Abstract
This study aims to investigate the relationship between the ownership structure and firm performance. The study uses two performance measures i.e. market-based performance measure (Tobin’s Q) and accounting-based performance measure (return on assets (ROA)) as dependent variables and ownership proxies and other control variables as independent variables whereas leverage is used as moderating variable. The ownership proxies include the managerial ownership and institutional ownership while the control variables include the size of the firm, the coefficient of variation, and growth. This study has used simple regression analysis while using data of 355 firms listed on Karachi Stock Exchange (KSE) for the years 2003 to 2008. The results show that the ownership structure has significant relationship with the market-based performance measure, while it has insignificant relationship with the accounting-based performance measure. Moreover, the leverage has no moderating effect on the relationship between ownership structure and firm performance
Highlights
The study uses two performance measures i.e. market based performance measure, the Tobin’s Q and the accounting-based performance measure, the return on assets (ROA), both as the dependent variables and the independent variables include the ownership proxies and other control variables, whereas leverage is used as moderating variable
The ownership proxies include the managerial ownership and institutional ownership while the control variables include the size of the firm, the coefficient of variation of net income, and growth
The ownership proxies include the managerial ownership and institutional ownership while the control variables include the size of the firm, the coefficient of variation, and growth
Summary
This section covers in brief the discussion on both the theoretical foundation and empirical evidences of the relationship between the ownership structure and firm performance and the moderating role of debt on this relationship. The managerial entrenchment or opportunism can be reduced by external block-holders which will result in low agency conflicts that exists directly between the inside managers and the stockholders (Shleifer and Vishny, 1986) In this case the large external block holders will prefer high debt ratios below the bankruptcy point as these higher debt ratios can serve as monitoring tool. In order to reduce this problem of asymmetrical information the companies favor to finance company’s operations through internal sources that is retained earnings at the first instance which is at the same time least costly, they prefer to use debt and as a last choice they use equity financing, which is considered as the most costly one This theory claims a negative relationship between the capital structure of the firm and firm performance. The results reported by Amjed (2011) are different to other investigations on capital structure which shows a significant but negative relationship between the company’s performance and the leverage
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