The effect of ownership structure on firm performance in nonfinancial sector of Pakistan

Abstract

Ownership structure is one of the important components of corporate governance system that significantly affects firm performance. This study analyzes ownership structure on the basis of ownership concentration as well as composition and examines its effect on financial (ROA & EBIT) and market performance (EPS & Tobin‘s Q) of nonfinancial sector of Pakistan while incorporating industrial dummies, firm size and regime change. The data of the study comprises of 100 nonfinancial firms listed at Karachi Stock Exchange (KSE) Pakistan over the period of 2005-2012. Findings of the study support the concept of managerial entrenchment and controlling power of concentrated shareholders by concluding that managerial ownership has negative but concentrated ownership has positive effect on the firm performance. The large sized firms perform better than small and medium sized firms. The performance of nonfinancial sector of Pakistan seems better during the period before financial crisis than the one after financial crisis. This two period comparison serves as contribution towards existing literature. Moreover, the study finds varying management style and firm performance across industries. In this connection ownership structure does not play a significant role in the determination of performance of different industries. Key Words: ownership structure, firm performance, regime change, rent protection theory, agency theory, control-ownership disparity, agency problems.