Ownership Structure, Corporate Governance and Firm Performance

• Author: Praveen Kumar,Alessandro Zattoni
• DOI: http://doi.org/10.1111/corg.12146
• Date: 01 November 2015
• Published date: 01 November 2015

Editorial

Ownership Structure, Corporate Governance and

Firm Performance

Praveen Kumar and Alessandro Zattoni

Ownership structure is a key variable in corporate gover-

nance studies as it determines who has the ultimate

decision-making power in the corporation (Zattoni, 2011).

Ownership is not only an important variable, but also a

multidimensional one as it can be analyzed along various

dimensions, such as the concentration of shareholders, the

identity of shareholders, and the divergence between owner-

ship and voting rights.

Since the seminal work of Berle and Means (1932), owner-

ship concentration is considered a key variable in corporate

governance studies. In their study, Berle and Means (1932)

showed that the ownership structure of US listed companies

was already dispersed at the beginning of the twentieth

century. In such a context, lacking powerful shareholders,

companies face a principal-agent problem (also called agency

problem of the first type), as managers can pursue their own

interests at the expense of shareholders (Kumar & Zattoni,

2014a). More recently, the empirical evidence has shown that

listed companies localized in non-Anglo-American countries

are usually controlled by large shareholders (Aslan & Kumar,

2014; Kumar & Zattoni, 2014b). In such a context, controlling

shareholders can not only address opportunistic behavior

by top management, but also try to expropriate minority

shareholders. In other words, in the presence of a dominant

shareholder, there is the risk of the emergence of a principal-

principal problem (also called agency problem of the second

type). Based on the previous arguments, the corporate

governance literature typically hypothesizes a U-shaped rela-

tionship between ownership concentration and firm perfor-

mance, i.e., it assumes management expropriation for low

concentrationlevels and effective monitoringfor high concen-

tration levels(Hu & Izumida, 2008). Despite the largenumber

of previous studies, the debate on ownership concentration

and firm performanceis still open. For example,a recent study

shows that governance mechanisms (including ownership

structure) can have an indirect effect on performance through

investments in R&D (Zhang, Chen, & Feng, 2014).

A second characteristic of ownership structure that plays a

relevant role in corporate governance studies is the identity

of large shareholders. Previousstudies have shown that large

shareholders of listed companies may vary across countries;

and, in a large majority of cases, these are wealthy entrepre-

neurial families or the State (e.g., La Porta, Lopez-de-Silanes,

Shleifer, & Vishny, 1998; Zattoni & Judge, 2012). If ownership

concentration determines the power of shareholders vs

top managers, the identity of shareholders influences their

economic interests and decision making.Governance scholars

have hypothesized that institutional investors are the most

efficient type of shareholders because they are intrinsically

motivated to maximize shareholder value, whereas other

types of shareholders may be tempted to look for personal

benefits at the expense of the corporate value (Thomsen &

Pedersen, 2000).Recent studies have reinvigorated the debate

on this issue. On the one hand, they challenge the ability of

institutionalinvestors to pursue shareholder valuemaximiza-

tion (Tilba& McNulty, 2013).On the other hand, they empha-

size how family-controlled companies can outperform public

corporations (Van Essen etal., 2015), favor restructuring pro-

cesses aimed at increasing firm performance (Kavadis &

Castañer, 2015), ordistribute larger and morestable dividends

(Pindado, Requejo, & Torre, 2012).

Global empirical evidence also highlights that large inves-

tors typically control listed companies using mechanisms

aimed at creatinga divergence between ownershipand voting

rights (Aslan & Kumar, 2012). Specifically, large shareholder s

tend to control large listed companies by utilizing mecha-

nisms (the so-called control-enhancing mechanisms) aimed

at reducing the amount of financial resources necessary to

buy the majority of voting rights. These mechanisms are par-

ticularly common in non-Anglo-American countries where

wealthy entrepreneurial families adopt them in various com-

binations to increase the divergence between ownership and

voting rights (Cuomo, Zattoni, & Valentini, 2013; La Porta,

Lopez-de-Silanes, Shleifer, & Vishny, 1999; Zattoni, 1999).

The use of these mechanisms –and the attendant divergence

between ownershi p and voting rights –is assumed to nega-

tively affect firm performance (La Porta et al., 1999), and the

empiricalevidence seems to support this view (e.g.,Claessens,

© 2015 JohnWiley & Sons Ltd

doi:10.1111/corg.12146

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Corporate Governance: An International Review, 2015, 23(6):469–471