THE EFFECTS OF OWNERSHIP CONCENTRATION ON PERFORMANCE OF PAKISTANI LISTED COMPANIES

Nouman Afgan,Klaus Gugler,Robert Kunst

doi:10.12955/cbup.v4.764

Nouman Afgan, Klaus Gugler + Show 1 more

Open Access

https://doi.org/10.12955/cbup.v4.764

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Abstract

This paper analyzes the effects of ownership concentration on investment performance in a large sample of Pakistani publicly-listed companies from 1997 to 2007. Special attention is directed to statistical methods from the field of panel-data econometrics, which are able to deal with endogeneity problems and with structural reverse causality. The preferred estimator that is based on firm fixed effects insinuates that the voting rights of ultimate shareholders affect Tobin’s q unambiguously negatively, whereas the squared voting rights affect it unambiguously positively. This implies a U-curved relationship between Tobin’s q and voting rights concentration with a turning point at 45%. More than 75% of the companies fall in the upward sloping part of the curve. While positive incentive effects are at work in Pakistan, financial market development is retarded by the reluctance of minority shareholders facing dominant shareholders to hold small stakes in listed companies. Consistently, institutional shareholders do not yet provide a positive monitoring role in Pakistan.

Highlights

The analysis of the effects of ownership concentration on investment performance is an important strand of the literature on corporate governance since the pioneering work of Morck, Shleifer, and Vishny (1988)
Department of Economics, University of Vienna, Austria, robert.kunst@univie.ac.at, we describe the sources of information, and report the descriptive statistics of variables used in the analysis
Firm fixed effects are preferred to pooled ordinary least squares. This is the first paper on a South Asian developing country that uses panel data modelling for estimating the effects of ownership concentration on investment performance, thereby addressing the endogeneity problem of reverse causality

Summary

Introduction

The analysis of the effects of ownership concentration on investment performance is an important strand of the literature on corporate governance since the pioneering work of Morck, Shleifer, and Vishny (1988). In a sample of large U.S companies, they found that Tobin’s q displays a Z-shaped non-monotonic reaction to managerial shareholdings: a positive relation holds up to 5%; between 5% and 25%, a negative relation dominates; thereafter, a positive relation takes over once more. They interpreted the positive part of the relation as being consistent with incentives becoming more and more aligned between outside shareholders and managers, i.e. managerial shareholdings overcome the problem of the separation of ownership and control.

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