Does promoters' ownership reduce the firm's financial distress? Evidence from non-financial firms listed in India

Abstract

PurposeOwnership concentration (OC) is an essential element of corporate governance (CG) for a firm's performance. The purpose of the study is to investigate the connectivity of OC (particularly considering promoters' holdings) with the firm's financial distress (FD) of non-financial firms (NFF) listed in India.Design/methodology/approachThe panel data regression analysis (applying quantile regression for the 25th quantile, 50th quantile, and 75th quantile) is employed to inspect the connection between OC (promoters' holdings) and the firm's FD (computed using Altman Z-scores). The data for a cross-section of 78 listed firms (non-financial) in India, considering the time frame of five years (2015–16 to 2019–20), are cumulated for the study. The leverage (leverage ratio), competition (Lerner index), valuation (mcap), sales, and profitability (net profit margin) variables are incorporated as control variables.FindingsThe study's findings reveal that OC (promoters' holdings) positively relates to the firm's FD because OC negatively associates with Zscore (as Zscore is inverse to FD). Additionally, the non-linear association also indicates positive connectivity of OC and Zscore (a U shape association), alternatively showing a negative non-linear connection of OC (promoters' holdings) with the firm's FD (inverse U shape association). This result implies that initially, promoters' holdings enhance the firm's FD, and after a maximum threshold, promoters' holdings start reducing FD in non-financial listed firms in India. The findings also show an interesting aspect of OC at different quantiles. The results indicate that a higher OC is powerful when distress is both high and low to achieve stability. Conversely, less OC among promoters is required to achieve such stability when the distress is medium (50th quantile).Research limitations/implicationsThe scope of the study is limited to NFFs listed in India, which is one of the limitations of the present paper. Hence, this does not provide evidence for financial firms. Only one aspect of OC (promoters' holdings) is considered in the current study. However, OC can also be explored for FD in terms of institutional and retail investors. These limitations can be considered as the present study's future scope.Originality/valueMost of the studies regarding OC have explored the broader aspect of OC. However, the current study has narrowed the OC to promoters' holdings. No other study exclusively examines the association of OC (as promoters' holdings) with the firm's FD. Promoters' holdings have a more significant role in a firm's CG practices because of direct involvement of promoters' holdings in business activities. Thus, the present study's findings have notable implications for managers, policymakers, and investors concerned with the financial health of firms.

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“…However, the leverage of firms in the sample was around 0.49 (median close at 0.48), which is relatively high as compared with US firms (Kanoujiya et al, 2023). The variation in leverage is also very high (0.01 minimum and maximum 0.99).…”

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“…This study also tests the endogeneity issues arising from the main explanatory variables (Wooldridge 2015;Kanoujiya et al 2022). Applying the Wu-Hausman test and the Durbin-Watson Chi2 test, the exhibited p-values by these tests are not significant (higher than 0.50) except for the control variable l_sales (Table 10).…”

“…Applying the Wu-Hausman test and the Durbin-Watson Chi2 test, the exhibited p-values by these tests are not significant (higher than 0.50) except for the control variable l_sales (Table 10). Therefore, the issue of endogeneity due to explanatory variables for dependent variables is discarded (Wooldridge 2015;Kanoujiya et al 2022). The third lag of the independent variables is used as an instrument variable (IV) in the regression for testing endogeneity (Wooldridge 2015;Kanoujiya et al 2022).…”

“…Therefore, the issue of endogeneity due to explanatory variables for dependent variables is discarded (Wooldridge 2015;Kanoujiya et al 2022). The third lag of the independent variables is used as an instrument variable (IV) in the regression for testing endogeneity (Wooldridge 2015;Kanoujiya et al 2022). The present study employs a multi-method approach, including several variants of the dependent variable (Z1, Z2, and Z3) to ensure the robustness of the results (Kanoujiya et al 2022).…”

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“…Therefore, the surviving pandemic area became a top responsibility for corporate executives, especially for those firms that fight against economic uncertainty, unstable market condition, and financial distress zone. Researchers pointed out that "the covid-19 imposes a significant impact on the financial condition of firms, it might be going on to financial distress zone, hence, many firms collapse due to COVID-19 crisis and financial instability" (Kanoujiya et al, 2022;Md-Rus et al, 2013). However, external or internal, financial or non-financial factors are also responsible for a firm's financial distress (Md-Rus et al, 2013;Udin et al, 2017).…”