The Impact of Social Capital from Shareholders on Firm Performance: An Emerging Country Tests
20 Pages Posted: 16 Aug 2011
Based on the balanced scorecard (BSC), a strategic alignment among different departments and external parties is the key to improve organizational performance. According to the “social exchange theory”, an organization exploits opportunities to align with external partners, such as shareholders, suppliers, and etc., in order to gain operation performance. Through the “resource dependence theory”, shareholders bring knowledge and resources from their outside networks to advance company performances, in which social capital from large shareholders is the main factor for such improvement. We use the concept of interlock to define the social capital from large shareholders as a “shareholder interlock”. We further examine the relationship between large shareholders’ social capital and firm performance.
This paper classifies shareholder interlock in different perspectives, one is foreign or local institutional shareholders, the other one is group or non-group large shareholders. We investigate the impact of each type of shareholder interlock on firm performance separately. “Social exchange theory” notes that there are two different motivations in resource exchange: socioemotion outcome and economic benefit. Relationship maintenance is significant to group shareholders, but not to non-group shareholders. Conversely, non-group shareholders focus on economic wealth. Under this situation, group shareholders usually invest in a group of internal firms so as to maintain relationship and trust, whereas non-group shareholders usually invest in outside firms to gain an economic benefit. This study hypothesizes that non-group shareholder interlock has a stronger positive impact on firm performance than that of group shareholder interlock.
The empirical results show that the overall shareholder interlock has a positive impact on firm performance and that all three types of shareholder interlock have a positive impact on firm performance. After comparing group shareholder interlock with non-group shareholder interlock, we do not find that non-group shareholder interlock has a stronger positive impact on firm performance than that of group shareholder interlock.
Keywords: Social Capital, Firm Performances, Foreign Institutional Shareholders, Local Institutional Shareholders, and Shareholder Interlock
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