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

• DOI: https://doi.org/10.1108/CG-10-2016-0203
• Date: 03 April 2018
• Pages: 206-219
• Published date: 03 April 2018
• Author: Mamduh M. Hanafi,Bowo Setiyono,I Putu Sugiartha Sanjaya
• Subject Matter: Strategy,Corporate governance

Ownership structure and firm

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 classification –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