Table of Contents
TOC o “1-3” h z u Chapter 1: Introduction PAGEREF _Toc524101436 h 21. 1 Background of the Study PAGEREF _Toc524101437 h 21. 2 Introduction to the Study PAGEREF _Toc524101438 h 21. 3 Problem Statement PAGEREF _Toc524101439 h 41. 4 Objectives of the Study PAGEREF _Toc524101440 h 41. 5 Rationale of the Study PAGEREF _Toc524101441 h 41. 6 Scope of the Study PAGEREF _Toc524101442 h 51. 7 Sources of Data PAGEREF _Toc524101443 h 51. 8 Limitations of the Study PAGEREF _Toc524101444 h 5Chapter 2: Literature Review PAGEREF _Toc524101445 h 6Chapter 3: Development of Research PAGEREF _Toc524101446 h 93.1 Philosophy PAGEREF _Toc524101447 h 93.2 Method PAGEREF _Toc524101448 h 103.3 Approach PAGEREF _Toc524101449 h 103.4 Data Collection PAGEREF _Toc524101450 h 113.5 Sampling PAGEREF _Toc524101451 h 11Chapter 4: Research Methodology PAGEREF _Toc524101452 h 124.1 Idea PAGEREF _Toc524101453 h 124.2 Questions PAGEREF _Toc524101454 h 124.3 Objective PAGEREF _Toc524101455 h 124.4 Hypothesis PAGEREF _Toc524101456 h 134.5 Theoretical framework PAGEREF _Toc524101457 h 14Chapter 5: Conceptual framework PAGEREF _Toc524101458 h 155.1 Effect of Directorial Ownership PAGEREF _Toc524101459 h 155.2 Effect of Government Ownership PAGEREF _Toc524101460 h 165.3 Effect of Institutional Ownership PAGEREF _Toc524101461 h 175.4 Effect of Foreign Ownership PAGEREF _Toc524101462 h 185.5 Effect of Public Ownership PAGEREF _Toc524101463 h 185.6 Empirical Model PAGEREF _Toc524101464 h 19Chapter 6: Analysis and Results PAGEREF _Toc524101465 h 226.1 Descriptive Statistics PAGEREF _Toc524101466 h 226.2 Regression Analysis PAGEREF _Toc524101467 h 236.3 Multicollinearity Analysis PAGEREF _Toc524101468 h 266.4 Breusch-Pagan Test PAGEREF _Toc524101469 h 276.5 Hypothesis Outcome PAGEREF _Toc524101470 h 286.6 Reasoning of Results PAGEREF _Toc524101471 h 30Chapter 7: Limitations PAGEREF _Toc524101472 h 32Chapter 8: Conclusion PAGEREF _Toc524101473 h 33Chapter 9: References PAGEREF _Toc524101474 h 34
Chapter 1: Introduction1. 1 Background of the StudyIn this era of digitization and technological advancements, profitability is one of the primary concern for any organization. Factors affecting profitability are therefore the major factors to be considered in order to obtain expected profit from an organization. There are many factors/process that aids to measure and/or influence profitability and corporate governance is one core component.
Ownership structure deals with corporate governance, as concentration of ownership determines control over decision making process related to the organization. Majority of the listed organizations in Bangladesh have five type of owners which includes: directorial ownership, government ownership, institutional ownership, foreign ownership and public ownership.
This study deals with the effect ownership structure has on performance of an organization. It is conducted to determine whether ownership structure has significant correlation or impacts performance of an organization.
1. 2 Introduction to the StudyIn organizations, the impact of ownership structure on financial performance is very important. Shareholders are concerned regarding their profitability on investment and also monitoring managerial decisions that would impact their profit. This study focuses to analyze the impact of directorial ownership, government ownership, institutional ownership, foreign ownership and public ownership on financial performance of organizations in Bangladesh.
Ownership structure is very important as it mentions amount of control someone has over the business together with the liability of ownership and profit sharing. This makes it critical in context of organizations from 4 various industries to have been given the choice of ownership to be directorial, government, institutional, foreign or public (Boubakri et al., 2005). Ownership structure is vital for development of strong and healthy economic system, especially in emerging economies (Lang and So, 2002). Such importance is given to ownership structure because of its relationship with corporate governance and agency theory.
As per the theories stated in Berle and Means (1932), ownership structure of shareholders and managers there is a greater chance of potential conflict of interest which affects financial performance of an organization. It is suggested by Jensen and Meckling (1976) that managers acting as agents on behalf of an organization tends to follow strategies that meet their own personal goal rather than the one of the organization.
Better management monitoring can be obtained from ownership concentration as it is a vital component of corporate governance. To compute an organization’s success, performance is the primary indicator and ownership concentration has a major impact on performance.
As stated by Frich and Kohlar (1999) performance is conduct of activities for an organization over a period of time in part or in full with relation to its past or projected cost efficiency, responsibility or accountability of management. European Central Bank (2010), looks at financial performance of banks from the perspective of analyzing the main drivers of profitability; efficiency, earnings, leverage, and risk- taking. The report goes on to note that the performance however needs to incorporate the views of different stakeholders which include debt, equity holders, depositors and managers.
Strong positive relationship between ownership concentration and profitability is observed as per studies of Jensen and Meckling (1976), Mehran and Cole (1998), Lang and Djankov (2000), Mitton (2002); Iannota, Sironi and Nocera (2007) and Ongore (2011). On the other hand, studies of Lehn and Demsetz (1985), McConnell and Servaes (1990), Karathanasiss and Drakoes (2004) and Berger et al., (2005) state that concentration of ownership impacts negatively on organization performance. Whereas, according to Ongore (2011), various type of shareholders have different perspectives and objectives.
1. 3 Problem StatementPrevious studies which were conducted on ownership structure and financial performance of an organization has resulted in various outcomes. Therefore, this area requires more study especially in developing countries where growth is vital for the economy to prosper. In Bangladesh, little literature is available on the latest data regarding ownership structure and financial performance of enlisted organizations. This study is expected to analyze the impact of ownership structure on financial performance of enlisted organizations in Bangladesh based on latest data available.
1. 4 Objectives of the StudyPrimary objectives:
To analyze the variables affecting profitability and ownership structure of organizations.
To examine the effect of ownership structure on performance of listed organizations in Bangladesh.
To understand the importance of the factors that influences performance of organizations.
To understand the significance of factors in ownership structure organizations.
To present relationship between variables of ownership structure and performance of organizations.
1. 5 Rationale of the StudyPerformance is one of the most important aspects for any organization which includes all the respective stakeholders. Various factors determine/influence performance and profitability is a major factor in this process.
Investigation of the relationship between ownership structure and firm performance has been conducted in several studies across the globe. However, only a few studies have been found in Bangladesh specifically in this topic. This research would be helpful to analyze the ownership structure and its effect on performance of organizations in Bangladesh which could be compared to studies conducted in other regions of the world.
1. 6 Scope of the StudyThis study is based on data of last 5 years (2012-2016) including 99 organizations listed in Dhaka Stock Exchange at present. 99 organizations include 4 major industries including commercial banks, non-banking financial institutions, chemical ; pharmaceutical organizations and textile organizations.
Specific variables such as Return on Asset (ROA) and Return on Equity (ROE) is considered to determine profitability. This paper is not intended to determine the subjective factors that could have affected profitability of organizations during the time period of collected data. Further scope of analysis exists with other variables of firms’ profitability.
1. 7 Sources of DataTo collect data, only secondary sources have been used. Mainly annual report of the organizations have been collected from Dhaka Stock Exchange (DSE) and their websites. Some data have been collected also from various sources which includes company records, publications, previous researches etc.
1. 8 Limitations of the StudyThis paper is based on certain assumptions which might not be statistical estimates such as the variables affecting performance. Financial analysis required ample amount of time, patience, due procedure and most importantly sound knowledge. There could be violation in following right procedure in preparation of this study due to time and knowledge constraint.
There could be few more limitations like:
Enough information was not found, in order to make this a comprehensive study
This study is solely based on secondary data, there has been no use of primary data
Chapter 2: Literature ReviewCorporate Governance term can be explained in various ways. According to World Bank, corporate governance represents “organization and rules that affect expectations about the exercise of control of resources in firms” (World Bank Development Report, 2002, p. 68). Other explanation states that “corporate governance issues arise in an organization whenever two conditions are present. First, there is an agency problem, or conflict of interest, involving members of the organization – these might be owners, managers, workers or consumers. Second, transaction costs are such that this agency problem cannot be dealt with through a contract” (Hart, 1995, p. 678). Corporate governance interpretations have one thing in common that there is a requirement for handling systems and to limit conflicts.
Berle and Means (1932) researched on the ownership from the perspective of management. The role played by management, minority versus majority shareholders in financial performance of an organization were also stated in the research. They also argued that concentration of ownership is more prominent in developing countries.
Researches including theoretical and empirical ones show relationship between ownership structure and firm performance was motivated by Berle and Means (1932) which identified separation of ownership and control. The research states an inverse correlation between concentration of shareholding and firm performance and also concludes that ownership structure affects firm performance.
After Berle and Means (1932), the positive relativity of ownership structure to firm profitability is argued widely. In addition to the debate, other researchers also researched on this topic and provided supporting evidences (Jensen & Meckling, 1976) mentioning the fact that separation among ownership and control provides managers with reduction risk facilities and managerial incentives.
Amount of ownership owned by insider management and outsiders with no role in firm management is researched by Jenson and Meckling, (1976). The outcome stated that both a firm’s value and performance increase with the level of insider ownership.
Fama and Jensen (1983) argue that ownership concentration above a certain level will allow managers to become entrenched and expropriate the wealth of minority shareholders. This argument led scholars in a hot debate over the possible non-linear relation of ownership concentration and firm performance.
Leech and Leahy (1991) researched the effect of separating ownership from control. Ownership structure was described using many measures of concentration and control. Thus, it was expected that ownership structure will affect firm’s performance through the effects of ownership concentration. However, it a negative and significant relationship was found between concentration of ownership and firm value.
Ownership concentration is the distribution of shares held by majority shareholders (Lee, 2008). In context of an organization, especially bank, concentration of ownership is very important element for growth and development specifically in the countries that are emerging. Identity of ownership can be categorized into foreign, domestic, public, private investors and institutional investors.
However in case of banking, financial performance might be affected negatively due to concentrated ownership and increased operating costs. Although, Ungureanu (2008) states that monitoring and control of all banking activities are improved with ownership structure for a better flow of information. On the other side, according to Berger et al., (2005) there is a negative impact of ownership concentration on performance. Financial distress and crisis tends to affect companies with high concentration more compared to others (Nora and Rejab, 2015).
Stated by Aydogan and Gursoy (2002) that government owned organizations bear higher risk which results in better financial performance. According to the study of Najid and Rehman (2015), it can be stated that ownership structure has strong positive correlation with financial performance of an organization. Sun and Tong (2003) states that foreign ownership did not have any significant impact on financial performance of organizations but government ownership showed negative effect on organization’s financial performance.
Lee and Jun (2011) stated that ownership structure is the key factor of determining behavior of a firm, decision making, incentives and ultimately the performance. Ownership structure was determined as an internal mechanism of corporate governance. Although Demsetz and Villionga (2001) did not find any evidence of relationship between ownership structure and performance, Berger (2003) found substantial positive relationship between ownership and performance. On the other hand it was explained by Gupta (2005) that government owned organizations has negative effect on financial performance in India.
Major aspect of ownership structure is associated with a company’s shares and concentration. According to Citak (2007, p.231), a company’s owner ship is considered to be highly concentrated if a high percentage of shares is held by relatively fewer owners.
Emerging economies has more ownership concentration as discussed by Khamis, Hamdan and Elali (2015). This can trigger potential conflicts between majority and minority shareholders which in result affecting firm performance.
Chapter 3: Development of ResearchBusiness research involves establishing objectives and gathering relevant information to obtain answer to one or more issue(s). Following in this study are the hypothesis developed which are relevant to the study.
This chapter consists of a comprehensive discussion on overall research methodology including research philosophy, research approach, research design, research method, data collection mechanism, sampling framework relevant the research.
3.1 PhilosophyA research philosophy is a belief about the way in which data about a phenomenon should be gathered, analyzed and used. It facilitates as a roadmap to conduct the business research.
Research philosophy provides an insight for the motive in order to conduct the research. It also includes data collection process and interpretation processes. Research philosophy is of two types – positivism and phenomenology.
Positivists believe that reality is stable and can be observed and described from an objective viewpoint (Levin, 1988), i.e. without interfering with the phenomena being studied. They contend that phenomena should be isolated and that observations should be repeatable. Positivism acts as a guide for conducting the business research. It adheres to the view that only “factual” knowledge gained through observation (the senses), including measurement, is trustworthy. In positivism studies the role of the researcher is limited to data collection and interpretation through objective approach and full faith will be bestowed on the collected data and statistical results (Easterby-Smith, et al., 2008).
In case of phenomenology, it is generally observed that respondents may provide their irrational decision-making and cognitive biases while providing data (Bryman, 2012). Under the phenomenological philosophy, help from the social scientists is often required (Cassell and Symon, 2012).
The research will follow a positivism philosophy as the research interpretation would only depend on only factual data available on annual reports.
3.2 MethodResearch method is a systematic plan for conducting a research focusing on a decision to use either qualitative, quantitative or a mix of both for the research.
Qualitative research is exploratory, and it is used when it is not known what to expect, how to define a problem or how to develop an approach to the problem. Whereas quantitative research is expected to conclude the purpose as it quantifies a problem. Hence, quantitative method will be used for conducting the research.
Two of the most used research methods are: inductive and deductive. Deductive reasoning works from the more general to the more specific. Also known as “top-down” approach.
Inductive reasoning works the other way round, moving from specific observations to broader generalizations and theories where researcher begin with specific observations and measures, begin to detect patterns and regularities, formulate some tentative hypotheses that can be explored. Inductive reasoning is more open-ended and exploratory, whereas, deductive reasoning is narrower in nature and concerned with testing or confirming hypothesis. As hypothesis testing is being conducted in this research with all numeric analysis, therefore, deductive reasoning approach shall be used in this research.
3.4 Data CollectionData can be collected in two ways, Primary and Secondary.
For primary data, questionnaire, face to face interview, over the phone interview, mailing, focus group discussion is used. For secondary data, information from various sources and previous conducted research relevant to the topic is used.
In this research, data from annual reports will be used which would therefore be a secondary data collection method.
3.5 SamplingThe purpose of sampling is to estimate an unknown characteristic of a population. Sample is subset of larger population. Sample will be selected from all the enlisted organizations in Dhaka Stock Exchange (DSE). Researches done earlier will be used as a guide to select organizations from various sectors. Stratified sampling will be used in the research and data of organizations from different sectors will be analyzed to conduct the research.
In total, 99 enlisted organizations are selected for data collection among which are: 29 commercial banks, 20 non-banking financial institutions, 22 chemical ; pharmaceutical organizations and 28 textile organizations.
Chapter 4: Research Methodology4.1 IdeaResearch is conducted to investigate and evaluate the effect of ownership structure on financial performance of an organization.
Does change in directorial ownership affect financial performance of an organization?
Does government ownership affects organization’s financial performance?
Does institutional ownership affects organization’s financial performance?
Does foreign ownership have any effect on financial performance?
Does public ownership affect organization’s financial performance?4.3 Objective
To understand how directorial ownership affects financial performance of an organization.
To determine relationship between institutional finance to the organization with the financial performance of the organization.
To understand how government ownership affects organization’s financial performance.
To estimate effect of financing from foreign owners on financial performance of an organization.
To determine the relationship between finance obtained from publicly issued shares and organization’s financial performance.
Hypothesis linked with directorial ownership affecting financial performance of an organization.
H0: Directorial ownership has no significant impact on financial performance
Ha: Directorial ownership has significant impact on financial performance
Hypothesis linked with government ownership affecting organization’s financial performance.
H0: Government ownership has no significant effect on financial performance
-Ha: Government ownership has significant effect on financial performance
Hypothesis linked with institutional ownership affecting organization’s financial performance.
H0: Institutional ownership does not affect financial performance
Ha: Institutional ownership affects financial performance
Hypothesis linked with finance from foreign owners on financial performance
H0: Foreign ownership has no significant relationship with financial performance
Ha: Foreign ownership has significant relationship with financial performance
Hypothesis linked with finance obtained from publicly issued shares and organization’s financial performance
H0: Public ownership does not affect financial performance
Ha: Public ownership affects financial performance
4.5 Theoretical framework
Corporate governance has become one of the most important aspects affecting financial performance of an organization. Ownership structure is one of the main dimensions of corporate governance and also influences it as conflicts of interest arises with change in structure of ownership which affects financial performance of the organization negatively.
Corporate governance is defined by Shleifer and Vishny (1997) in ways which entities/individuals financing the corporations are assured to get a return on their investment. On the contrary, Tirole (2001) states that the definition of traditional shareholder approach for measuring corporate governance is inadequate. In Tirole’s view, all stakeholders must be considered in designing of a corporate governance system who are affected by the firm’s decision rather than just the financiers. Shleifer and Vishny’s (1997) perspective is used in the research and also enhanced with definition from Eckbo (2006) who argued that an organization’s corporate governance incorporates all internal and external constraints which results in affecting financial performance of the organization.
Chapter 5: Conceptual framework
This study aims to cover 99 enlisted organizations which are locally incorporated. The research provides an overview of relationship between corporate governance and financial performance of an organization. Concepts of ownership structure, impact of ownership structure, effect of organization’s various shareholders on decision making, Agency theory, components of financial performance indicator, framework variables (dependent, independent), hypothesis development, data collection, analysis, interpretation of data and suggestions have been discussed.
5.1 Effect of Directorial OwnershipInternal governing mechanism defines boards which shape the governance of a firm with the other two axes in corporate governance: shareholders and managers. It is argued by Fama (1980) that presence of non-executive directors ensure proper action monitoring of the executive directors and also ensuring that policies pursued by executive directors are aligned with the one of shareholders’ interest. Much of power within the organization has been provided to the board of directors for corporate governance and also to increase executive accountability of non-executive directors. As per Fernández-Rodríguez, Gómez-Ansón and Cuervo-García (2004) there are strong perceptions that independent directors lead to better governance. However the existing empirical shows mixed result between the relationship of firm performance and board independence for the higher expectations from the role of the non-executive board members (e.g. Dalton, Daily, Ellstrand and Johnson, 1998; Dulewicz and Herbert, 2004; Peng, 2004; Weisbach and Hermalin, 2003). On the contrary, few researches suggest that firm performance will worsen if independent directors is in majority (Bhagat and Black, 1999).
Cost is incurred whenever management tends to pursue their own interest rather than the shareholders’, therefore monitoring by the board is important to minimize this potential cost. Monitoring by board is also important in order to reduce agency costs required to separate ownership and control. Thus, firm performance improves (Fama, 1980; Mizruchi, 1983; Zahra and Pearce, 1989).
As suggested by researchers who studied on the monitoring function that preference shall be for board dominated by outside directors (Barnhart, Marr and Rosenstein, 1994; Baysinger and Butler, 1985; Daily, 1995; Daily and Dalton, 1994; Weisbach, 1988). According to their argument, boards that consist of insiders primarily or outsiders who are not independent of the firm or management tend to not have incentive for monitoring management due to their dependency on the CEO of the organization. However, boards dominated by nonaffiliated directors are expected to monitor better as they do not have any disincentive for monitoring. But this hypothesis is not supported by any statistical data (Dalton, Daily, Certo and Roengpitya, 2003; Dalton et al., 1998).
Firm performance gets better with increasing managerial ownership (Jensen & Mecking, 1976), but according to another research substantial ownership provides manager with the power to utilize the opportunity for personal benefits (Ruan, Tian & Ma, 2009). These suggests that level of determining the level of ownership of manager is necessary to ensure firm performance.
5.2 Effect of Government OwnershipIt is assumed that government ownership decreases concentration on profit maximization as government has both of the political and economic objectives which is not similar to the objectives of commercial firms (Estrin and Perotin, 1991). According to Shleifer and Vishny (1998), private ownership is preferred over government ownership as it is expected to be more efficient and profitable improving the performance of the firm. Megginson and Netter (2001) states that change of ownership that reduces government share leads to improved efficiency.
Wang (2004) did not find any noticeable negative relationship between government ownership and firm performance. On the contrary, it is argued by Bos (1991) that when government has significant ownership procession, they have incentive to monitor closely which increases profitability by reducing agency costs. Outcome of researches on relationship between government ownership and firm performance in numerous economies have contradicting results. The outcome indicates and encourages the necessity for additional studies on the topic.
5.3 Effect of Institutional OwnershipThere is a possibility of institutional ownership to have an impact on the activities of managers directly through ownership. Transformation in corporate behavior could result from existence of institutional ownership due to better monitoring from investors. The aspect of having a considerable percentage of ownership in firm’s share affects the ability to monitor policies and activities of managers. Therefore, it is rational to consider a relationship between institutional ownership and performance of a firm.
The “black box” theory from the study of Berle and Means (1932) states that separation of ownership and control of modern companies reduces management motivation to ensure efficiency of the firm. The studies of Pound’s (1988), Brickley, Lease, and Smith (1988); and Kocchar and David (1996) analyzed various aspects and impacts of institutional ownership and firm performance. Institutional ownership had been classified into two groups: pressure-resistant institutional investors and pressure sensitive institutional investors. The research resulted negative relationship between pressure sensitive institutional investor and firm performance, whereas it resulted inversely for pressure resistant institutional investors.
Relationship between institutional ownership and firm performance vary from country to country as per researches of Gilson and Roe (1993), and Roe (1994). To add, findings of Shleifer and Vishny (1986) also support the greater effect of monitoring managers by large shareholders like institutional investors, whereas monitoring by board of directors have little or no ownership in firm.
A very important role in firm performance is played by institutional ownership which is done by reducing agency problem and increased monitoring. Firms with less institutional shareholding does not have the best governance structure or firm performance. For firms with higher institutional investor shareholding, the share prices are usually less marketable as they are held for longer periods.
The study paper of Dematz and Villolonga (2001) stated the relationship between institutional ownership and performance, with an outcome of ownership affecting firm performance in many ways.
5.4 Effect of Foreign OwnershipAs per Gorg and Greenaway (2004), in international business strategy the outcome gained from foreign ownership of firms is the most challenging concern. Existing business literatures states that companies invest abroad to take advantage of the advantages which are not available in domestic companies (Dunning, 1993; Markusen, 1995; Caves, 1996).
It is widely known that foreign ownership plays a vital role in performance of the firm, especially in developing and transition economies. According to researchers (Aydin, Sayin & Yalama, 2007), usually it is the multi-national institutions that performs better compared to domestically owned ones.
5.5 Effect of Public OwnershipWhen ownership of a company is private, the company is said to be private company. It can be expected that private ownership provides a higher guarantee of corporate governance by the role of external owners who monitor managerial performance and ensures complete focus on profitability as firm’s objective (Estrin, 2002).
Various outcomes have been generated by analysts who reviewed the performance differences between private and state owned enterprises. Most of the outcomes state that private owned enterprises has better financial performance. Among these, Andrews and Dowling (1998) and Parker (1997) can be highlighted as the analysis uncovered positive influence of private ownership with better financial performance. As corporate governance mechanisms vary around the world, change in ownership can effect performance of the companies.
Public ownership may represent personal claim to firm’s cash flow individually and from an agency perspective can be explained as principal directly monitoring the agent. On the contrary, government or institutional ownership is likely to have indirect monitoring where there are layers of agents acting on behalf of the principal. It is argued by Pound (1988) that institutional ownership is more efficient than public ownership due to the lower cost of monitoring. But public ownership is less risky as the number of shareholder is larger in number.
The larger number of shareholders interest, priorities and objectives has various effect to performance of the organization. It was observed by Thomas and Pedersen (2000) that greater number of shareholders has significantly higher impact on organization’s performance. Larger amount of shareholders relationship to better organization performance was examined by Nora and Rejab (2013).
Study of Wu and Cui (Zeitum ; Tian, 2007) states the effect of ownership structure on a firm’s performance. Positive relation was found between ownership concentration and return on assets (ROA) and return on equity (ROE).
The research is aimed to provide an understanding regarding the relationship of ownership structure and different financial indicators of an organization. It can be more specified that the research is done to analyze if banks owned by public sector, directors, government, private, institutional owned organization differ significantly in performance.
5.6 Empirical ModelUsually three types of data are used for analysis: time series data, cross sectional data and panel data. In this study, data are collected from the time period of 2012 to 2016 on multiple variable to analyze the impact/change across the timeframe. Panel data is used for this research to examine the impact of ownership structure on firms’ performance in Bangladesh.
Random effects models and Fixed effects models are used for analyzing panel data in econometrics. In econometrics, Random Effects models and Fixed Effects models are used in the analysis of hierarchical or panel data when one assumes no fixed effects.
Two of the most common assumptions for panel data analysis are:
Random effects assumption
Fixed effects assumption
Random effects assumption states that specific individual effects are not correlated with independent variables. Whereas, fixed effect assumption states that specific individual effects are correlated with independent variables. Random effects model has been used to conduct the research.
I wanted to explore the nature of relationship between changes in ownership structure and its impact on financial performance. Various statistical methods (Chi-square, F-test) were used to analyze the association and extent of contribution within the variables. In order to assess the factors related to variables of ownership structure and variables of financial performance, multiple regression analysis was performed. The model used for this analysis can be explained as follows:
PER = ? + ?1 x1 + ?2 x2 + ?3 x3 + ?4 x4 + ?5 x5 + ?
PER (Performance): is a measure of financial performance or profitability of the organization. It consists of two variables in this research.
ROA (return on assets): measured as ratio of net income after interest and tax to total assets. It is also known as the capacity of earning profit by a bank on the total asset employed.
ROA = NI/TA
NI: Net Income
TA: Total Assets
ROE (return on equity): measured as ratio of net income after interest and tax to total equity. It can be also stated as the direct measure of return to the shareholders.
ROE = NI/TA
NI: Net Income
TA: Total Equity
x1: is the percentage of ownership by directors
x2: is the percentage of ownership by government
x3: is the percentage of ownership by institutions
x4: is the percentage of ownership by foreign investors
x5: is the percentage of ownership by public
?: the coefficients of the independent variables (explanatory variables)
After the formation of regression equation, research was forwarded to investigate correlation, R-squared (R2), meaningfulness and its coefficient. R-Square is the measure for determining relationship between dependent and independent variables. The value of R-Square coefficient determines the extent of dependent’s variability which is explained by independent variable. F-test is conducted to determine meaningfulness and T-test would be done for equation coefficients. To evaluate the hypothesis, two separate models were defined and were estimated for each dependent variable i.e. ROA and ROE. Below mentioned are the two models developed to conduct the research:
ROA = ? + ?1 x1 + ?2 x2 + ?3 x3 + ?4 x4 + ?5 x5 + ?1
ROE = ? + ?1 x1 + ?2 x2 + ?3 x3 + ?4 x4 + ?5 x5 + ?1
Chapter 6: Analysis and ResultsThis section is intended to provide details of empirical the study conducted. The evidences includes descriptive statistics, various tests and respective results.
6.1 Descriptive StatisticsIn order to assure the accuracy of data and also to summarize and describe data meaningfully descriptive statistics test is conducted. Stated below are the behavior of data including dependent and independent variables.
Variable Observations Mean Std. Dev. Min Max
director 494 0.4338 0.1795 0 0.9
Government 494 0.0179 0.1013 0 0.9019
institute 494 0.1421 0.1024 0 0.5706
foreign 494 0.0276 0.0827 0 0.6318
public 494 0.3764 0.1759 0.0065 0.7694
roa 494 3.72% 0.0553 0.04% 0.4927
roe 494 11.73% 0.1110 0.18% 0.8869
Table 1: Statistical behavior of the data for the period of 2012 to 2016.
Table above contains descriptive statistics of the study, which indicates that mean of ROA for the period of 5 years is 3.72% with a standard deviation of 0.0553 and mean of ROE is higher equaling to 11.73% with standard deviation of .1110. This could be due to the fact that equity share in financial institutions is comparatively small which consists half of the sample. Primary source of funding in financial institutions are deposits which are used to finance investments and advances.
Mean values state that directors have the highest percentage of ownership among the other dependent variables, amounting to 43.38% with also highest standard deviation of .1795. Followed by public, institution, foreign and government ownership amounting to 37.64%, 14.21%, 2.76% and 1.79% respectively. It is also observed that foreign ownership has the least standard deviation with 0.0827.
6.2 Regression AnalysisOwnership Structure and Financial Performance (Dependent Variable: ROA)
Number of observations 494
F (5, 488) 11.96
Probability > F 0.0000
Adjusted R-squared 0.1000
Root MSE 0.0524
Source SS dfMS
Model 0.1643 5 0.0329
Residual 1.3414 488 0.0027
Total 1.5057 493 0.0031
roaCoefficient Std. Err. t P>|t| 95% Conf. Interval
director 0.1237 0.0967 1.28 0.201 -0.0662 0.3136
government 0.0375 0.0997 0.38 0.707 -0.1584 0.2335
institute 0.0110 0.0976 0.11 0.910 -0.1807 0.2027
foreign 0.1838 0.0997 1.84 0.066 -0.0121 0.3797
public 0.0432 0.0972 0.45 0.656 -0.1477 0.2342
_cons -0.0400 0.0962 -0.42 0.677 -0.2290 0.1490
Table 2: Ownership Structure and Financial Performance (Dependent Variable: ROA)
From Table 2, it can be inferred that all ownership variables have positive relationship with the profitability variable ROA. Majority of the resulted P-values of dependent variables are greater than 0.01, 0.05, 0.10 indicating that ownership structure does not have any significant effect on ROA. But foreign ownership has significant relationship with ownership concentration where the p-value i.e. .066 is less than 0.1, where 1% increase in foreign ownership will result in increase of ROA by 0.1838%. Organizations with maximum ownership to a single family can influence agency conflict that could result in reduced performance. Owners of institutions usually has short term objectives which might restrict organization from long term profitability. Greater government ownership could impact organizations’ financial performance negatively due to intervention in internal work process. Results are supported by Lehn and Demsetz (1985); McConnell and Servaes (1990) and in contrast to findings of Mehran and Cole (1998).
P-value of the model is 0.0000 (value less than 0.01, 0.05, 0.1) stating that at least one independent variable is significant. R-Squared value is 0.1091 which is not good but acceptable meaning that 10.91% of ROA is explained by all dependent variables together.
Ownership Structure and Financial Performance (Dependent Variable: ROE)
Source SS dfMS
Model 0.5465 5 0.1093
Residual 5.5238 488 0.0113
Total 6.0703 493 0.0123
Number of observations 494
F (5, 488) 9.66
Probability ; F 0.0000
Adjusted R-squared 0.0807
Root MSE 0.1064
roe Coefficient Std. Err. t P;|t| 95% Conf. Interval
director -0.0412 0.1961 -0.2100 0.834 -0.4266 0.3442
government -0.1840 0.2024 -0.9100 0.364 -0.5817 0.2137
institute -0.2729 0.1980 -1.3800 0.169 -0.6619 0.1161
foreign -0.0765 0.2023 -0.3800 0.705 -0.4741 0.3210
public -0.2199 0.1972 -1.1100 0.265 -0.6073 0.1676
_cons 0.2621 0.1952 1.3400 0.180 -0.1215 0.6456
Table 3: Ownership Structure and Financial Performance (Dependent Variable: ROE)
From Table 3, it can be stated that the ownership structure affects ROE negatively but insignificantly. However, similar to the results of ROA, P-values are greater than 0.01, 0.05, 0.10 inferring that ownership structure does not have any significant effect on ROE. All dependent variables have non-significant negative impact on ROE which indicates that any change in ownership structure will affect ROE negatively and non-significantly.
P-value of the model is 0.0000 (value less than 0.01, 0.05, 0.1) stating that at least one independent variable is significant. R-Squared value is 0.0900 which is lower but acceptable meaning that 9.00% of ROE is explained by all dependent variables together.
6.3 Multicollinearity AnalysisOne of the most common methods to determine Multicollinearity among variables is Variation Inflation Factors (VIF). It tends to quantify the amount of inflation that occurs in the estimated coefficients’ variance when multicollinearity exists. VIF of 1 indicate that there is no correction among predictor variables. In general cases, rule of thumb states that VIF warrants exceeding 4 numbers require further investigation but VIFs greater than 10 indicate significant multicollinearity.
.vifVariable VIF 1/VIF
director 53.97 0.018527
public 52.42 0.019078
government 18.3 0.054638
institute 17.89 0.055905
foreign 12.19 0.082038
Mean VIF 30.95
All the variables have VIF value which is greater than 4 and even 10 therefore it can be stated that the variables have significant multicollinearity amongst them.
. vce, corrCorrelation matrix of coefficients of regression model
e(V) director government institute foreign public _cons
director 1.0000 government 0.9697 1.0000 institute 0.9675 0.9496 1.0000 foreign 0.9533 0.9256 0.9399 1.0000 public 0.9884 0.9679 0.9676 0.9544 1.0000 _cons -0.9964 -0.9726 -0.9782 -0.9596 -0.9958 1.0000
From the above depicted table of correlation matrix of coefficients of regression model it can be stated that all of the variables are highly correlated with each other as expected from the result of variation inflation factor (VIF). Most correlated are public ownership and directorial ownership with a coefficient of 0.9884. Whereas, lowest correlation exists between foreign ownership and government ownership with a coefficient of 0.9256. Correlation could be stated significant if coefficient is greater than 0.5000. Thus, it can be inferred that severe multicollinearity exists in the regression model.
6.4 Breusch-Pagan TestBreusch-Pagan (BP) test is one of the most used tests for testing heteroskedasticity in a linear regression model. Heteroskedasticity occurs when standard deviation of any variable which is observed over a certain time period is not constant. It is also known as error variance within at least one independent variable in a sample that is used to calculate the margin of error between data sets i.e. actual results vs. expected results.
Breusch-Pagan / Cook-Weisberg test for heteroskedasticity
Ho: Constant variance
Variables: director government institute foreign public
chi2(5) = 447.41
Prob > chi2 = 0.0000
Breusch-Pagan test results in a chi-squared distribution and for my data the statistic is 447.41. P-value is resulted from chi-squared test. Null hypothesis is rejected if p-value is less than 0.05. Results of the above test state a p-value < 0.05 therefore there is significant evidence of heteroskedasticity.
6.5 Hypothesis OutcomeHypothesis linked with directorial ownership affecting financial performance:
As p-value of ROA and ROE (0.201 and 0.834 respectively) for directorial ownership is greater than 0.01, 0.05 or 0.10 for both ROA and ROE. Null hypothesis cannot be rejected, rather it is accepted stating that directorial ownership has no significant impact on financial performance.
H0: Directorial ownership has no significant impact on financial performance
Hypothesis linked with government ownership affecting organization’s financial performance:
As p-value of ROA and ROE (0.707 and 0.364 respectively) for government ownership is also greater than 0.01, 0.05 and 0.10 for both ROA and ROE. Null hypothesis cannot be rejected, rather it is accepted indicating that government ownership has no significant effect on financial performance.
H0: Government ownership has no significant effect on financial performance
Hypothesis linked with institutional ownership affecting organization’s financial performance:
As P-value of ROA and ROE (0.910 and 0.169 respectively) for institutional ownership is greater than 0.01, 0.05 and 0.10 for both ROA and ROE. Null hypothesis is accepted inferring that institutional ownership does not affect financial performance.
H0: Institutional ownership does not affect financial performance
Hypothesis linked with foreign ownership on financial performance:
As p-value of ROA and ROE (0.066 and 0.705 respectively) for foreign ownership is less than 0.10 for ROA, Null hypothesis is rejected stating that foreign ownership has significant relationship with financial performance (ROA). However, P-value of foreign ownership is greater than 0.01, 0.05 and 0.10 for ROE.
Ha: Foreign ownership has significant relationship with financial performance
Hypothesis linked with public ownership and organization’s financial performance:
As p-value of ROA and ROE (0.656 and 0.265 respectively) for public ownership is greater than 0.01, 0.05 and 0.10 for both ROA and ROE, Null hypothesis is accepted. This infers that public ownership does not affect financial performance.
Ho: Public ownership does not affect financial performance
6.6 Reasoning of Results
As per the results of our analysis, the most of the dependent variables are not significant to affect financial performance of the organization. There could be many potential reasons behind the insignificance, as stated below:
Data from 4 different industries are used to analyze regression equation whereas, the business model or ownership structure (as per law) is not the same.
Directorial ownership consists of 43.38% of the ownership structure on an average stating that most organizations have directors as their major shareholder but does not affect financial performance of organizations. This could be due to average of 37.64% shareholders being public and managers has to take decision regarding business aligning benefits to both the directors and public shareholders. Therefore directorial ownership does not affect financial performance of the organizations.
Government ownership is only 1.79% of the total ownership concentration on an average and financial institutions have regulations to comply from regulatory bodies. This could be the major reason for insignificant relationship between government ownership and financial performance.
Institutional ownership consists of 14.21% in ownership concentration on an average. Investors could be weak in Bangladesh and are not capable enough to provide monitoring services which is in accordance with studies of Sanchez and Garcia (2007) and Lee (2008).
Foreign ownership consist of 2.76% of ownership concentration on an average. The amount of average foreign ownership is nominal and this empirical study states that financial ownership does not affect organization performance significantly. However, the relationship with ROA is significantly positive. Foreign owners are concerned more about long term profit, therefore, are expected to invest more in structured organizations.
Public ownership is second largest in shareholding concentration, i.e. 37.64%, on an average. But according to this study it can be inferred that public ownership does not affect organization’s financial performance. Public ownership does not allow shareholders to control or influence any major decision of an organization. As public shareholders are not a major part of decision making process, it is expected not to have any significant relationship with organization’s financial performance.
Taking all results in to account, the study shows that organization’s ownership structure does not affect financial performance.
Chapter 7: LimitationsData collected from 99 organizations and of five years only, which is not enough to determine relationship in such broader scale. Researches conducted across the globe suggests that all organizations from an industry is required to obtain a clear picture of relationship between variables.
Data of organizations belong to different industries, whereas various industry has certain trends that is dependent on social or economic condition of the country. Different industries prefer different structure of ownership and impact on financial performance. Due to having data from 4 different industries, there is structural differences between ownership, business type, costs associated and possibility of profitability.
Only secondary data was used to conduct the research. Collecting primary data could have provided a better outcome with in depth qualitative analysis. Quantitative analysis would allow to conduct research based on factual data only which is publicly available, therefore, in-depth analysis is not possible without availability of primary data like interview sessions, focus group discussions etc.
The political instability of Bangladesh during 2013 had an impact on the economy due to which most of the organizations were affected. Bangladesh faced a decrease of GDP performance by 0.07 per cent which can be attributed to the political turmoil. Costs increased which in turn decreased profitability during this period of instability which is not accounted in the research.
Data of only enlisted organizations were used to conduct this research. Therefore, the results cannot be generalized due to small sample size and absence of organization of all type.
Chapter 8: ConclusionThe research paper empirically investigates relationship between ownership structure and financial performance of an organization. It involves determining the importance of dependent variables like directorial ownership, government ownership, institutional ownership, foreign ownership and public ownership. Research is based on a sample of 99 enlisted organizations from 4 different sectors of Bangladesh and 5 years (2012-2016) of financial data from respective annual reports. Results obtained from regression analysis are similar to the findings of most studies in the literatures mentioned in this research.
Overall, the findings of research state that there is no significant relationship between the majority of variables determining ownership structure and Return on Assets, although the effect is positive but is insignificant. Foreign ownership has significant effect on Return on Asset meaning that ROA will increase with more foreign ownership.
Similar results have been observed for relationship between ownership structure and Return on Equity where the relationship is insignificant but effect is negative. No dependent variable is significant enough to cause negative effect on the relationship.
Hence, it cannot be concluded that ownership structure affects organizational performance.
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