Firm Value and its Non - Linear Relationship with Endogenous Promoter Ownership in India

Authors

  •   D. Satish Associate Professor, IBS Hyderabad, IFHE University, Dontanpally, Hyderabad - 501 203, Telangana
  •   S. V. Satyanarayana Professor and Chairman BOS, Osmania University College of Commerce, Osmania University, Hyderabad - 500 007, Telangana

DOI:

https://doi.org/10.17010/ijf/2018/v12i6/128107

Keywords:

Endogeneity

, Promoter Ownership, Firm Value, Regulations, Corporate Governance, Boards, Tobin Q, 2SLS, Polynomial, Non - Linear Model, Durban - WU - Hausman (DWH) Test

G320

, G100, G180, G380

Paper Submission Date

, January 29, 2018, Paper sent back for Revision, May 12, Paper Acceptance Date, May 20, 2018.

Abstract

In India, promoters own a significant portion of the shares of the listed firms. The investors also swear by the names of the promoters behind the firms. In this context, the paper studied the relationship between promoter ownership and firm performance among NSE listed companies by first testing for endogeneity of the promoter ownership variable. The paper also studied the impact of deferential promoters' holding on performance of these firms. The paper used 2SLS model to study the relationship while taking Tobin Q as a proxy for firm performance. The results showed the existence of a strong relationship between promoter ownership and firm performance, while the non linear study showed a slight U shaped relationship,  indicating a slight reduction in performance of the firm to a certain point  with an increase in promoter ownership and then a gradual increase in firm performance with an increase in promoter ownership after that point. The results of the non linear study were significant as it showed that the performance of the firms was maximum when the promoter holding in the firms was the highest. This goes against the theory of promoter entrenchment and justifies the craze of Indian investors for promoter led firms with substantial holdings. The research also recommended regulators not to further reduce the maximum promoter holdings which was brought down to 75% for private listed firms in the year 2013 by SEBI.

Downloads

Download data is not yet available.

Downloads

Published

2018-06-01

How to Cite

Satish, D., & Satyanarayana, S. V. (2018). Firm Value and its Non - Linear Relationship with Endogenous Promoter Ownership in India. Indian Journal of Finance, 12(6), 7–24. https://doi.org/10.17010/ijf/2018/v12i6/128107

Issue

Volume 12, Issue 6, June 2018

Section

Articles
Crossref
Scopus
Google Scholar
Europe PMC

References

Ahamed, N. (2014). Multiple directorship & interlock: An empirical study of its impact on firms' financial performance. Indian Journal of Finance, 8 (10), 48 - 61. DOI: 10.17010/ijf/2014/v8i10/71848

Berle, A., & Means, C. (1932). The modern corporation and private property. New Brunswick, USA : Transaction Publishers.

Cho, M. - H. (1998). Ownership structure, investment, and the corporate value :An empirical analysis. Journal of Financial Economics, 47 (1), 103 - 121. DOI: 10.1016/S0304405X(97)00039

Clark, V. (1984). Computer - aided multivariate analysis. Belmont. CA: Lifetime Learning Publications.

Cong, R. (2004). Strata 5: How do I test endogeneity? How do I perform a Durbin-WuHausman test ? Retrieved from https://www.stata.com/support/faqs/statistics/durbin-wuhausman-test/

Craswell, A. T., Taylor, S. L., & Saywell, R. A. (1997). Ownership structure and corporate performance: Australian evidence. Pacific Basin Finance Journal, 5 (3), 301 - 323.

Davidson, R., & MacKinnon, J. G. (1993). Estimation and inference in econometrics. New York : New York Oxford University Press.

de Miguel, A., Pindado, J., & de La Torre, C. (2004). Ownership structure and firm value: New evidence from Spain. Strategic Management Journal, 25(12), 1199 - 1207. DOI : https://doi.org/10.1002/smj.430

Demsetz, H. (1983).The structure of ownership and the theory of the firm. Journal of Law and Economics, 26 (2), 375 - 390. DOI:10.1086/467041

Demsetz, H., & Lehn, K. (1985). The structure of corporate ownership: Causes and consequences. Journal of Political Economy, 93 (6), 1155 - 1177. DOI: 10.1086/261354

Demsetz, H., & Villalonga, B. (2001). Ownership structure and corporate performance. Journal of Corporate Finance, 7 (3), 209 - 233.

Garcıa - Meca, E., & Sanchez - Ballesta, J. P. (2011). Firm value and ownership structure in the Spanish capital market. Corporate Governance : The International Journal of Business in Society, 11(1), 41 - 53. DOI: 10.1108/14720701111108835

Gugler, K., Mueller, D. C., & Yurtoglu, B. B. (2008). Insider ownership, ownership concentration and investment performance: An international comparison. Journal of Corporate Finance, 14(5), 688 - 705. DOI:10.1016/j.jcorpfin.2008.09.007

Han, K. C., & Suk, D. Y. (1998). The effect of ownership structure on firm performance : Additional evidence. Review of Financial Economics, 7 (2), 143-155.

Iturralde, D. T., Maseda, D. A., & Arosa, D. B. (2011). Insiders ownership and firm performance. Empirical evidence. International Research Journal of Finance and Economics, 67, 118 - 129.

Kole, S. (1996). Managerial ownership and firm performance: Incentives or rewards ? In M. Marr & M. Hirschey, Advances in financial economics (Vol. 2, pp. 119 - 149). London : JM Press.

McConnell, J., & Servaes H. (1990). Additional evidence on equity ownership and corporate value. Journal of Financial Economics, 27 (2), 595 - 612.

Ming, T. C., & Gee, C. S. (2008). The influence of ownership structure on the corporate performance of Malaysian Public Listed Companies. ASEAN Economic Bulletin, 25 (2), 195 - 208.

Morck, R., Shleifer, A., & Vishny, R. W. (1988). Management ownership and market valuation: An empirical analysis. Journal of Financial Economics, 20, 293 - 315. DOI: 10.1016/0304-405X(88)90048-7

Oswald, S. L., & Jahera, J. S. (1991). The influence of ownership on performance: An empirical study. Strategic Management Journal,12 (4), 321 - 326.

Pant, M., & Pattanayak, M. (2007). Insider ownership and firm value: Evidence from Indian corporate sector. Economic and Political Weekly, 42 (16), 1459 - 1467.

Park, K., & Jang, S. C. (2010). Insider ownership and firm performance: An examination of restaurant firms. International Journal of Hospitality Management, 29 (3), 448 - 458. DOI: 10.1016/j.ijhm.2009.10.023

Parmar,K. S., Reddy, V. N., & Chauhan, Y. K. (2015). Theoretical underpinnings of the determinants of firm performance: A literature review. Indian Journal of Finance, 9 (9), 36 - 43. doi:10.17010/ijf/2015/v9i9/77194

Short, H., & Keasey, K. (1999). Managerial ownership and the performance of firms: Evidence from the UK. Journal of Corporate Finance, 5 (1), 79 - 101.

Woodbridge. (2003). Review of Clare Jackson, Restoration Scotland. Royalist Politics, Religion and Ideas. Parliamentary History, 23 (2), 268 - 271.

Zhou, X. (2001). Understanding the determinants of managerial ownership and the link between ownership and performance. Journal of Financial Economics, 62 (3), 559 - 571.