Ownership structure and firm performance: evidence from the subprime crisis period

AuthorMamduh M. Hanafi, Bowo Setiyono, I Putu Sugiartha Sanjaya
DOIhttps://doi.org/10.1108/CG-10-2016-0203
Pages206-219
Publication Date03 Apr 2018
Ownership structure and rm
performance: evidence from the subprime
crisis period
Mamduh M. Hanafi, Bowo Setiyono and I Putu Sugiartha Sanjaya
Abstract
Purpose This paper aims to compare the effect of ownership on firm performances in the 1997 and
2008 financial crises. More specifically, it investigates the effect of cash flow rights, control rights and
cash flow rights leverage on firm performance. Two conditions motivated the study. First, the 2008
financial crisis happened quickly, so it was endogenous for firms. This setting is ideal to deal with
endogeneity problems in astudy that involves ownership and performance. Second,during the 2000s,
awarenessand implementation of corporate governanceincreased significantly. The authorsbelieve that
the markets learn these changesand incorporate them into prices, as suggested by an efficient market
hypothesis.
Design/methodology/approach The paper investigates and compares the effect of ownership
structure on firm performance in the 2008 subprime crisis period to that in the 1997 financia l crisis.
Both crises happen unexpectedly, so the authors can expect that the crises ar e exogenous to firms.
The authors use cash flow rights, control rights and cash flow right leverage for the ownership
structure dimension. They also study time-series data to investigate the effect of ownership on a
firm’s value.
Findings The study finds that cash flow right and cash flow right leverage di d not affect stock
performance during the subprime crisis of 2008.It also finds that cash flow right leverage and cash
flow right affected stock performance during the financial crisis of 1997. The study attributes this
finding to the learning process and improvement of corporate governance dur ing the period of the
2000s. Using time-series data, it finds that cash flow rights positively affect firm performance,
suggesting an alignment effect. Ownership concentration improves firm performance. W hen the
study split its sample, it found that the effect ownership on firms’ value is stronger for large firms.
Research limitations/implications The study’s main limitation is that it does not test directly the
learning process hypothesis. The study contributes to the current literature by presenting more recent
evidence on the effect of ownershipstructure on firm performance in a developing country. The authors
argue that markets learn the improvement of corporate governance and incorporate this development
into prices. Extending this research to other markets will provide confirmation whether the learning
processis an internationalphenomenon.
Practical implications The awareness and implementation of corporate governance should be
maintained at least at this level. The positive relationship between ownership concentration and firm
performance suggests that concentrated ownership performs monitoring more effectively. Investors
shouldpay attention to ownership concentration.
Social implications The finding that prices already reflect corporate governance may suggest that
market is monitoring this issue.This seems to be a good finding. Markets can be expected to discipline
companies in the implementation of corporate governance. The awareness and implementation of
corporategovernance should be maintainedat least at the current level.
Originality/value The study contributes to the current literature by presenting additional
evidence on the effect of ownership (using cash flow rights, control rights and cash flow right
leverage) on firms’ performance in a more recent period and in a developing country. This period
Mamduh M. Hanafi is
Associate Professor at the
Department of Financial
Management, Faculty of
Economics and Business,
Universitas Gadjah Mada,
Yogyakarta, Indonesia.
Bowo Setiyono is Assistant
Professor at the
Department of Business
(Finance and Banking),
Faculty of Economics and
Business, Universitas
Gadjah Mada, Yogyakarta,
Indonesia.
I Putu Sugiartha Sanjaya is
Associate Professor at the
Department of Accounting,
Universitas Atma Jaya
Yogyakarta, Yogyakarta,
Indonesia.
JEL classication G15, G34
Received 27 October 2016
Revised 29 April 2017
24 July 2017
Accepted 13 September 2017
PAGE 206 jCORPORATE GOVERNANCE jVOL. 18 NO. 2, 2018, PP. 206-219, © EMERALD PUBLISHING LIMITED, ISSN 1472-0701 DOI 10.1108/CG-10-2016-0203

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