakeholders [Shleifer
and Vishny (1997)]. A special case of a country where judicial
efficiency is low [World Bank (2010)], property and investors'
rights are weak, and family- and group-controlled businesses are
ubiquitous is Pakistan. Despite these facts, this country has not been
able to attract sufficient attention of empirical researchers in this
area. The main objective of this study is to fill this gap.
Specifically, this study tests hypotheses and predictions of various
theories which were discussed in the preceding paragraphs in the context
of Pakistan. In doing so, it accounts for the problem of endogeneity by
estimating two-stage least square (2SLS) regression and models the
relationship between various ownership variables in a manner that is
consistent with the suggestions of Demsetz and Villalonga (2001).
Moreover, it uses several alternative proxies for external monitoring to
check robustness of the results. The rest of the paper is organised in
the following manner. Section 2 briefly reviews the existing literature
and testable hypothesis are drawn in light of existing literature. Data,
methodology and model specification are discussed in Section 3. Section
4 highlights the descriptive statistics and discusses the regression
results. Finally in Section 5 some concluding remarks are presented.
2. THEORETICAL FRAMEWORK AND RELATED LITERATURE
This section reviews the theoretical considerations surrounding a
firm's ownership structure and the firm's performance.
Empirical evidence in favour or against these theoretical underpinnings
are also presented. Finally, testable hypotheses are developed towards
the end of this section.
2.1. Ownership Patterns and Firm's Performance
More than two centuries ago, Adam Smith observed that managers of a
joint stock company cannot be expected to work with the same devotion as
the owner of the business would. Berle and Means (1932) extended
Smith's rationale and argued that firms with dispersed ownership
will suffer more from agency problems. Diffused ownership gives
significant power to managers under which they could use the firm's
resources for their personal gains, instead of maximising the
shareholders' wealth. Berle and Means recipe for better corporate
performance is a concentrated ownership structure. Jensen and Meckling
(1976) developed a more comprehensive framework to suggest that
concentrated ownership benefits a firm in a sense that large
shareholders can reduce the firm's transaction costs by negotiating
and enforcing contracts with different stakeholders. Shleifer and Vishny
(1986) reach the same conclusion as Berleand Means, and Jensen and
Meckling, but with a different explanation. Shleifer and Vishny (1986)
suggest that large shareholders have the ability and incentives to
monitor managers, which implies that the presence of large shareholders
improves the firm's value. The consensus developed over the passage
of time from the perspective of agency theory, imperfections in the
labour, capital, and product markets was that the ownership structure
does matter in the valuation of a firm. However, Demsetz (1983), Demsetz
and Lehn (1985), and Demsetz and Villalonga (2001) challenged this view
when they hypothesised that ownership structure and firm value are
determined endogenously. Their central hypothesis was that existing and
potential shareholders change ownership structure of the firm in view of
the profit-maximisation motives. In other words, ownership structure is
as likely to be influenced by the firm performance as it may influence
firm performance. As a result, there should be no systematic
relationship between the two. Limited empirical evidence exists in
support of the views of Demsetz (2003) as observed by Shleifer and
Vishny (1997, p.759),
"Although Demsetz (1983) and Demsetz and Lehn (1985) argue
that there should be no relationship between ownership structure of a
firm and its performance, the evidence has not borne out their
view."
Thus, there exists some sort of agreement among financial
economists that large shareholders create value, however, the
relationship may not be infinitely linear. For example, when large
shareholders possess a larger fraction of shareholdings, this may enable
them to indulge in expropriating minority shareholders and other
stakeholders such as bondholders [Shleifer and Vishny (1997)]. This
aspect of ownership structure and its implications for firm performance
are reviewed next.
2.2. Large Shareholders and Firm Performance
Large shareholders bring a unique set of benefits and costs to a
firm. As outlined in Subsection 2.1, large shareholders are good at
monitoring and reducing transaction costs in a sense that they make and
enforce better contracts with stakeholders of the firm. However, at the
same time, large shareholders have costs as well. Shleifer and Vishny
(1997) discuss several costs of large shareholders which may in turn
destroy value for other stakeholders of the firm. First, if large
shareholders have relatively more control rights than their cash flow
rights, they might pay themselves special dividends or take unfair
advantage from business relationship with their companies [Grossman and
Hart (1988); Harris and Raviv (1988)]. Second, large shareholders may
force firms to take more risk in hope of higher return. This creates
moral hazards problems for debt holders as they do not share in upside
movements of the firm profit but are affected by the downside movements
[Jensen and Meckling (1976)].
The above discussion makes it clear that the relationship between
ownership structure and firm performance is inverted U-shaped. Stulz
(1988) was the first one to suggest this kind of relationship. A number
of empirical studies, including McConnell and Servaes (1990), Morck, et
al. (1988), and Wruck (1989), upheld Stulz's view.
A special case of large shareholders is the large-insiders'
ownership which is reviewed next.
2.3. Insiders' Dominance
Increasing managers' ownership stake in a firm reduces the
agency conflicts [Jensen and Meckling (1976)], however, managerial
ownership beyond a certain point gives rise to another problem, known as
managerial entrenchment. Fama and Jensen (1983) argue that higher
managerial ownership makes the managers entrenched from job market risks
or take-over threats. Entrenched managers are better placed to extract
rents in the form of special dividends, perks, or bonuses [Shleifer and
Vishney (1997)]. Managerial entrenchment effects and rent extraction
costs are assumed to be greater in countries where protection of
investors' and property rights are weak, and judicial efficiency is
low [La Porta, et al. (2000); Shleifer and Vishney (1997)]. Given that
Pakistan is a developing country, and like many other developing
countries, it is expected that investors' protection is weak and
judicial efficiency is low in Pakistan. In addition, many firms are
owned by families and groups where managers hold significant portion of
the total shares. In light of the above discussion, we test the
following hypothesis,
H1: Firms with higher managerial ownership experience poorer
performance.
2.4. The Monitoring Effect of Certain Groups of Shareholders
Managerial rent extraction can be controlled to some extent if there are
shareholders in the firm who have monitoring capabilities. Large
shareholders, institutional shareholders, and associated companies are
such groups of shareholders who might question and restrict managerial
actions.
2.4.1. Institutional Shareholders and Firm Performance
Institutional investors are an important stakeholder in corporate
governance mechanisms because they have the potential to play the
monitoring role [Roberts and Yuan (2010); Shleifer and Vishny (1986)].
Several reasons exist why they would or would not monitor the activities
of managers. Institutional investors are usually thought to have longer
investment horizons which in turn motivate them to get involved in the
affairs of the firm [Jeon, Lee, and Moffett (2011); Short and Keasey
(1999); Wahab and Rahman (2009); Shome and Singh (1995)]. Their
willingness to monitor is also related to their ability to monitor.
Their ability in turn is related to several factors:Firstly, they have
better access to various sources of information to know about managerial
rent extractions (Lev, 1988); and, secondly, they can potentially
intimidate the firms' management either through sale of their
shares or by using their voting rights [Gillan and Starks (2003)].
Empirical evidence suggests that when institutional shareholders do
not own a significant fraction of their total investments in a firm,
their level of commitment will be low [Bums, Kedia, and Lipson (2010)].
In extreme cases, large external shareholders (like institutional
shareholders) may be passive voters and may collude with managers to
expropriate other minority shareholders [Pound (1988)]. A number of
studies that examined the possibility of whether or not institutional
investors can influence a firm value have failed to find any association
between the two. [Agrawal and Knoeber (1996); Duggal and Miller (1999);
Faccio and Lasfer (2000); Karpoff, Malatesta, and Walking (1996)].
Reasons behind the passive role of institutional investors include lack
of ability to monitor [Taylor (1990)], short-term investment horizons
[Coffee (1991)] free rider problems [Ernst Maug (1998)] and regulatory
restrictions [Jennings (2005)].
H2: Presence of institutional investors will lead to better
performance by the firm.
2.4.2. Group Association
If a firm is a part of a large group of companies, the firm can
reap several benefits from the group association. First, group companies
can act as large external shareholders who can help in controlling
expropriations by the top management. James (1999) adds to the view by
arguing that the ownership held by the associated firms are more long
term in nature and this very characteristic of unmitigated sphere of
investment leads to efficient strategic decisions. Another argument that
goes in favour of associated ownership is that a firm can benefit from
the goodwill and reputation of the group. Furthermore, group companies
assist one another through shared resources such as finance, technology,
and experience [Villalonga and Amit (2006); Wang (2006); Sraer and
Thesmar (2007); and Maury (2006)].
Recently, several studies have shifted the focus towards internal
conflicts of interests that shareholders in business groups can
experience [see Dewenter, et al. (2001); Weinstein and Yafeh (1998); and
Morck, Nakamura, and Shivdasani (1998); Berger and Ofek (1995)]. On one
hand, it is believed that business groups do not act opportunistically
due to their reputation as these groups are highly visible. This
visibility might be due to their big sizes and/or usually the famous
business tycoons or personalities with bureaucratic and political
backgrounds that sit on their managerial boards [Dewenter, et al.
(2001)]. On the other hand, a complex web of intra-group transactions
might make it more difficult for analysts and investors to know about
their opportunistic behaviour. Thus the complexity of intra-group
transaction can increase the probability of opportunistic behaviour.
In an agency framework, a higher ownership percentage of group
companies should reduce agency conflict between shareholders and
managers, but at the same time, it might lead to severe conflicts of
interest between majority-insiders and minority-outsiders. Thus, if the
group-reputation hypothesis holds, group companies should exhibit better
market and accounting performance than non-group companies, as the
transaction costs of such companies are assumed to be low due to the
group size and reputation. However, if complexity of transaction
hypothesis is true, then group companies would display weak performance,
which would imply that the group companies are involved in minority
shareholders exploitation, and/or the group has inferior reputation and
is facing higher transaction costs.
In view of the above, two testable hypotheses can be proposed.
Given that group companies monitor the managers' activities and/or
the firm does not exploit minority shareholders due to the group's
reputation, a testable hypothesis is:
H3a: Higher ownership percentage of associated companies in a firm
leads to a better performance of the firm.
If group companies do not care about the group's image and/or
the intra-group transactions are considered complex by analysts and
shareholders, then they will demand risk premium in view of possible
expropriation of minority shareholders. A testable hypothesis, in this
context, is:
H3b: Higher ownership percentage of associated companies in a firm
leads to a better performance of the firm.
2.5. How to Measure Firm Performance
An enduring query that has puzzled empirical researchers is what
measure of performance is most appropriate in studying the relationship
between corporate ownership structures and a firm's performance.
Literature mainly suggests the use of accounting-based and market-based
measures of a firm's performance. Both of them have their own
advantages and disadvantages. Demsetz and Lehn (1985) used accounting
profit rate while Demsetz and Villalonga (2001) and Morck, Shleifer, and
Vishny (1988) used both accounting measure and Tobin's Q as
alternative measures of firm performance. The majority of researchers
like McConnell and Servaes (1990), Loderer and Marin (1997), Cho (1998),
Himmelberg, Hubbard, and Palia (1999), Hermalin and Weisbach (1991) and
Holdemess, Kroszner, and Sheehan (1999) have used Tobin's Q as a
preferred measure of firm performance. These two measures differ in
terms of time and the fact that who actually measures performance. The
problem with accounting profit rate is that its calculation is subject
to accounting standards which do not account for market value of growth
options. Also accounting profit rate is inherently more
backward-looking. In other words, accounting profit rate is based on the
facts reported in the financial records, so future expected cash flows
are minimally considered. In contrast, Tobin's Q is a market-based
measure of performance. It accounts for all present decisions/actions
taken by the management as well as the future expected performance of
the firm. The disadvantage associated with this measure is that it is
driven by the investors' psychology and may be biased at time
because of the investors' undue optimistic or pessimistic
behaviours. Moreover, Tobin's Q also involves the figures from
financial records [i.e., book value of tangible assets) in its
calculation which is why Demsetz and Villalonga (2001) suggested that
there would be a correlation between the two measures. The above
discussion highlights that each measure has its own pros and cons and
should be used with caution. This study uses Tobins's Q as well as
accounting-based measures for the purpose of comparison and robustness
of results.
2.6. Control Variables
A number of other variables may affect the firm performance beside
the ownership structures, commonly referred to as the control variables.
The following control variables have largely been used in empirical
studies.
2.6.1. Financial Leverage
In perfect capital markets, the capital structure does not
influence a firm's value [Modigliani and Miller (1958)]. However,
once the assumptions of the perfect capital markets are relaxed, then
capital structure does matter. Stiglitz and Weiss (1981) looked into
this relationship in the context of asymmetric information where
leverage is treated as a signalling device. They found that information
asymmetry between managers and shareholders and between lenders and
borrowers could lead to adverse selection problem. Ultimately, high
quality borrowers can use debt as a signalling device and improve its
market performance [Leland and Pyle (1977)]. Further, leverage is viewed
as a mechanism to align the interest of mangers and shareholders. Agency
theory suggests that there exists a conflict of interest between the
firm's managers and shareholders where managers follow their own
objectives. Higher leverage under such circumstances can play a
disciplining role by reducing the free cash flow at the
managers'-disposal [Jensen (1986)] and may expose the managers to
external monitoring of lenders [Easterbrook (1984); Rozeff (1982)].
Grossman and Hart (1982) further argue that to escape the personal cost
of bankruptcy, managers will like to have less leverage in the
firm's capital structure. Consequently, a better corporate
performance is expected in the presence of high leverage. An alternative
view held by the researchers like Jensen and Meckling (1976) and Myers
(1977) targets the agency cost created by different priorities of
bondholders and stockholders. Shareholders indulge in moral hazards by
investing in risky projects and enjoy the win-win situation at the cost
of bondholders who share in losses if the projects fail and do not share
in gains if risky project are successful. Myers (1977) conjectures that
a firm foregoes positive NPV projects in the presence of risky-debts,
which is known as the underinvestment problem. This set of arguments
suggests a negative relationship of leverage with firm performance.
A large strand of literature that provides evidence of both
positive and negative relationship of leverage and firm performance is a
clear signal of disagreement among researchers in this area. Mahakud and
Misra (2009) attributed this disagreement to the definition of corporate
performance used by different researchers.
2.6.2. Firm Size
Size of a firm has a significant role to play in determining
performance of the firm. Large firms are expected to be more diversified
both in terms of demographics and product offerings which make them less
vulnerable to the risk of bankruptcy [Titman and Wessels (1988)]. Fama
and French (1992) found significant size premium in a sample of more
than 5000 US firms from 1927 to 1987. This indicates riskiness of small
firms. This premium might also relate to low resources endowment, poor
product quality, lack of research, lower provision for training and
development of employees, and absence of qualified management in small
firms. A counter argument is that big firms might suffer from
inefficiencies due to tall bureaucratic structures. Also, agency
problems are expected to be severe in big firms. The relative big size
of a firm might not necessarily be a result of honest efforts of the
management. Instead, the managers might have invested in non-value
maximising projects to ensure continued employment in the firm, get more
bonuses, or for empire-building [Murphy (1985)]. It will be interesting
to see which of these competing arguments is corroborated by the
empirical findings. In a meta-analysis, Capon, Farley and Hoenig (1990)
reported that the relationship between firm size and financial
performance was flat based on the results of 88 empirical studies.
2.6.3. Growth (How Performance Can Affect Growth) Capon, et al.
(1990, p. 1157) commented on growth while discussing the implication of
their meta-analysis of determinants of financial performance that,
"High growth situations are desirable; growth is consistently
related to profits under a wide variety of circumstances."
Literature provides several explanations for the positive
association between growth and firm performance. For example, sales
growth has positive impact on factors that include internal motivation,
promotion and retention of talented employees. Growth facilitates all
the way to the implied opportunities for investments in new equipment
and technologies that upgrade the production process as a whole. In
addition, sales growth provides opportunities or economies of scale
[Gale (1972); Buzzell, et al. (1975)] and learning curve benefits.
However, sales growth might not always lead to better corporate
performance. According to agency theory, managers pursue growth because
growth helps them achieve personal objectives. Growth guarantees
employment and salary increases for managers due to the greater
responsibilities of managing a larger firm [Murphy (1985)].
2.6.4. Beta (Market Risk)
The Capital Asset Pricing Model (CAPM) of Sharpe (1964), Lintner
(1965) and Black (1972) and predict a positive relationship between
required /observed rate of return on a stock and its beta. Beta is the
ratio of covariance between a given stock return and the market return
to the variance of the market return. CAPM assumes that beta is a proxy
of all systematic risks of a stock. As beta of a stock increases,
investors will require higher risk premium which will result in lower
share price of the given stock. As a result, it is expected that beta is
negatively related with the market performance of a firm.
2.6.5. Idiosyncratic Risk (Standard Error)
Theory of CAPM suggests that firm-specific risk is irrelevant
because the negative covariance between assets' returns cancel out
unsystematic risk of the assets when sufficiently large numbers of
assets are included in a portfolio. However, when investors do not
invest in large number of securities, the unsystematic risk of their
investments will affect them. Majority of the firms are owned and
controlled by families, blockholders and associated companies in
Pakistan. The holdings of these investors are necessarily not
diversified. Thus, it is expected that unsystematic risk and market
performance are negatively related in Pakistan.
2.6.6. Sales Turnover (ST)
A firm's financial performance can also depend on how
efficiently the management uses the firm's assets. A firm with
better utilisation of firm's resources, like a firm with higher
sales turnover, is expected to perform well in comparison to other
firms.
2.6.7. Tangibility (TG)
Assets tangibility refers to the percentage of a firm's fixed
assets to total assets. Assets tangibility can be a proxy for the
firm's operating leverage or availability of collaterals which can
be offered against debt financing. Operating leverage has implications
for both risk and returns. In good times, firms with higher operating
leverage will perform better than other firms and vice versa. In perfect
markets, the risk-return trade-off will make the share price insensitive
to operating leverage. On the other hand, if tangibility is considered a
proxy for the availability of collaterals, then it is supposed to reduce
the worries of the lenders which in turn would help in lowering the cost
of borrowing. Additionally, literature suggests that the collateral can
solve several issues related to asymmetric information. Chan and Kanatas
(1985) argue that the collateral has more stable value which gives more
confidence to the lender in lending decision. The apparent advantage in
getting external financing at favourable terms should lead to a better
firm performance.
3. DATA AND METHODOLOGY
3.1. Sample and Data Sources
The study uses the financial and ownership data of 183 firms listed
on the Karachi Stock Exchange over the period 2003 to 2008. Initially,
the sample consisted of all the firms with the data available on the
pattern of shareholdings. We also require the firms to satisfy the
following criteria:
A firm should not be financially-distressed such as firms with
negative equities,
A firm should not be a financial firm,
A firm should not be owned by the Government of Pakistan,
Firms with abnormal or influential data can create goodness of fit
problems and make the generalisation of results difficult. For this
reason, all such firms or observations were identified with Cook's
D and/or studentised residuals and were removed.
It is important to note that the data on ownership variables is
available but sometimes with gaps. This restriction necessitated time
series averages of the ownership variables for every cross-sectional
unit. Theoretically, averages can reduce or miss yearly variations in
the ownership variables. However, it is expected that this problem would
not be severe in Pakistan. Since blockholdings are ubiquitous and many
firms are owned by families and business groups in Pakistan, therefore,
ownership structures of the listed firms can be expected to show
considerable persistence over short periods.
Data on ownership variables is obtained from the annual reports of
the sample firms. The firms listed on KSE are required by the Companies
Ordinance, 1984 and by the Code of Corporate Governance, 2002 under
clause XIX (i) to provide information on the pattern of shareholdings in
their annual reports. Financial data has been taken from the
"Balance Sheet Analysis of Joint Stock Companies Listed on the
Karachi Stock Exchange", a publication of the State Bank of
Pakistan.
3.2. Specifications of the Models
A framework of panel data is used to test different hypotheses
developed in the previous section. Panel data, as noted by Hsiao (1986),
has several distinct advantages. For example, panel data provides more
degrees of freedom, increases variations in the data and thereby reduces
the chances of multicollinearity, and makes it possible to control for
fixed effects, etc. We test the hypotheses using the following
methodology.
The econometric methodology adopted in this study is broadly
borrowed from the study conducted by Demsetz and Villalonga (2001). They
consider firm performance and ownership structure as endogenously
determined. To account for the endogeniety issue, a method of two stages
least square (2SLS) is applied. Unlike Demsetz and Villalonga (2001) who
use time series averages, this study uses panel data framework because
panel data analysis has several advantages over simple cross section or
time series analysis. Due to data limitation, variables such as
advertising expenditure, research and development expenditures and firm
concentration ratio were dropped from the econometric model. The final
form of the model estimated has the following two equations,
[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (1)
[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (2)
3.3. Testing for Endogenity
If the problem of endogenity does not exist, then 2SLS regressions
yield inefficient estimates [Woodridge (2001)]. To test whether
ownership variables and firm performance are endogenously determined, a
test suggest by Durbin-Wu-Hausman (1978) can be used which directly
compares the OLS and 2SLS estimates and determines whether the
differences are statistically significant. If estimates from the two
regressions differ significantly, it can be suspected that ownership
variables and firm performance are endogenous. Operationally, this can
be accomplished by in two steps. In the first step, directors'
ownership percentage is regressed on all variables in the Q regression
plus instrumental variables that are supposed to be correlated with
director's ownership but uncorrelated with the error term. Then
from this auxiliary regression, residual values are predicted. In the
second step, the predicted residual values are then added to the Q
regression as an explanatory variable. If residuals are found to be
statistically significant, it is taken as an evidence of endogenity. As
for the results of this study are concerned, the residual values were
highly significant and that is why the preferred model for the analysis
of data is 2SLS regression.
A summary of the variables used in this study, their measurement
and the symbols used in the analysis are reported in Table 1.
4. RESULTS AND DISCUSSION
In this Section, we present and discuss descriptive statistics and
results of various specifications which were discussed in the Section 3.
4.1. Descriptive Statistics
Table 2 shows correlation matrix of the variables used in the
regression analysis. With the exception of correlation between Q and
ROA, none of the other variables are correlated to an extent that
warrants attention. The two alternative measures of performance i.e. Q
and ROA have a correlation of 0.53, which shows a reasonable level of
correlation and hence they can prove to be good alternative measures of
performance.
Table 3 reports mean Tobin Q for groups of firms which are based on
the 50th percentile of the financial and the ownership variables. The
results indicate that Tobin's Q is significantly higher in firms
where the percentage ownership of associated holdings and block holdings
is above their respective 50th percentiles. This supports the view that
associated-holdings and blockholdings reduce agency costs, and/or create
positive signalling effect. Tobin's Q is also higher in larger
firms and in firms with higher sales turnover ratios. Firm size can be a
proxy for financial distress [Titman and Wessel (1988)] or information
asymmetry [Petit and Singer (1985)]. In either case, the effect of firm
size is expected to be positive on the market performance. And
sales-turnover ratio is a gauge of operating efficiency of the firm. The
results indicate that better operating efficiency leads to higher market
performance. On the other hand, Tobin Q is significantly lower in firms
where directors' and institutional ownership percentage is above
their respective 50th percentiles. These results partially support the
results in the previous section where it was found that directors do not
pay dividends willingly. As the directors' percentage of
shareholdings increases, they become more powerful in their decisions.
As shown in Tables 3 and 4, directors' unwillingness to pay
dividends does not decline even if a firm faces lower or no transaction
costs of external financing. Results in
Table 3 show that market is recognisant of this fact. With
increasing ownership stake of directors in a firm, the chances of
expropriating other external shareholders increase which in turn lead to
lower Q. The negative association between Q and institutional
shareholding is somehow unexpected. Given their monitoring role and
signalling effects, the association should be positive. One might
postulate that institutional shareholders are viewed by the market as
large entities that collude with managers. However, we need to prove
this point with stronger evidence that might come from 2SLS regressions.
Table 3 reports that firm with high systematic risk and
idiosyncratic risk have lower Qs. In the edifice of capital market
theory, only systematic risk is priced into the valuation of securities.
However, in less-diversified markets, like ones where shares are held
not according to diversification principles but motivated by control
consideration, idiosyncratic risk will be a relevant factor. This
argument seems to be true in Pakistan as many firms are controlled by
families. Shareholders in these firms are not fully-diversified. They
are affected to a larger extent by firm-specific risks. And finally, Q
is low in firms that experienced higher growth rate in their assets in
previous years. This indicates that the market views growth in assets
merely as empire building by managers, and not as valuable projects that
would maximise the shareholders wealth.
Table 4 is similar in construction and analysis to Table 3, except
that this table reports mean ROA for groups of firms divided on the
basis of median values (50th percentile) of selected ownership and
financial variables. This analysis is useful in a sense that ROA depict
a picture of operational performance, whereas Q is the market perception
of this performance. For example, Table 4 shows that mean ROA is
significantly lower in firms where directors' ownership is higher
than in firms where directors ownership is low.
This finding corresponds to results reported in Table 3 where Q is
significantly lower in firms with higher percentage of directors'
ownership. As stated previously, higher ownership stake makes the
directors powerful enough to influence many decisions in their favour.
If agency predictions of Jensen and Meckling's (1986) model are
correct, higher stakes of directors will give them ample incentives to
improve the firm performance and increase the firm's value. But if
they know that private benefits are greater than maximising the overall
value of the firm, they would still act opportunistically and adopt
strategies that enhance their own welfare. This can be expected in a
system which provides room for opportunistic behaviours. If this
argument is true, managers might try to hide the true profits of the
firm by colluding with suppliers of raw material and intentionally
inflate costs of production in books of accounts. Doing so, they
directly pocket the cash not paid to suppliers but shown in costs of
production. Consequently, this will deprive minority shareholders of
dividends and government of taxes. Though profitable, yet the firm will
look less profitable in books. Accounting-based measure of firm
performance, such as ROA will be lower for firms where directors have
more control on the firms' decisions. Since market participants can
recognise this fact, Tobin's Q is also expected to be low. The
results from both ROA and Tobin's Q mean-comparison analysis in
Table 3 and Table 4 are aligned.
ROA is higher in firms where institutional ownership is above the
50th percentile but the difference in mean ROAs of the two groups of
firms is marginally significant at 10 percent level. In Table 3,
institutional shareholding is negatively associated with Q. Overall, we
do not see a clear picture of how institutional investors influence
firm's performance. Table 4 reports that ROA is significantly
higher where the percentage ownership of blockholders and associated
ownership is above their respective 50th percentiles. The reason
attributed to this positive association can be the possible monitoring
role.
Among the financial variables, ROA is higher in larger firms, firms
with higher growth rate, and firms where ratios of sales-to-tangible
assets are higher. It is interesting to see that ROA is higher in
growing firms, but Tobin Q is lower in such firms. This discrepancy is
difficult to explain. Explanations for the other variables are the same
as offered with Q in Table 3. Two of the variables that measure
riskiness of a firm's stock price warrant some explanation.
Diversified investors do not concern themselves with idiosyncratic risk
(which is measured by the standard error of the regression on observed
stock returns and returns of the market index, denoted by SER). However,
at firm's level, this risk might matter for a stand-alone firm. If
a firm faces higher idiosyncratic risk and the firm is not part of a
group of firms, even this risk might increase the probability of default
of the firm. On the other hand, systematic risk (which is measured by
coefficient of market return in the regression of observed stock returns
and returns of the market index, and denoted by BETA) affects both
diversified and non-diversified firms. Both SER and BETA increases the
firm's risk, and hence it's cost of capital. The results in
Table 4 show that ROA is lower in firms with higher SER and BETA. It is
inferred that firms with higher idiosyncratic risk and systematic risk
face higher costs of borrowing which results in lower ROA.
4.2. Regression Results of Tobin's Q and ROA
The results of regression models are presented in Table 5 and Table
6 where the dependent variables are Tobin's Q and return on asset
(ROA), respectively. These tables report coefficient of the explanatory
variables for both OLS and 2SLS models. Table In fact, Table 7 and Table
8 show results of regressions for robustness checks. The coefficients of
the explanatory variables are given outside the small parenthesis
whereas their standard errors are given inside the parentheses. The *,
**, and *** indicate statistical significance at 1 percent, 5 percent,
and 10 percent respectively. Since we treat managerial ownership as
endogenously determined, Table 5 and Table 6 report results of both Q
regressions and DIRC regression. Under the columns DIRC, we report
results of regressions where directors' ownership percentage is the
dependent variable.
In all Q regressions, results are consistent as far as the
coefficient of the DIRC is concerned, except in Table 7 where ownership
percentage of associated holdings is used as a proxy of external
monitoring. The results of both OLS and 2SLS estimations show that
Tobin's Q is inversely related with the ownership percentage of
directors. These results are in line with the argument of Shleifer and
Vishny (1997) who proposed that large shareholders may distribute wealth
in a manner that adversely affects the interest of minority shareholders
(known as the expropriation hypothesis). When the directors'
ownership percentage increases, they gain more and more control over the
decisions of the firm which makes the expropriation of minority
shareholders more likely. Expropriation exacerbates agency costs and
negatively affects firm value. The literature provides one more
explanation for the results. Fama and Jensen (1983) discussed in their
seminal paper the costs of insiders' holdings. They argued that
higher ownership percentage but induce other costs make managers
entrenched (formally known as the entrenchment hypothesis). The
likelihood of firing or challenging the decisions of directors who have
larger chunk of shareholdings in their hands is theoretically small.
Consequently, higher ownership stake of the manager in the firm may not
necessarily align their interest with that of the other shareholders.
The negative sign of DIRC coefficient approves the entrenchment and
expropriation hypotheses against the alignment of interest hypothesis.
As argued in previous sections, legal protection and investors'
activism are weak in Pakistan. Insiders try to exploit outsider minority
shareholders and avoid taxes as and when the opportunity arises. One
indication of this was reported in the case of dividends in the earlier
analysis. The dividend payout ratios were found to be significantly
lower in firms with higher directors' ownership percentage. This
was true whether or not the firm faced transaction costs of external
financing. Weak legal protection of the investors' rights like in
case of Pakistan aggravates the costs of entrenchment. Recognisant of
this fact, the market values firms less favourably where directors owns
a substantial fraction of the firm shares.
In ROA regression, the sign of the coefficient of the DIRC is still
negative; however, it is statistically insignificant in all regressions.
The results indicate that increasing ownership stake of directors in a
firm does not improve the operating performance of the firm which
negates the prediction of alignment of interest hypothesis, proposed by
Jensen and Meckling (1976). When one considers this finding in
combination with Q results, it can be argued that managerial ownership
is not a source of value creation to the firm; instead it is a source of
value destruction.
The three proxies used for external monitoring effect yield
conflicting results. In Table 7, the linkage between INST and Q is
negative both in OLS and 2SLS, though the coefficient is statistically
significant only in the later. BLOC and ASSO are positively and
significantly affect Q only in OLS regression. These findings are
against what one might expect.
Intuitional shareholders, blockholders, and associated companies
have potentially more incentives and capabilities to monitor and
actively participate in running of the firm. Two explanations can be
given for the negative coefficient of the INST. First, it is possible
that institutional investors collude with managers and collectively
expropriate minority shareholders. Second, it is expected that
institutional shareholders sell their shares when market values of the
firm's shares are high, possibly because they speculate that better
performance will be followed by worst performance. This explanation will
hold true especially in highly volatile markets. Like many emerging
markets, Pakistani stock market is also characterised by higher
volatility. Demsetz and Villalonga (2001) provide similar justification
when they found that director's ownership declined significantly
when Tobins' Q was high.
Table 7 shows that market performance of the firms included in the
sample increases with the increase in ownership percentage of associated
companies and blockholders. However, these results are statistically
significant only in the OLS regressions. ROA regressions display similar
statistics. Results in Table 8 show that ownership percentages of
associated companies or the blockholders in a firm have significant
impact on the operating performance of the firm. These findings are
incongruent with the view that significant ownership by blockholders in
a firm or the association of a firm with a group of companies have
positive externalities in the form of reduced agency costs or benefiting
from the experiences and resources-sharing of the group companies. It is
important to note that previous research studies use the term
'blockholders' for external large shareholders who are not
part of the executive management. However, the data do not allow us to
differentiate between internal and external blockholders. In Pakistan,
as argued before, family holdings is a prominent feature of the
corporate sector. Therefore, in the absence of complete information, the
compelling assumption is that blockholders are either directors or
family members of the top management. Based on this assumption, BLOC
should reduce problems between management and shareholders. But it might
give birth to another agency problem that exists between the majority
and the minority shareholders [Shleifer and Vishny (1997)]. This way,
higher ownership percentage of blockholders presents a trade-off between
the benefits of reduced agency costs against the costs of minority
expropriation. If these two are equal in amount, the ownership
percentage of blockholders should be inconsequential to the value of the
firm.
Similarly, the ownership percentage of associated companies
presents a trade-off. As discussed previously, association of a firm
with a group of firms can help the firm in financial matters, technology
transfers, experience sharing, and in overcoming many imperfections in
product, capital, and labour markets [for a survey of this literature,
Tarzijan (1999) can be seen]. Moreover, it is believed that business
groups do not act opportunistically due to their reputation as these
groups are highly visible [Dewenter, et al. (2001)]. Thus, group
association should have a positive impact on the firm's operating
and market performance. On the other hand, a complex web of inter-group
transactions might make it difficult for analysts and investors to know
about opportunistic behaviour, thus the complexity of their intra-group
transactions increases the probability of their opportunistic
transactions. Again, if the benefits of group association and costs of
opportunistic behaviour of group firms are equal in amount, the
ownership percentage of associated companies in a firm should be
inconsequential to the value of the firm. Unfortunately, it cannot be
said in the current analysis whether the irrelevance of ownership by
blockholders and associated companies in firm performance is due to
these trade-offs or due to passive roles of these shareholders.
Among the control variables, idiosyncratic risk and market risk are
still negatively related to market performance of the firm as they were
in the mean-comparison tests in Table 3. The Capital Asset Pricing Model
(CAPM) of Lintner (1965), Black (1972) and Sharpe (1964) predict a
positive relationship between required /observed rate of return on a
stock and beta (a measure of systematic risk) of the stock. CAPM argues
that firmspecific risk (firm-specific error term in the beta regression)
is cancelled out when sufficiently large number of assets are included
in a portfolio which is why idiosyncratic risk is irrelevant. The
coefficient of systematic risk, BETA, is negative in the regression used
for an analysis. As mentioned above, CAPM predicts that higher beta
leads to a higher expected return, which is possible only when the
firm's stock price is low. In other words, beta and stock price
should be negatively related. Thus, as far as the firm's systematic
risk is concerned, the results support CAPM but are not in line with the
findings of Fama and French (1992) who found that the relationship
between beta and returns is flat. The reason one may give in support of
negative and statistically significant linkage between idiosyncratic
risk, SER, and Tobin's Q is that investors in Pakistan do not hold
diversified portfolios. Majority of the firms are owned and controlled
by families, blockholders and associated companies. The holdings of
these investors are necessarily not diversified. In the parlance of
capital market theory, idiosyncratic risk will be irrelevant only if
investors hold diversified portfolios. Negative coefficient of SER
proves the above assertion.
Firm size, which is used as a control variable in the Q and ROA
regressions, has negative impact on market performance and positive
impact on operating performance of the firm. Larger size helps a firm to
have more economies of scale, face lower information asymmetry [Petit
and Singer (1985)] and face lower chances of bankruptcy [Titman and
Wessels (1988)]. Both the market and operating performance of the firm
should be positively related to the size of the firm. One explanation
for the results might be that opportunistic managers may increase size
of a firm irrespective of whether such an increase maximises the
shareholders' wealth or not which is why larger firms are viewed
unfavourably by the market. However, the discrepancy in the results of
ROA and Q regression is not explainable.
5. CONCLUSION
The main objective of this paper was to highlight the importance of
the ownership structure and its impact on the financial and the market
based performance of the firm. These objectives are accomplished by
empirically evaluating the data of 183 nonfinancial firms listed on the
Karachi Stock Exchange for the period 2003 to 2008. The impact of the
ownership structure on firm performance is investigated in detail. The
results indicate that Tobin's Q is significantly higher in firms
where the percentage ownership of associated holdings and block holdings
is above their respective 50th percentiles. This supports the view that
associated-holdings and blockholdings reduce agency costs, and/or create
positive signalling effect. Tobin's Q is also higher in larger
firms and in firms with higher sales turnover ratios.
REFERENCES
Agrawal, A. and C. Knoeber (1996) Firm Performance and Mechanisms
to Control Agency Problems between Managers and Shareholders. The
Journal of Financial and Quantitative Analysis 31:3, 377-397.
Berger, Philip G. and E. Ofek (1995) Diversification's Effect
on Firm Value. Journal of Financial Economics 37, 39-66.
Berle, A. and G. Means (1932) The Modern Corporation and Private
Property. New York: Macmillan.
Black, F. (1972) Capital Market Equilibrium with Restricted
Borrowing. Journal of Business 45, 444-455.
Bums, N., S. Kedia, and M. Lipson (2010) Institutional Ownership
and Monitoring: Evidence from Financial Misreporting. Journal of
Corporate Finance 16, 443-455.
Buzzell, Robert D., Bradly T. Gale, and Ralph G. M. Sultan (1975)
Market Share--A Key to Profitability. Harvard Business Review 53,
97-106.
Capon, N., U. F. John, and H. Scott (1990) Determinants of
Financial Performance: A Meta-Analysis. Management Science 36:10,
Focussed Issue on the State of the Art in Theory and Method in Strategy
Research, pp. 1143-1159.
Chan, Y. S. and G. Kanatas (1985) Asymmetric Valuations and the
Role of Collateral in Loan Agreements. Journal of Money, Credit and
Banking 17:1, 84-95.
Cho, M. (1998) Ownership Structure, Investment, and the Corporate
Value: An Empirical Analysis. Journal of Financial Economics 47,
103-121.
Claessens, S., S. Djankov, J. P. H. Fan, L. H. P. Lang, and B. I.
Fomento (1999) Expropriation of Minority Shareholders: Evidence from
East Asia. World Bank.
Coffee, J. C. (1991) Liquidity versus Control: The Institutional
Investor as Corporate Monitor. Columbia Law Review, 1277-1368.
Demsetz, H. (1983) The Structure of Ownership and the Theory of the
Firm. Journal of Law and Economics 26, 375-390.
Demsetz, H. and B. Villalonga (2001) Ownership Structure and
Corporate Performance. Journal of Corporate Finance 7:3, 209-233.
Demsetz, H. and K. Lehn (1985) The Structure of Corporate
Ownership: Causes and Consequences. Journal of Political Economy 93,
1155-1177.
Dewenter, K., W. Novaes, and R. H. Pettway (2001) Visibility versus
Complexity in Business Groups: Evidence from Japanese Keiretsu. Journal
of Business 74, 79-100.
Duggal, R. and J. A. Miller (1999) Institutional Ownership and Firm
Performance: The Case of Bidder Returns. Journal of Corporate Finance 5,
103-117.
Easterbook, F. H. (1984) Two Agency-cost Explanations of Dividends.
The American Economic Review 14, 650-659.
Faccio, M. and M. A. Lasfer (2000) Do Occupational Pension Funds
Monitor Companies in which they Hold Large Stakes? Journal of Corporate
Finance 6, 71-110.
Fama, E. F. and K. R. French (1992) The Cross-Section of Expected
Stock Returns. Journal of Finance 47, 427-165.
Fama, E. F. and M. C. Jensen (1983) Separation of Ownership and
Control. Journal of
Law and Economics 26, 301-325. Gale, B. T. (1972) Market Share and
Rate of Return. Review of Economics and Statistics 54, 412-423.
Gillan, S. and L. Starks (2003) Corporate Governance, Corporate
Ownership, and the Role of Institutional Investors: A Global
Perspective. Journal of Applied Finance 13, 4-22.
Grossman, S. J. and O. D. Hart (1982) Corporate Financial Structure
and Managerial Incentives. In: J. McCall (Ed.) The Economics of
Information and Uncertainty. University of Chicago Press. 107-140.
Grossman, S. J., and O. D. Hart (1988) pne Share-one Vote and the
Market for Corporate Control. Journal of Financial Economics 20,
175-202.
Harris, M., and A. Raviv (1988) Corporate Control Contests and
Capital Structure. Journal of Financial Economics 20, 55-86.
Hermalin, B. E. and M. S. Weisbach (1991) The Effects of Board
Composition and Direct Incentives on Firm Performance. The Journal of
the Financial Management Association 20:4, 101-112.
Himmelberg, C. P., R. G. Hubbard, and D. Palia (n.d.) Understanding
the Determinants of Managerial Ownership and the Link Between Ownership
and Performance. Journal of Financial Economics 53:3, 353-384.
Holdemess, C. G., R. S. Kroszner, and D. P. Sheehan (1999) Were the
Good Old Days That Good? Changes in Managerial Stock Ownership Since the
Great Depression. Journal of Finance 54:2, 435-69.
Hsiao, C. (1986) Analysis of Panel Data. Cambridge University
Press, New York. (Econometric Society Monographs. No. 11).
James, H. (1999) Owner as Manager, Extended Horizons and the Family
Firm. International Journal of the Economics of Business 6, 41-56.
Jensen, M. C. (1986) Agency Cost of Free Cash Flow, Corporate
Finance, and Takeovers. American Economic Review 76:2.
Jensen, M. C. and W. H. Meckling (1976) Theory of the Firm:
Managerial Behaviour, Agency Costs and Ownership Structure. Journal of
Financial Economics 3, 305-360.
Jensen, M. C. and W. H. Meckling (1986) Theory of the Firm:
Managerial Behaviour, Agency Costs, and Ownership Structure. Journal of
Financial Economics 3, 305-360.
Jeon, J. Q., C. Lee, and C. M. Moffett (2011) Effects of Foreign
Ownership on Payout Policy: Evidence from Korean Market. Journal of
Financial Markets 14, 344-375.
Karpoff, J., P. Malatesta, and R. Walking (1996) Corporate
Governance and Shareholder Initiatives: Empirical Evidence. Journal of
Financial Economics 42:3, 365-395.
La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny
(2000) Agency Problems and Dividend Policies Around the World. Journal
of Finance 55, 1-33.
Leland, H. E., and D. H. Pyle (1977) Information Asymmetries,
Financial Structure and Financial Intermediation. Journal of Finance
32:2, 371-387.
Lev, B. (1988) Toward a Theory of Equitable and Efficient
Accounting Policy. The Accounting Review 63, 1-22.
Lintner, J. (1965) The Valuation of Risk Assets and the Selection
of Risky Investments in Stock Portfolios and Capital Budgets. Review of
Economics and Statistics 47:1, 13-37.
Loderer, C. and K. Martin (1997) Executive Stock Ownership and
Performance: Tracking Faint Traces. Journal of Financial Economics 45,
223-255.
Mahakud, J. and A. K. Misra (2009) Effect of Leverage and
Adjustment Costs on Corporate Performance. Journal of Management
Research 9:1, 35-42.
Maug, E. (1998) Large Shareholders as Monitors: Is There a
Trade-off between Liquidity and Control? Journal of Finance 53, 65-98.
Maury, B. (2006) Family Ownership and Firm Performance: Empirical
Evidence from Western European Corporations. Journal of Corporate
Finance 12, 321-341.
McConnell, J. J. and H. Servaes (1990) Additional Evidence on
Equity Ownership and Corporate Value. Journal of Financial Economics 27,
595-612.
Modigliani, F. and M. Miller (1958) The Cost of Capital,
Corporation Finance and the Theory of Investment. American Economic
Review 48:3, 261-297.
Morck, R., A. Shleifer, and R. Vishny (1988) Management Ownership
and Market Valuation: An Empirical Analysis. Journal of Financial
Economics 20, 293-315.
Morck, R., M. Nakamura, and A. Shivdasani (2000) Banks, Ownership
Structure, and Firm Value in Japan. Journal of Business 73:4, 539-567.
Myers, S. (1977) Determinants of Corporate Borrowing. Journal of
Financial Economics 5, 147-175.
Pettit, R. R. and R. F. Singer (1985) Small Business Finance: A
Research Agenda. Financial Management 14, 47-60.
Rozeff, M. (1982) Growth, Beta and Agency Costs as Determinants of
Dividends Payout Ratios. The Journal of Financial Research 58:3,
249-259.
Sharpe, William F. (1964) Capital Asset Prices: A Theory of Market
Equilibrium under Conditions of Risk. Journal of Finance 19:3, 425-12.
Shleifer, A. and R. Vishny (1986) Large Shareholders and Corporate
Control. Journal of Political Economy 95, 461-488.
Shleifer, A. and R. W. Vishny (1997) A Survey of Corporate
Governance. The Journal of Finance 52:2, 737-783.
Shome, D. K. and S. Singh (1995) Firm Value and External Block
Holdings. Financial Management 24:4, 3-14.
Short, H. and K. Keasy (1999) Managerial Ownership and the
Performance of Firms: Evidence form the UK. Journal of Corporate Finance
5, 79-101.
Smith, A. (1776) An Inquiry into the Nature and Causes of the
Wealth of Nations. Random House, Inc.
Sraer, D. and D. Thesmar (2007) Performance and Behaviour of Family
Firms: Evidence from the French Stock Market. Journal of the European
Economic Association 5:4, 709-751.
Stiglitz, J. E. and A. Weiss (1981) Credit Rationing in Markets
with Imperfect Information. American Economic Review 71, 393-410.
Stulz, R. (1988) Managerial Control of Voting Rights: Financing
Policies and the Market for Managerial Control. Journal of Financial
Economics 20, 25-54.
Tarzijan, J. (1999) Internal Capital Markets and Multimarket
Contact as Explanations for Conglomerates in Emerging Markets. ABANTE
2:1.
Titman, S. and R. Wessels (1988) The Determinants of Capital
Structure Choice. Journal of Finance 43, 1-19.
Villalonga, B. and R. Amit (2006) How Do Family Ownership, Control
and Management Affect Firm Value? Journal of Financial Economics 80:2,
385-417.
Wang, D. (2006) Founding Family Ownership and Earnings Quality.
Journal of Accounting Research 44:3, 619-656.
Weinstein, D. and Y. Yafeh (1998) On the Cost of a Bank-centered
Financial Systems. Journal of Finance 53, 635-672.
Wruck, K. (1989) Equity Ownership Concentration and Firm Value:
Evidence from Private Equity Financings. Journal of Financial Economics
23, 3-28.
Comments
This paper examines the impact of corporate ownership structure on
firm performance. It is well researched and covers relevant literature
except that it seems a rehash of the papers referred at the end of these
comments. These papers appeared in less known publications.
The framework developed for estimating ownership structure on firm
performance is a simultaneous equation model where in equation 1, firm
performance depends on ownership structure and in equation 2, ownership
structure depends on firm performance. The authors seem to have ignored
the simultaneous equation bias. There is no discussion of the
identification of this simultaneous equation model. A list of control
variables is given but the paper does not provide any information on the
list of instruments. Another flaw in this paper is that it discusses
panel data as a framework for analysis of various hypotheses but
presents results for OLS and 2SLS data. The authors conclude that
"associated-holdings and blockholdings reduce agency costs, and/or
create positive signalling effect". This is not proved by the model
the employ.
Nadia Tahir
Lahore Business School, University of Lahore, Lahore.
REFERENCES
Abdullah, Fahad, Attaullah Shah, Abdullah Muhammad Iqbal, and
Raheel Gohar (2011) Investors' Power and the Dividend Cost
Minimization Model: Which One Better Explains the Dividend Policy in
Pakistan? African Journal of Business Management 5:24, 10747-10759.
Shah, Syed Zulfiqar Ali, Wasim Ullah, and Baqir Hasnain (2011)
Impact of Ownership Structure on Dividend Policy of Firm (Evidence From
Pakistan) International Conference on E-business, Management and
Economics 3, Hong Kong.
Ahmed, Hafeez and Attiya Javid (2009) Dynamics and Determinants of
Dividend Policy in Pakistan (Evidence from Karachi Stock Exchange
Non-Financial Listed Firms) International Research Journal of Finance
and Economics Euro Journals Publishing, Inc.
Fahad Abdullah <fahad.abdullah@imsciences.edu.pk> is
Assistant Professor, Institute of Management Sciences, Peshawar.
Attaullah Shah <attaullah.shah@imsciences.edu.pk> is Assistant
Professor, Institute of Management Sciences, Peshawar. Safi Ullah Khan
<safiullah75@yahoo.com> is Assistant Professor, Kohat University
of Sciences and Technology, Kohat.
Table 1
Names, Measurement and Symbols of Variables Used in this Study
Variable Symbol Measurement
Directors' ownership DIRC Shares owned by directors /
total shares
Institutional shareholders' INST Shares owned by financial
ownership institutions / total shares
Associate companies ASSO Shares owned by associate
ownership companies / total shares
Blockholders ownership BLOC Shares owned by 5 largest
blockholders / total shares
Individual shareholders' IND Shares owned by individuals/
ownership total shares
Dividend payout ratio DVD Dividend paid / net income
Tobin's Q Q (book value of debt + market
value of equity) / book value
of assets
Return on Assets ROA Net income / total assets
Firm Size SIZE Natural log of total assets
Growth rate GROW Geometric mean of annual
percentage increase in assets
Firm's systematic risk BETA Ratio of covariance between
stock returns and market
returns to the variance of
market returns
Firm's idiosyncratic risk SER firm-specific error term in
the beta regression
Sales turnover ratio ST Gross sales / total assets
Financial leverage LEV Total debts / total assets
Fixed assets ratio TANG Net fixed assets / total
assets
Financial performance FP A general term used for both
ROA and Q
Operational risk CV Coefficient of variation of
net income
Table 2
Matrix of Correlation among the Variables
Q DIRC INST GROW LEV TANG ROA SER
Q 1.00
DIRC -0.21 1.00
INST 0.08 -0.36 1.00
GROW 0.15 -0.03 0.04 1.00
LEV -0.11 0.09 -0.09 0.05 1.00
TANG -0.11 0.18 -0.05 -0.15 0.07 1.00
ROA 0.53 -0.21 0.14 0.25 -0.33 -0.28 1.00
SER -0.31 0.18 -0.24 -0.17 0.09 0.16 -0.35 1.00
BETA 0.03 -0.16 0.16 0.07 -0.03 0.12 0.07 -0.23
ST 0.25 -0.15 0.09 0.08 0.02 -0.30 0.36 -0.22
SIZE 0.13 -0.29 0.25 0.12 0.17 -0.01 0.16 -0.34
BETA ST SIZE
Q
DIRC
INST
GROW
LEV
TANG
ROA
SER
BETA 1.00
ST -0.05 1.00
SIZE 0.26 0.05 1.00
Table 3
Tobin's Q by 50th Percentile of Firms ' Variables
Below 50th Above 50th
Variables Percentile Percentile Difference T-Value
DIRC 1.967 1.151 -0.816 -4.959
INST 1.874 1.287 -0.588 -3.545
BLOC 1.145 1.986 0.841 5.120
ASSO 1.153 1.991 0.838 5.101
GROW 1.774 1.350 -0.424 -2.567
LEV 1.589 1.545 -0.045 -0.268
TANG 1.222 1.073 -0.149 -3.846
ROA 0.915 1.377 0.462 12.985
SER 1.823 1.315 -0.508 -3.059
BETA 1.894 1.242 -0.652 -3.916
ST 1.027 1.268 0.241 6.313
SIZE 1.076 1.218 0.142 3.655
Table: 4
ROA by 50th Percentile of Finns' Variables
Below 50th Above 50th
Variables Percentile Percentile Difference T-Value
DIRC 0.125 0.070 -0.055 * -7.521
INST 0.091 0.105 0.014 1.857
BLOC 0.085 0.111 0.027 * 3.609
ASSO 0.071 0.124 0.053 * 7.307
GROW 0.081 0.114 0.033 * 4.394
LEV 0.130 0.066 -0.064 * -8.876
TANG 0.116 0.072 -0.044 * -6.030
Q 0,049 0.140 0.091 * 13.48
SER 0.126 0.071 -0.055 * -7.546
BETA 0.110 0.086 -0.023 * -3.117
ST 0.056 0.133 0.077 * 11.070
SIZE 0.0797 0.109 0.029 * 3.975
Table 5
OLS and 2SLS Regressions for Q
Q
OLS 2SLS
DIRC -0.369(0.079) * -4.664(1.779) *
INST -0.165(0.12) -2.033(0.811) **
GROW 0.489(0.159) * 0.765(0.357) **
LEV -0.232(0.093) ** 0.222(0.272)
TANG -0.015(0.056) 0.549(0.261) **
SER -5.795(0.765) * -6.414(1.642) *
BETA -0.055(0.03) *** -0.204(0.088) **
SIZE 0.008(0.014) -0.151(0.072) **
Constant 1.545(0.129) * 3.566(0.877) *
F-Statistics 17.22 4.08
P-value(F-Statistics) 0.00 0.00
[R.sup.2] 0.14 0.13
Adj.[R.sup.2] 0.1323 0.1298
Table 6
OLS and 2SLS Regressions for ROA
ROA
OLS 2SLS
DIRC -0.008(0.013) 0.163(0.153)
INST 0.022(0.019) 0.083(0.058)
ST 0.058(0.004) * 0.062(0.005) *
GROW 0.13(0.027) * 0.082(0.049) ***
LEV -0.161(0.015) * -0.16(0.016) *
SIZE 0.019(0.002) * 0.026(0.007) *
Intercept -0.062(0.022) * -0.19(0.12)
F-Statistics 31.31 25.98
P-value(F-Statistics) 0
[R.sup.2] 0.53 0.441
Adj.[R.sup.2] 0.51 0.4203
Table 7
OLS and 2SLS Regressions for Q
Blockholders
OLS 2SLS
DIRC -0.285(0.075) * -4.048(1.548) *
BLOC/ASSO 0.427(0.079) * -0.084(0.262)
GROW 0.453(0.157) * 0.751(0.336) **
LEV -0.224(0.091) ** 0.306(0.283)
TANG -0.033(0.055) 0.495(0.242) **
SER -5.937(0.748) * -4.726(1.571) *
BETA -0.034(0.03) -0.222(0.097) **
SIZE 0.003(0.013) -0.165(0.073) **
Constant 1.299(0.13) * 3.074(0.771) *
F-Statistics 21.16 5.73
P-value(F-Statistics) 0 0
[R.sup.2] 0.1672
Adj.[R.sup.2] 0.1593
Associated Companies
OLS 2SLS
DIRC -0.046(0.095) 11.219(11.034)
BLOC/ASSO 0.426(0.085) * 6.674(6.126)
GROW 0.518(0.157) * 0.459(0.664)
LEV -0.167(0.092) *** -0.361(0.432)
TANG -0.008(0.055) -0.837(0.844)
SER -5.661(0.748) * -7.364(3.561) **
BETA -0.03(0.03) 0.663(0.691)
SIZE -0.007(0.014) 0.123(0.14)
Constant 1.357(0.128) * -3.745(5.024)
F-Statistics 20.56 1.29
P-value(F-Statistics) 0 0.24
[R.sup.2] 0.1633
Adj.[R.sup.2] 0.1553
Table 8
OLS and 2SLS Regressions for ROA
Blockholders
OLS 2SLS
DIRC -0.011(0.012) 0.127(0.132)
ST 0.057(0.004) * 0.059(0.005) *
GROW 0.13(0.027) * 0.091(0.045) **
LEV -0.163(0 015) * -0.166(0.016) *
SIZE 0.019(0.002) * 0.026(0.007) *
BLOC 0.004(0.013) 0.009(0.014)
Intercept -0.06(0.023) * 0.16(. 102)
F-Statistics 31.2 27.1
P-value(F-Statistics) 0.00 .00
[R.sup.2] 0.53 0.46
Adj.[R.sup.2] 0.51 0.44
Associated Companies
OLS 2SLS
DIRC -0.028(0.015) *** 0.055(0.087)
ST 0.059(0.004) * 0.057(0.005) *
GROW 0.125(0.027) * 0.116(0.028) *
LEV -0.165(0.015) * -0.163(0.015) *
SIZE 0.02(0.002) * 0.022(0.003) *
BLOC -0.028(0.014) ** 0.015(0.048)
Intercept -04(.02) * -04(.06) ***
F-Statistics 31.01 30.01
P-value(F-Statistics) .00 .00
[R.sup.2] 0.53 0.52
Adj.[R.sup.2] 0.51 0.5
