Concentrated Ownership Structure Research Articles

Legal Analysis of Related Party Transactions in the BRICS Countries

Legal literature in the past has often debated whether concentrated corporate ownership (i.e. sizeable corporate conglomerates and corporate enterprises owned by business families or the government of a State) in a relatively close market leads to a high volume of related party transactions between the corporations in the respective market. The emerging economies attract substantial foreign investment due to the rapid growth of their markets and the presence of large publicly listed companies. Concentrated ownership structures in these countries tend to result in the expropriation of resources by controlling shareholders for their personal enrichment. There has been a high corporate failure rate due to related party transactions, despite the adoption of regulatory reforms that promote transparency, accountability, and fairness. Listed companies in the BRICS countries are marked by concentrated ownership structures controlled by either a family or the State. Although there are differences in ownership structures as well as indications of agency problems in the United States and the United Kingdom, the BRICS countries have adopted the same legal strategies to prevent unfair or abusive related party transactions in their respective countries, such as the appointment of independent directors, independent audit committees, CEO duality, and disclosure requirements. This study seeks to conduct cross-country comparative research to assess the ways in which the BRICS countries have regulated related party transactions. Each of the BRICS countries has adopted different monitoring mechanisms to prevent abusive related party transactions, which will be examined in the course of this research.

The role of multiple directorships in minimizing idiosyncratic risk due to the presence of large shareholders: Evidence from Indonesian companies

This study aims to evaluate the role of multiple directorships in the relationship between large shareholders and idiosyncratic risk in Indonesian companies for 2017-2021. The study model included dynamic panel data for estimation and a two-step GMM system to address endogeneity issues. Multiple directorships and long-term shareholders have low-frequency data whereas idiosyncratic risk is associated with high-frequency data. The robustness test employed the Fama-Frenchhee factor model while the single factor model was used to evaluate idiosyncratic risk. Indonesia adheres to a two-tier system that separates the roles and functions of the board of directors and the board of commissioners. Furthermore, the concentrated ownership structure of Indonesian companies can cause agency problems between large and small shareholders. The study results show that large shareholders can strengthen the relationships of busy directors to reduce idiosyncratic risk. As a result, this research recommends increasing the role of multiple directorships in monitoring and predicting business conditions internally and externally to minimize interference from large shareholders which can cause expropriation due to agency problems.

Exacerbate or alleviate? Impact of controlling shareholders' share pledging on over-investment

This paper investigates the relationship between controlling shareholders' share pledging and firm level over-investment. Utilizing Chinese A-share market data spanning 2007–2020, we find that firms with share pledging by controlling shareholders are more prone to over-invest, and the over-investment degree becomes severer as the pledging percentage increases. In addition, we observe this effect more pronounced in firms characterized by more concentrated ownership structure. Our findings still hold after the endogeneity disposal with a firm-fixed effect regression, Heckman two-stage regression with instrumental variables, the propensity score matching (PSM) and differences-in-differences (DID) approach. Furthermore, we observe that firms with controlling shareholders' share pledging tend to be concerned more with additional investments while neglecting maintenance investments and R&D investments. Combined with the motivation of controlling shareholders to gain substitute cash flow rights and convey good signals to the market, as well as the feasibility by using their dominate voting rights and pledged funds, it properly illustrates the mechanism through which controlling shareholders' share pledging impact over-investment, which meanwhile aggravates the principal-principal (PP) conflicts between controlling shareholders and minority shareholders. Consequently, our findings empirically demonstrate that signaling costs in signaling theory could be explicit conflicts in the agency theory, adding new empirical evidence for the relationship between signaling theory and agency theory.

Are family firms green?

AbstractThis study examines environmental management practices of 1690 family and nonfamily firms from 29 countries and 19 industrial sectors over an 8-year period. We show that the family effect on firm environmental management practices ranges substantially, from extremely negative to no effect at all. Moreover, the magnitude of the effect depends on the type of firm, the industrial context, the type of economy, and the stages of the business cycle. This study offers a novel understanding of the extreme heterogeneity of environmental management practices of family businesses and serves as a springboard for future research aiming to better understand the environmental strategies of publicly traded firms with concentrated ownership structures. It also provides important and novel evidence for policymakers, investors, and business owners, particularly for firms with different ownership and management structures.

The Effect of Institutional Share Ownership, Ownership Structure, and Corporate Social Responsibility on Environmental Sustainability in Energy Companies in Indonesia

This research investigates the complex interplay between institutional share ownership, ownership structure, corporate social responsibility (CSR), and environmental sustainability in the context of Indonesian energy companies. A quantitative analysis utilizing structural equation modeling was employed to analyze data from a sample of 150 energy firms. The results reveal significant positive relationships: higher levels of CSR, increased institutional share ownership, and a more concentrated ownership structure are associated with improved environmental sustainability practices. These findings contribute to the understanding of the factors shaping environmental responsibility in the Indonesian energy sector, offering practical insights for companies and policymakers.

A Study of Controlling Shareholds' Tunneling Behavior

Since the establishment of the Shanghai Stock Exchange and the Shenzhen Stock Exchange in the 1990s, China's capital market has emerged. Over the years, the domestic capital market has achieved certain results, but negative phenomena have gradually emerged, and the problem of tunneling is one of the representative issues. A concentrated ownership structure is prone to breed tunneling behavior, which results in a decrease in company value, damage to the interests of minority shareholders, and a reduction in market efficiency. This paper, through the study of relevant literature, summarized the behaviors of controlling shareholders' asset-stripping companies that harmed people's interests, listed different methods used by controlling shareholders for asset stripping, explored the causes of controlling shareholders' asset-stripping behavior, and examined the consequences of controlling shareholders' asset stripping methods.

Board characteristics and takaful performance: the moderating role of ownership concentration

Purpose The purpose of this study is to examine the impact of board characteristics (board size, board independence and duality) on the performance of takaful insurance providers with distinguishable muamalah contracts (wakalah and hybrid) moderated by ownership concentration. Design/methodology/approach The sample consists of 30 takaful insurances. The authors divided it into two subsamples: 18 insurance companies using wakalah contracts provided by Southeast Asia and 12 insurance companies using hybrid contracts provided by the Gulf Cooperation Council over the period 2010–2020. For data analysis, the authors used the partial least squares path modeling method. Findings The results show that the larger the board of directors and the higher the number of independent directors, the greater the takaful performance in both the wakalah and hybrid subsamples. Nondual functions improve the takaful performance in both the wakalah and hybrid subsamples. The results also reveal that a highly concentrated ownership structure positively (negatively) moderates the relationship between board size and takaful performance in the wakalah (hybrid) subsamples. Moreover, highly concentrated ownership insignificantly (negatively) moderates the relationship between independent directors and takaful’s performance in the hybrid (wakalah) subsample. Furthermore, a highly concentrated ownership structure insignificantly (negatively) moderates the relationship between the nondual structure and takaful performance in the wakalah (hybrid) subsample. Originality/value This study contributes to the understanding of the moderating role of a highly concentrated ownership structure between the characteristics of the board of directors and the performance of takaful insurance, which applies wakalah and hybrid contracts. In addition, this study contributes to takaful insurance by determining the appropriate board characteristics that must be adopted to achieve oversight and improve performance. Regulators should appreciate this contribution to the formulation of suitable approaches for efficiently supervising takaful insurance activities.

The effect of ownership concentration on firm risk and value: evidence from Germany

Aim: This paper aims to understand the effects of between ownership concentration on firm risk and value.
 Design / Research methods: The author focuses on the largest publicly listed 91 German corporations in the time period 2010 to 2021. The resulting sample contains between 928 and 1051 observations and is analysed through a pooled OLS regression analysis. Ownership concentration is measured in terms of the number of blockholders, the size of the largest shareholder, and the Herfindahl Index of the ten largest shareholders. Firm value is captured with Tobin’s Q and firm risk is computed as the annualised daily stock price volatility.
 Conclusions / Findings: It is found that ownership concentration affects firm risk significantly negatively. Moreover, results suggest an inverse U-shape relationship between ownership concentration and firm value. This relationship can be explained by combining the negative effects of rising ownership concentration on firm risk with its implications for the creation of firm value.
 Originality / Value of the article: The German market has used to have a network-like structure with a concentrated ownership structure. However, over the past two decades, it transformed towards a more Anglo-Saxon-like and market-based structure with a rather dispersed ownership structure. Furthermore, factors which govern the relationship between ownership concentration are used to explain parts of the relationship between firm value and ownership concentration in a new way, thereby adding value to understanding the latter, highly debated, relationship.

The Impact of Corporate Governance Structure on the Financial Risk

This paper first introduces the research background of financial risks and corporate governance structure, using a sample of A-share companies listed in Shanghai and Shenzhen Stock Exchange from 2016 to 2018. It applies Z-score to measure financial risks and finds some quantitative methods to measure the factors in the corporate governance structure. This paper uses multiple linear regression model to analyze the correlation between financial risks and the corporate governance structure. The results show that ownership concentration, executive shareholding percentage and executive compensation have the most significant influence on financial risks and all of them are negatively correlated with financial risks. Therefore, we recommend companies to improve the non-executive director mechanism of listed companies, to maintain a relatively concentrated ownership structure, and to take effective incentive mechanism for executives. These recommendations can help companies better manage financial risks.

Does social trust mitigate insiders' opportunistic behaviors? Evidence from insider trading

Does social trust restrain or exacerbate the opportunistic behaviors of corporate insiders? On the one hand, insiders susceptible to a high-trust environment will be less opportunistic; on the other hand, unethical insiders may exploit high-trust people to engage in more opportunistic behaviors. This paper tests the two competing hypotheses by investigating how trust surrounding corporate headquarters affects insider trading profitability, assuming that opportunistically informed trades have higher trading profits. We show that social trust negatively affects insiders' trading gains. This relationship holds after instrumental variable regressions and a difference-in-difference framework. Additionally, the role of trust is more prominent when insiders face more trading opportunities from information asymmetry, weak monitoring, and concentrated ownership structure; however, the impact of trust attenuates when formal regulations are in place. We also examine the indirect channels, including cautious financial reporting, informative disclosure, and active communications with investors through which social trust can deter informed trading. Our findings suggest that social trust can discourage opportunistic proclivity and spur more ethical deeds among managers.

Institutional Ownership and Integrated Reporting in the Digital Age: A Conceptual Exploration of Firm Performance in Malaysia

This concept paper explores the potential moderating role of institutional ownership on the relationship between Integrated Reporting (IR) adoption and firm performance within the context of the digital business era, specifically in Malaysia. Drawing on stakeholder theory and agency theory, the paper highlights the dual role institutional investors can play in shaping a firm's adoption of IR and its subsequent effect on performance. Through a comprehensive review of the existing literature, the paper unravels the unique challenges and opportunities that arise when adopting IR in the digital business landscape, particularly in developing nations with concentrated ownership structures. The study emphasizes the importance of nuanced understanding to promote corporate transparency and sustainable value creation. It aims to guide future research endeavors, informing policymaking and business practices to optimize the benefits of IR in the digital era. The conceptual framework and discussions put forth in this paper are intended to contribute to the broader academic discourse on the evolution of IR practices in the digital business era.

Delisting regulation and corporate financialization: Evidence from China

We investigate the impact of the implementation of new delisting regulations in China in 2020 on corporate financialization, utilizing data of non-financial listed companies in Chinese A-share market from 2018 to 2022. We find a reduction in corporate financialization after the new delisting regulation, and the decline can be attributed partly to a more constrained free cash flow and reduced managerial myopia. The decrease in financialization is more pronounced among non-SOEs, companies with management shareholding, concentrated ownership structure, and less external attention. After the new delisting regulation, the operational performance of companies’ core business is also improved, and more long-term assets are allocated, indicating a positive effect of the new delisting regulation on real economy.

Dividend Policy and Ownership Concentration: An Empirical Analysis of the Non-Financial Sector of Pakistan

A concentrated ownership structure is likely to raise the agency problem between large and minority shareholders. This situation allows dividends to work as a tool to fix agency problems. The underlying objective of this study is to check the relationship of ownership concentration with dividend payouts based on the agency theory. The study used data from 56 non-financial firms listed at the Pakistan Stock Exchange (PSX) for nine years from FY2011 to FY2019. The dependent variable is the dividend payout ratio, while ownership concentration as proxied by institutional shareholders and foreign shareholders is the independent variable. Profitability ratio, liquidity ratio, and firm size are the control variables. The Hausman test suggested using the fixed-effect model with Driscoll-Kraay standard error. The findings confirm a positive association between ownership concentration and dividend payout. Institutional and foreign shareholders also posit a strong positive association with the dividend payout ratio. Ownership concentration was found to be significantly affecting Pakistan's non-financial sector regardless of the identity of the concentrated owner. This means that concentration contributes positively to dividend policy to mitigate agency problems. Despite this positive association, it also favors the assumption that large shareholders can influence management, and the impact could be vice versa. It is recommended that businesses with concentrated ownership structures should leverage dividends strategically to address agency problems.

Multiple Blockholders, Audit Committee’s Power and Earnings Management: Evidence from Indonesia

Objective – The purpose of this study is to empirically analyze the impact of the power status of audit committees and multiple blockholders on accrual earnings management. Methodology – This study applied a quantitative research method with secondary data from the annual report. In this research, manufacturing companies were used as samples listed on the Indonesia Stock Exchange with a total of 4 years ranging from the period of 2018 – 2021. This research used multiple regression with fixed effect driscoll-kraay standard error. Findings – It is revealed that multiple blockholders have a positive impact on accrual and real earnings management, while the power status of the audit committee has no impact on accrual and real earnings management. It can be implied that in Indonesia, multiple blockholders play a significant role in increasing earnings management, and audit committees’ power cannot reduce earnings management in the presence of multiple blockholders. Novelty – Previous literature argues that the power of audit committees should be bigger than management to control earnings management. However, in the context of Indonesia, where a concentrated ownership structure is prevalent, multiple blockholders can play a significant role in earnings management. This study is the first to analyze the negative effect of multiple blockholders in the country, which is dominant with a concentrated ownership structure. If multiple blockholders enjoy the private benefits of control through earnings management, the audit committee’s power over management would be useless. Type of Paper: Empirical JEL Classification: C33, D22, G34 Keywords: Earnings Management; power status of audit committee; multiple blockholder; monitoring; ownership. Reference to this paper should be made as follows: Rudyanto, A.; Hidagusti, R.R. (2023). Multiple Blockholders, Audit Committee’s Power and Earnings Management: Evidence from Indonesia, J. Fin. Bank. Review, 8(2), 105 – 115. https://doi.org/10.35609/jfbr.2023.8.2(3)

Does Multiple Blockholder Prevent Audit Committee's Power to Restrain Earnings Management? Evidence from Indonesia

Previous literature argues that the power of audit committee should be bigger than management to control earnings management. However, in the context of Indonesia where concentrated ownership structure is prevalent, multiple blockholders can play significant role in earnings management. If multiple blockholders enjoy the private benefits of control through earnings management, the audit committee's power over management would be useless. The purpose of this study is to analyze the impact of power status of audit committees and multiple blockholders on accrual earnings management. In this research, manufacturing companies were used as samples listed on the Indonesia Stock Exchange with a total 4 years ranging from the period of 2018 – 2021. This research used multiple regression with fixed effect driscoll-kraay standard error. The result of this research shows that multiple blockholder has a positive impact on accrual earnings management while power status of audit committee has no impact on accrual and real earnings management. It can be implied that in Indonesia, multiple blockholders play significant role in increasing earnings management and audit committees' power cannot reduce earnings management in the presence of multiple blockholders. Keywords: Earnings Management; power status of audit committee; multiple blockholder; monitoring; ownership.

A better start: board diversity matters in assessing stock price crash risk

PurposeThe determinants that contribute to reducing stock price crash risk have garnered attention from scholars and practitioners. However, our understanding of the relationship between board diversity and stock crash risk, as well as the contextual factors that influence this relationship, remains limited. To address this gap, this study aims to investigate how different attributes of board diversity affect stock price crash risk, particularly under conditions of higher performance hazard and ownership concentration.Design/methodology/approachUsing a two-stage least squares fixed-effects estimator, the authors analyze a panel data set of 1,792 firm-year observations across 282 firms listed on the KOSPI200 from 2010 to 2019.FindingsRelation-oriented diversity reduces future stock price crash risk, particularly when firms experience performance shortfalls and have concentrated ownership structures, but task-oriented diversity has no significant effects. The results imply that only relation-oriented diversity strengthens governance mechanisms by curtailing managerial bad news withholding behaviors, and the role of relation-oriented diversity in reducing stock crash risk becomes more crucial when firms have higher performance hazard and concentrated ownership.Originality/valueThis study makes crucial contributions as follows: the authors contribute to the stock crash risk literature by shifting the focus from how to when board diversity matters in assessing stock crash risk; the authors extend the board diversity research and enhance scholarly understanding of the effects of board diversity on corporate governance by highlighting that not all aspects of board diversity improve firm governance mechanisms; and the authors widen the lens from a single attribute to multiple attributes of diversity to reveal the effects of diversity on boards in assessing future crash risk.

Career concerns and earnings management in government‐owned banks

AbstractWe examine how government ownership in banks affects earnings management to determine whether competing political or agency interests prevail. Using bank ownership data for 171 Chinese commercial banks from 2006 to 2018, we find more accruals management in government‐owned banks, especially to reduce earnings. This effect is stronger in banks with less influence from controlling shareholders, more concentrated ownership structures, and in more developed provinces. Overall, our results find support for the agency view, where managers in government‐owned banks use accruals management to reduce social and political responsibilities, leading to increases in their promotion prospects.

Insider Sales and Corporate Bond Yield Spread: Evidence from China

ABSTRACT We study whether and how insider sales affect a firm’s bond yield spreads. By examining insider sales and corporate bond yield spreads from 2011 to 2022 in the Chinese market, we find robust evidence that insider sales have a significant and important impact on corporate bond yield spreads. A one-standard-deviation increase in insider sales resulted in an increase of 11.82 bps in corporate bond yield spread. Further analysis suggests that while both the information asymmetry channel and the tunneling channel exist, bond investors do not believe that excess return from insider sales would reduce fund occupancy and alleviate default risk. We also find that ownership structure matters for the impact of insider sales on corporate bond yield spreads, where insiders in firms with more concentrated ownership structures tend to tunnel or withhold private information, whereas a more balanced ownership has the opposite effect. There is also weak evidence that the impact of insider sales on corporate bond yield spreads is larger in private firms than in state-owned ones. In addition, institutional investor ownership weakens the role of insider sales in bond pricing and, in particular, weakens the response of bond investors to insider sales in private firms.

Regulator as a minority shareholder and corporate fraud: Quasi-natural experiment evidence from the pilot project of China Securities Investor Services Center

The China Securities Investor Services Centre (CSISC) is a unique governance mechanism in China, backed by the Chinese regulator. This institution holds 100 shares of each public firm in the pilot regions and monitors large shareholders by exercising its rights. Using a difference-in-difference (DID) methodology, the study investigates a sample of Chinese listed firms from 2013 to 2017 to evaluate the role of regulatory minority shareholders in curbing corporate fraud, yielding consistent and robust results. The findings of the mechanism tests indicate that CSISC shareholding significantly reduces the propensity for fraud while increasing the probability of fraud detection. The results of heterogeneity tests show that the effect of CSISC shareholdings on corporate fraud is more pronounced in firms with severe internal agency problems and poorer external governance environments. Additional analyses examine the impact of CSISC shareholdings on different types of corporate fraud and show that it significantly reduces disclosure and operational fraud. This research has important implications for improving minority shareholder protection in countries with concentrated ownership structures and for constraining corporate fraud.

Stakeholder theory, risk-taking and firm performance

PurposeThis study, using stakeholder approach, aims to examine the impact of corporate governance and risk-taking on the performance of the top 100 nonfinancial listed firms in Vietnam from 2015 to 2019.Design/methodology/approachThe theoretical and empirical studies are reviewed for rational hypotheses development. Firm performance is represented by return on assets, return on equity and Tobin’s Q.FindingsSpecifically, concentrated ownership structure, large workforce, being a great workplace, quick sales growth, high receivables turnover, being funded by both the state and foreigners and high-risk exposure positively affect firm performance. However, a high level of state ownership or foreign ownership, more independent members on board, large board size and chief executive officer (CEO) duality show an inverse effect. Besides, an inverted U-shaped relationship with firm performance is recognized for liquidity ratios.Originality/valueThis study uses three triangles, including governance, risk, and performance. The paper offers some evidence-based recommendations to improve firm performance in Vietnamese businesses.