Ownership Concentration and Agency Crises in Indian Manufacturing Firms

Abstract

The study attempts to examine the dubious role of majority shareholders in internal governance in the form of moderating agency problems in Indian manufacturing firms. It uses a set of strongly balanced panel data of 91 manufacturing firms of the BSE 200 index of India from 2011–2018 and adopts panel data regression analysis to establish the relationship among the variables. The study measures ownership concentration through the Herfindahl–Hirschman Index (HHI), vertical agency crisis through assets utilization efficiency (AUE) and general and administrative expenses (G&AE) and horizontal agency crisis through return on equity (ROE). The majority owners are found neither to enhance the operating efficiency nor to minimize excessive discretionary expenses of the management. Besides, a negative impact of ownership concentration on return on equity is evidenced, which indicates increased horizontal agency crisis as a consequence of increased ownership concentration. Given the dominance of majority shareholders in the Indian manufacturing sector, it would be worthwhile for corporate policymakers to know whether these large owners act as an internal disciplinary mechanism to the management or squeeze the minority shareholders’ interest through expropriation. Finally, the study suggests stricter external regulatory and institutional specificities as an alternative mechanism to ensure better corporate governance and protection of minority shareholders’ interest.