Ownership Concentration and Firm Value: A Study from Indian Corporate Sector
28 Pages Posted: 17 May 2006
The paper contributes to the understanding of corporate governance issues in emerging economies by examining the role of blockholders in influencing firm value. Using a much disaggregated and uniform database from Indian corporate sector for the year 2001, we present a deeper understanding of interaction between ownership structure and firm value in the following ways. Unlike most existing research which studies the aggregated level of ownership, we include a wider set of mechanisms, such as identity and ownership concentration of outside blockholders controlling at least 5% of total equity of the firm. We analyze the role played by these shareholders with substantial voting power in situations when equity holding is less vis-a-vis more concentrated in the hands of promoters. We also attempt to see if these investors coordinate among themselves to constrain the insiders from expropriating corporate resources. We find a significant curvilinear relationship between firm value and the fraction of voting rights owned by insiders. The curve slopes downward until the insider ownership reaches approximately between 45% and 63% and then slopes upward. Empirical results on ownership concentration by minority blockholders do not support the monitoring hypothesis of these investors. Furthermore, the coordinated behavior of largest two minority blockholders has value increasing (decreasing) impact on firm value when the collective control is located in the lower (higher) range. Coordination problem exacerbates if the largest two are private corporate bodies.
Keywords: Ownership structure, Corporate Governance, Blockholders, India
JEL Classification: G32, G30
Suggested Citation: Suggested Citation