CHAPTER 8 CONCLUSIONS, IMPLICATIONS AND LIMITATIONS . 239
2.3 C ORPORATE GOVERNANCE STRUCTURES AND FIRM FINANCIAL PERFORMANCE 26
2.3.2 Ownership structure and firm financial performance
As suggested by agency theory, ownership concentration is a key corporate governance mechanism that helps to limit agency problems arising from the separation of ownership and control (Shleifer & Vishny, 1986). The central premise of arguments regarding the ownership concentration–performance relationship is the potential trade-off between the monitoring effect and expropriation effect of concentrated ownership (Filatotchev et al., 2013).
Accordingly, predictions of the positive performance effect of ownership concentration are based on its effective monitoring effect. Owning a large proportion of shares, controlling shareholders have strong incentives to actively monitor and real power to discipline and/or influence management (Shleifer &
Vishny, 1986). This helps to mitigate the agency problems which, in turn, leads to improved performance (Jensen & Meckling, 1976). In markets where external corporate governance mechanisms are under-developed, the monitoring effect of ownership concentration is even more important (Filatotchev et al., 2013). This is because in the absence of external managerial discipline, shareholders are forced to actively involve themselves in monitoring management, which can only be effective if ownership is concentrated (Heugens et al., 2009).
In contrast, predictions of the negative performance effect of ownership concentration are based on its expropriation effect. As argued by La Porta, Lopez- de-Silanes, and Shleifer (1999), the nature of agency problems varies significantly between firms with and without large shareholders. In the presence of highly concentrated ownership, the agency problem is likely to shift from traditional principal–agent conflict to principal–principal conflicts (Bebchuk & Weisbach,
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2010; Young et al., 2008). In other words, ownership concentration may increase the conflicts of interest between controlling shareholders and minority shareholders (Filatotchev et al., 2013).
Empirically, it has long been voiced by Demsetz (1983) that ownership structure is endogenously determined by the profit-maximisation process of shareholders as well as observable and unobservable firm characteristics. As a consequence, variations in ownership structure should not be systematically related to variations in firm performance (Demsetz & Villalonga, 2001). A number of empirical studies have emphasised and/or confirmed this endogenous relationship (e.g., Demsetz & Villalonga, 2001; Himmelberg, Hubbard, & Palia, 1999; Lemmon &
Lins, 2003)
However, another source of endogeneity, namely dynamic endogeneity, has been recently recognised in the ownership structure–firm performance relationship (Yabei & Izumida, 2008) as well as in the corporate governance–firm performance relationship in general (Wintoki et al., 2012). The dynamic nature of the corporate governance structures–firm performance relationship means that the current corporate governance structure and firm performance are influenced by past performance (Wintoki et al., 2012).
In particular, the dynamic nature of the ownership structure–firm performance relationship can be explained in two ways. If returns on stocks are the concern of large shareholders, they are more likely to concentrate their ownership in companies that have performed well to obtain more control over these companies or to take advantage of extra profit in the future given the persistence of profit (Yabei & Izumida, 2008). This implies a positive impact of past performance
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upon ownership concentration. In a similar vein, if a company performs poorly and large shareholders think that their company is over-priced and their ownership is at risk, they may reduce the size of their concentrated ownership (at high prices) to achieve more diverse personal portfolios (Yabei & Izumida, 2008). In this situation, a negative impact of past performance on ownership concentration is expected. As mentioned later in Subsection 4.3.1 of Chapter 4, the dynamic nature of the corporate governance–firm performance relationship has significant implications for choosing a suitable empirical approach.
Prior empirical studies on the ownership concentration–firm performance relationship for Asian markets have provided inconclusive findings. For example, some studies have reported a positive relationship (Xu & Wang, 1999), while others have found the relationship to be either negative (Hu, Tam, & Tan, 2010) or mixed (Haniffa & Hudaib, 2006). It should be noted that although these studies have taken other sources of endogeneity into consideration, they have ignored the dynamic endogeneity.
However, recent empirical studies in the Australasian region, which take into account the dynamic endogeneity, have also reported inconclusive results. Some studies have reported that the relationship is insignificant for the Australian market (Pham et al., 2011; Schultz et al., 2010), but significant for the Japanese market (Yabei & Izumida, 2008). Based on the conflicted predictions of agency theory and the above-mentioned arguments, this study proposes a significant linkage between ownership concentration and performance but does not establish any direction for this relationship. The fifth pair of hypotheses in this thesis is proposed as follows:
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HVN5: Ownership concentration has a significant effect on financial performance of Vietnamese listed companies.
HSG5: Ownership concentration has a significant effect on financial performance of Singaporean listed companies.