Regional dynamics of ownership structure and their impact on firm performance and firm valuation

Abstract

PurposeThe purpose of this paper is to analyse the impact of ownership structure on firm valuation and performance across different geographical regions within mainland China.Design/methodology/approachThe authors classify China in six geographical regions and use cross-sectional data of companies with A-shares listed on domestic stock exchanges in China for the year-end 2015. Using data from CSMAR and Wind database, they use multivariate regression technique and analytically compare the consistency of relationship between operational variables of ownership structure with corporate performance and evaluation.FindingsThe authors find that institutional ownership and state ownership negatively affect market valuation throughout various geographical regions of China. Further, in East, Northwest, South Central and Southwestern parts of China, managerial ownership and concentration of shareholding among top ten shareholders positively influence return on equity (ROE). Interestingly, institutional shareholding negatively affects return on assets (ROA), while institutional ownership has a neutral effect on profitability margin in Northeast China. Although in northern part of China, this relationship is slightly positive. In East China region, state ownership and ownership concentration are directly proportional to profitability margin.Practical implicationsAs some of the findings exhibit weak state of market efficiency in some regions, the study may also be useful in identifying arbitrage opportunities across different regions. Moreover, this study suggests that regions with the same business environment and conditions anywhere around the globe invite same or similar ownership structure for better firm performance and valuation.Originality/valueThe study provides unique understanding of relationship between ownership structure, market valuation and firm performance in various parts of China and will be an addition to the relevant literature. Given a change in company’s ownership structure and considering its region of incorporation, this study will help investment analysts in assessing performance and market valuation of the firm. It will also assist several classes of investors, financial institutions and international businesses in making their investment decisions.