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

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 a study that involves ownership and performance. Second, during the 2000s, awareness and implementation of corporate governance increased significantly. The authors believe that the markets learn these changes and 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 financial crisis. Both crises happen unexpectedly, so the authors can expect that the crises are 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 did 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 during 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. When 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 ownership structure 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 process is an international phenomenon. 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 should pay 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 corporate governance should be maintained at 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 is characterized by a significant increase in awareness and the implementation of good corporate governance.

Ownership Concentration and Performance Recovery Patterns in the European Union

“…Overall, ownership concentration has supported to some extent business recovery after the crisis, but this result is evidenced particularly for ROA-our results are thus in line with the literature on ownership concentration and performance during economic downturns. Thus, we support the conclusions of Saleh et al [73] for Australian firms' performance patterns during the global financial crisis and those of Hanafi et al [74], identify a positive relationship between ownership concentration and business performance in the case of US companies during the 1997 and 2008 crises. These results may be explained by the higher commitment of more concentrated ownership companies to protecting their businesses and allocating capital to profitable investments during difficult times, which is also recognized by market investors.…”

“…Listed Australian firms are examined by Saleh et al [73] and the results show that companies with a higher ownership concentration recorded Sustainability 2019, 11, 953 7 of 31 better performance measured by ROA and ROE for both family and non-family firms before and during the recent global financial crisis. The impact of ownership on Indonesian firms' performance in the 1997 and 2008 financial crises is studied by Hanafi et al [74]; the authors find that ownership concentration is beneficial for performance, with a plus for large firms, in whose case the connection between ownership concentration and firm value is stronger. Unfortunately, the impact of ownership concentration on firms' recovery after crises has not been studied so far, and our research fills this gap for EU companies.…”

The mediating role of board size, philanthropy and working capital management between basic corporate governance factors and firm's performance

“…It is evident from various Asian countries that ownership divergence and firm's profitability are in nonlinear relationship with each other (Lin and Lin, 2013;Wiwattanakantang, 2001;Utama et al, 2017). The study of Hanafi et al (2018) also shows significant relationship between ownership and firm performance, especially the saturated ownership increases the performance. Therefore, the policymakers and other stakeholders should pay great attention toward ownership.…”

The Moderating Effect of Government Ownership on the Relationship between Cash Flow and Firm’s Performance for Construction Industry in Malaysia

“…Finally, the result indicates there is a negative relationship between NCIF and firms' performance and GO has the lowest moderation effect on this activity. The efficiency of the firm is not strictly because of the government interference into its cash flow budget structure as agreed by Hanafi et al (2018). However, its assist the statement by Nagar and Raithatha (2016) that higher percentage of government authority in the cash flow structure of a firm would lower the firms' performance.…”

“…While, negative cash flow arises just as the capital expenditure exceeds the revenue and is reflective of a financially unstable. Profitability generated from the activity establish by a company after settling all the fixed and variable cost (Hanafi et al, 2018). The money generated returns to the investors of the company, who might or might not prefer to spend it in maintaining the business.…”