The impact of ownership concentration on firm value. Empirical study of the Bucharest Stock Exchange listed companies

Available online at www.sciencedirect.com ScienceDirect Procedia Economics and Finance 15 ( 2014 ) 271 279 Emerging Markets Queries in Finance and Business The impact of ownership concentration on firm value. Empirical study of the Bucharest Stock Exchange listed companies Georgeta Vintil a, tefan Cristian Gherghina a, * a The Bucharest University of Economic Studies, 6, Romana Square, district 1, Bucharest, 010374, Romania Abstract The aim of this study consists in providing the first empirical evidence for the companies listed in Romania regarding the influence of ownership concentration on firm value. The empirical research was employed for a sample of companies listed on the Bucharest Stock Exchange (BSE), over the period 2007-2011, being estimated multivariate regression models for panel data, unbalanced, with fixed effects. The value of the companies was measured out by the instrumentality of Tobin s Q ratio, however adjusted with the purpose of taking into account the industry membership diversity of the selected sample. We considered distinctly the ownership of the first, the second, and the third largest shareholder, as well the sum of holdings of the two largest shareholders and the sum of holdings of the three largest shareholders. Therefore, the results sustain a lack of influence on firm value exhibited by the first largest shareholder, while the second largest shareholder positively influences firm value. By considering the ownership of the third largest shareholder we identified a positive influence, but down to a level of holdings of 13.08 percent, thereupon the influence becomes negative. Thereby, beyond the identified threshold we could perceive the reduction of the third largest shareholder concern regarding the process of directors monitoring, thus following the own aims achievement. Further, from the ownership concentration perspective only the sum of holdings of the three largest shareholders positively influences firm value. However, there was not identified any statistically significant relationship between the sum of holdings of the two largest shareholders and firm value. Accordingly, the results are influenced by the context of an underdeveloped Romanian capital market within the first largest shareholder ownership discourages the occurrence of another investors holding significant stakes. 2014 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/3.0/). 2013 Published Elsevier Ltd. Selection and/or peer-review under responsibility of Emerging Selection and Markets peer-review Queries under in responsibility Finance and of Business the Emerging local Markets organization Queries in Finance and Business local organization Keywords: Ownership Concentration; Agency Theory; Firm Value. * Corresponding author. E-mail address: stefan.gherghina@fin.ase.ro. 2212-5671 2014 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/3.0/). Selection and peer-review under responsibility of the Emerging Markets Queries in Finance and Business local organization doi:10.1016/s2212-5671(14)00500-0

272 Georgeta Vintilă and Ştefan Cristian Gherghina / Procedia Economics and Finance 15 ( 2014 ) 271 279 1. Introduction According to Shleifer and Vishny, 1997 corporate governance refers to the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. With regard to the dissimilar aims between investors which finance the companies and directors, there results the undesirable occurrence of the agency problem. Triantis and Daniels, 1995 noticed the fact that the study of corporate governance considers the examination of mechanisms that deter and correct managerial slack. The ownership concentration as internal corporate governance mechanism is remarked through the shareholders with significant holdings which own the required incentives and resources in order to monitor and discipline the management. Therefore, a concentrated ownership structure could limit the agency problem, thus existing the convenient framework to maximize the value of the companies. Hence, this fact could be explained by the instrumentality of an efficient monitoring process. Thus, a higher degree of ownership concentration involves an emphasis of the incentives and power of shareholders holding significant stakes with the aim of management monitoring at lower costs. On the other hand, it is perceived the posibility of occurrence the agency problem due to the lack of convergence between the interests of majority and minority shareholders. By considering the fact that some companies are managed by persons other than its owners, Berle and Means, 1932 underlined the separation between ownership and control in modern corporations with dispersed ownership and the negative influence on firm value. Thereby, in this context management benefits of more freedom in order to use the companies resources than if the companies were managed by its owner or if the shareholders interests were more concentrated. However, because often management and ownership interests do not naturally concur when not housed in the same person, Berle and Means, 1932 mentioned the fact that when directors own small holdings within the companies and the ownership is dispersed, the benefits are in managers favor to the detriment of shareholders. Nevertheless, pursuant to Demsetz, 1983 the ownership structure identified in different companies, unconcerned to its form, dispersed or concentrated, is influenced by shareholders interests with the aim of profit maximizing. The aim of this study consists in providing the first empirical evidence regarding the relationship between ownership concentration and firm value, by using a sample of companies listed on the Bucharest Stock Exchange (BSE), over the period 2007-2011. As much, similar to most of the corporate governance literature, we quantify the value of firm by industry-adjusted Tobin s Q ratio. Likewise, in order to measure ownership concentration we consider distinctly the ownership of the first, the second, and the third largest shareholder, as well the sum of holdings of the two largest shareholders and the sum of holdings of the three largest shareholders. The remainder of this study is organized as follows. Section 2 presents the background and related literature, while Section 3 describes the sample, variables, and empirical methodology. Section 4 presents and discusses the empirical findings. Section 5 provides a summary and concludes the study. 2. Background and related literature The influence of ownership concentration on firm value could be positive (Berle and Means, 1932; Claessens and Djankov, 1999; Mitton, 2002) because with the increase of shareholdings the investors will be more interested in directors monitoring. On the other hand, the influence of ownership concentration on firm value could be negative, because a higher degree of ownership concentration could signify underdeveloped capital markets, within holding control as a disciplinary mechanism may be ineffective. Likewise, due to higher stakes, some shareholders could follow to establish several commercial or financial relationships consistent with their personal interests, but opposite to the company aims, thus determining simultaneously the impairment of minority shareholders. La Porta et al., 2002 noticed the fact that higher levels of ownership concentration are found within the countries characterized by a relatively low protection of shareholders, being

Georgeta Vintilă and Ştefan Cristian Gherghina / Procedia Economics and Finance 15 ( 2014 ) 271 279 273 underlined the existing conflict between majority and minority shareholders. Thus, there result the distinction between civil law and common law countries. Therefore, as a result of the aforementioned fact, the agency conflicts are dissimilar exhibited in these countries. On the one hand, in common law countries the consequence of lower levels of ownership concentration is reflected through the agency conflicts between managers and shareholders due to the fact that shareholders own a reduced power of monitoring and control. On the other hand, in civil law countries the companies are owned and controlled by shareholders holding higher levels of ownership, thus reducing the agency problem between managers and shareholders, but causing the emergence of several conflictual cases between majority and minority shareholders. The shareholders with significant stakes are holding the required power and incentives in order to hold off the expropriation in the benefit of minority shareholders. However, there could prevail the opposite scenario within the expropriation decision is initiated by majority shareholders. Becht and Röell, 1999 noticed the extraordinarily higher degree of concentration related to shareholder voting power in Continental Europe relative to the U.S. and the U.K. While in the U.S. the main agency problems emerge from conflictual relationships between managers and dispersed, insufficiently interventionist shareholders, in much of Continental Europe there are generally large blockholders present who could exercise control over management. Holderness and Sheehan, 1988 rejected the hypothesis according to which majority shareholders follow to use the company resources for their welfare. Besides, according to Holderness and Sheehan, 1988 the sole difference between both types of ownership structure is represented by the compensation disparities, although not significant, in behalf of directors from concentrated ownership structures. Furthermore, majority shareholders exercise influence not only through management monitoring, but in addition through the assignment of several representatives in top management positions. Zwiebel, 1995 mentioned the fact that if there exists a majority shareholder holding significant stakes, the presence of additional blockholders would determine a reduction in the liquidity of company shares, being a lower probability of a supplementary exertion of management monitoring. However, additional blockholders would register a small marginal contribution to managerial monitoring, thus leading only to an increase of concentration costs by reducing trading liquidity and informational value of the share price. On the other hand, when a majority significant shareholder is absent, the existence of smaller shareholders may induce the organization of coalitions in order to exercise joint control over the management. In case of a modest position caused by lower shareholdings related to the largest blockholder, the additional blockholders would provide support in the monitoring process and depending on the largest blockholder dimmension, they would determine a reduction of company shares at a lower rate. Earle, Kucsera, and Telegdy, 2005 by using a sample of companies listed on the Budapest Stock Exchange concluded the fact that the ownership of the largest shareholder positively influences corporate performance, measured through return on equity, as the ratio of before-tax income to value of equity and operating efficiency, as the ratio of real sales to the average number of employees. Likewise, the authors identified that that the sum of holdings of the largest and the second largest blockholder positively influences return on equtiy and operating efficiency. Moreover, Earle, Kucsera, and Telegdy, 2005 contradicted the results acquired by Zwiebel, 1995 because in a company could exist several shareholders holding higher stakes. By considering the ownership of the largest blockholder, the authors found that the marginal effects are negative. Thus, when the firm largest owner owns more than 50 percent of the shares, the presence of an additional blockholder negatively influence performance. In this context, the marginal costs of concentration outweigh the benefits related to the monitoring process.

274 Georgeta Vintilă and Ştefan Cristian Gherghina / Procedia Economics and Finance 15 ( 2014 ) 271 279 3. Sample, variables, and empirical methodology 3.1. Sample selection and description of variables The empirical research is accomplished for a sample of companies listed on the Bucharest Stock Exchange (BSE) over the period 2007-2011. The companies from the selected sample are listed at the three tiers of the BSE, respectively 63 companies in 2007, 67 companies in 2008, and 68 companies over the period 2009-2011, counting 334 statistical observations. Besides, our sample did not comprise the financial intermediaries, respectively the credit institutions, the five Romanian Financial Investment Companies (SIF-s), and Financial Investment Service Companies (SSIF-s), because this sector of activity is regulated by specific regulations. Likewise, we did not comprise in our sample the companies which were delisted due to non-fulfilment the criteria of performance, efficiency, reporting, and disclosure but whose shares are traded through the electronic systems of the BSE, comprised at the Unlisted tier. In addition, we did not comprise the companies listed at the International tier. The industry membership is varied as follows: wholesale/retail, construction, pharmaceuticals, manufacturing, plastics, machinery and equipment, metalurgy, food, chemicals, basic resources, transportation and storage, tourism, and utilities. Information about ownership concentration comes from the BSE webpage. Financial information comes from the Annual Reports of the companies. All the data were hand-collected. We employed several variables in order to measure firm value, the level of ownership concentration, and control variables. Table 1 summarizes all the variables used in this paper and their description. Table 1 Description of the selected variables Variable Description Variable regarding firm value Q_Adj Industry-adjusted Tobin s Q ratio. Tobin s Q ratio was computed as the market value of assets divided by the book value of assets, where the market value of assets equals the book value of assets plus the market value of common equity less the sum of the book value of common equity. Variables regarding the level of ownership concentration A1 The percentage of shares held by the first largest shareholder (%). A2 The percentage of shares held by the second largest shareholder (%). A3 The percentage of shares held by the third largest shareholder (%). C2 The sum of holdings of the first largest and the second largest shareholders (%). C3 The sum of holdings of the three largest shareholders (%). Control variables Ln(TotalAssets) Leverage Firm size, as total assets (logarithmic values). Leverage, computed as debt/book value of assets. Sales Sales growth, as the relative increase of sales from the previous year (%). YearsListed Number of years since listing on the BSE (logarithmic values). We retained separately only the ownership of the three largest shareholders, whereupon we computed the sum of holdings of the largest and the second largest shareholders, and the sum of holdings of the three largest

Georgeta Vintilă and Ştefan Cristian Gherghina / Procedia Economics and Finance 15 ( 2014 ) 271 279 275 shareholders since by considering the holdings of the next shareholders would not significantly influence our research due to the higher levels of ownership related to the largest shareholder. The value of the companies is measured through Tobin s Q ratio, by considering the specification similar to Kaplan and Zingales, 1997; Gompers, Ishii, and Metrick, 2003; Bebchuk, Cohen, and Ferrell, 2009. Similar with the studies undertaken by La Porta et al., 2002; Doidge, Karoly, and Stulz, 2004; Gozzi, Levine, and Schmukler, 2008 we did not consider the market value of debt at numerator, respectively the replacement cost of assets at denominator. However, we used an adjusted measure of Tobin s Q ratio, due to the industry membership diversity, similar Eisenberg, Sundgren, and Wells, 1998. So, the difference between Tobin s Q ratio corresponding to a company from a certain industry and the median of Tobin s Q ratio from that industry is Q, while the industry-adjusted ratio is computed as follows: Q_Adj = sign( Q)*sqrt( Q ), where sign( Q) is the sign of the difference between Tobin s Q ratio related to every company and the median of the ratio corresponding to the industry. We used the median instead of mean because the data were not normally distributed. Furthermore, we considered several control variables. We use total assets (logarithmic values) in order to control for firm size. Short and Keasey, 1999 noticed that size positively influences firm performance because largest companies could access funds much easier. Likewise, largest companies could create barriers to entry due to economies of scale. Pursuant to Morck, Shleifer and Vishny, 1988; McConnell and Servaes, 1990; Short and Keasey, 1999 we control for the level of indebtedness. While Jensen, 1986 underlined the significance of debt in order to limit the managerial discretion regarding the use of cash-flows, according to Myers, 1977 the presence of debt within capital structure determines the reduction of investments in profitable projects. We use sales growth to proxy for growth opportunities. Morck, Shleifer and Vishny, 1988 argued the fact that if managers own larger stakes in younger, fastergrowing companies that tend to have higher Tobin s Q ratio, the positive relationship between board ownership and firm value might be spurious. The age of the company is measured through the number of years since listing on the BSE (logarithmic values). Black, Jang, and Kim, 2006; Balasubramanian, Black, and Khanna, 2010 noticed that younger companies are likely to be faster-growing and perhaps more intangible asset intensive, which can lead to higher Tobin s Q ratio. 3.2. Empirical design In order to research the relationship between ownership concentration and firm value, we will estimate several multivariate regression models for panel data, unbalanced, with fixed effects, by considering the following general specification: Y it = + X it + Z it + u it i = 1,..., N; t =1,..., T (1) within Y is the dependent variable, respectively firm value, X is the vector of variables related to the level of ownership concentration, and Z is the vector of control variables. Furthermore, in order to identify possible nonlinear relationships between ownership concentration and firm value, we will estimate another set of regression models for the following general specification: Y it = + X it + X 2 it + Z it + u it i = 1,..., N; t =1,..., T (2) within towards the general specification (1), in the aforementioned specification come out the term X 2 being the vector of variables concerning the level of ownership concentration, but the values are squared.

276 Georgeta Vintilă and Ştefan Cristian Gherghina / Procedia Economics and Finance 15 ( 2014 ) 271 279 4. Empirical findings and discussion 4.1. Descriptive statistics Table 2 shows descriptive statistics for the selected sample. Therefore, the percentage of shares held by the largest shareholder record the highest mean value, besides exceeding the threshold of 50 percent. As well, in average, we notice the fact that there is not a sharp difference between the sum of holdings of the two largest shareholders and the sum of holdings of the three largest shareholders. The percentage of shares held by the largest shareholder is near the global average identified by Klapper, Laeven, and Love, 2006: Czech Republic (69 percent), Hungary (52 percent), Poland (39 percent), Slovak Republic (62 percent). Table 2 Descriptive statistics Variable N Mean Median Minimum Maximum Standard deviation Q_Adj 334 0.089281 0.000000-0.811778 1.870603 0.570688 A1 334 55.32130 55.54620 5.642000 99.63450 0.228845 A2 334 10.11330 10.76850 0.000000 43.74150 0.095826 A3 334 2.973800 0.000000 0.000000 24.43080 0.060076 C2 334 65.43460 67.41040 11.07400 99.63450 0.204698 C3 334 68.40840 72.34770 11.07400 99.63450 0.196218 Ln(TotalAssets) 334 8.241298 8.193217 6.977173 1.052934 0.610849 Leverage 334 0.387540 0.353737 0.006916 1.940834 0.285651 Sales 334 0.070588 0.045353-0.913607 2.503076 0.356558 YearsListed 334 0.968339 1.041393 0.000000 1.204120 0.253036 Table 3 exhibits the frequency of the shareholdings held by the largest shareholder over the period 2007-2011. Thus, in average, in 63 percent out of the companies from the selected sample, the largest shareholder own stakes over the threshold of 50 percent. Table 3 The frequency of the shareholdings held by the largest shareholder (2007-2011) 2007 2008 2009 2010 2011 N % N % N % N % N % A1 0.0000%<=x<=10.0000% 1 1.58730 0 0.00000 0 0.00000 0 0.00000 0 0.00000 10.0000%<x<=20.0000% 6 9.52381 5 7.46269 5 7.35294 2 2.94118 3 4.41176 20.0000%<x<=30.0000% 6 9.52381 6 8.95522 5 7.35294 8 11.76471 5 7.35294 30.0000%<x<=40.0000% 5 7.93651 9 13.43284 11 16.17647 11 16.17647 13 19.11765 40.0000%<x<=50.0000% 5 7.93651 4 5.97015 4 5.88235 4 5.88235 5 7.35294 50.0000%<x<=60.0000% 15 23.80952 14 20.89552 14 20.58824 13 19.11765 13 19.11765 60.0000%<x<=70.0000% 7 11.11111 7 10.44776 7 10.29412 6 8.82353 6 8.82353 70.0000%<x<=80.0000% 11 17.46032 13 19.40299 10 14.70588 12 17.64706 11 16.17647 80.0000%<x<=90.0000% 6 9.52381 5 7.46269 7 10.29412 6 8.82353 6 8.82353 90.0000%<x<=100.0000% 1 1.58730 4 5.97015 5 7.35294 6 8.82353 6 8.82353

Georgeta Vintilă and Ştefan Cristian Gherghina / Procedia Economics and Finance 15 ( 2014 ) 271 279 277 4.2. Results of regression Table 4 provides the estimation results for panel least squares regression models of Tobin s Q ratio on the ownership of the three largest shareholders and control variables. Therefore, the regression results provide support for a lack of relationship between the percentage of shares held by the largest shareholder and firm value (models 1 and 2). Besides, we notice a positive influence of the percentage of shares held by the second largest shareholder on Tobin s Q ratio (models 3 and 4). Likewise, the third largest shareholder positively influences firm value, but down to a level of holdings of 13.08 percent, thereupon the influence becomes negative (model 6). Table 5 exhibits the estimation results for panel least squares regression models of Tobin s Q ratio on the ownership concentration and control variables. Thus, we distinguish the fact that only the sum of holdings of the three largest shareholders positively influences firm value (model 3). Furthermore, by examining the influence of control variables, both in Table 4 and Table 5, we notice the positive influence of leverage on firm value, respectively the negative relationship between the number of years since listing on the BSE and Tobin s Q ratio. Table 4 Estimation results for panel least squares regression models of Tobin s Q ratio on the ownership of the three largest shareholders and control variables 1 2 3 4 5 6 Intercept 0.937956 (0.500640) 0.884203 (0.472166) 0.959779 (0.525065) 0.802285 (0.439154) 1.916000 (1.058611) 0.735416 (0.396680) A1-0.401659 1.017875 (0.500640) (0.786663) A1 2-1.322731 (-1.180901) A2 1.043536 2.590741 * (1.758821) (2.155207) A2 2-5.853694 (-1.478851) A3 3.572543 *** 8.007942 *** (3.843179) (3.991601) A3 2-30.60331 * (-2.488202) Ln(TotalAssets) 0.000763-0.032216-0.034053-0.026103-0.158144-0.020112 (0.003353) (-0.140701) (-0.149885) (-0.115122) (-0.702687) (-0.087576) Leverage 1.081127 *** 1.089227 *** 1.062651 *** 1.106238 *** 1.128686 *** 1.127144 *** (6.032457) (6.077784) (5.963206) (6.138135) (6.452852) (6.507767) Sales 0.082839 0.078303 0.059853 0.063414 0.039093 0.057552 (1.062106) (1.003492) (0.757164) (0.803656) (0.509274) (0.753574) YearsListed -1.092164 *** -1.080500 *** -1.147773 *** -1.114912 *** -1.104799 *** -1.055641 *** (-4.119217) (-4.075470) (-4.416350) (-4.283950) (-4.345004) (-4.179907) F-statistic 3.895275 *** 3.866825 *** 3.963974 *** 3.957413 *** 4.299512 *** 4.409768 *** R-sq 0.517970 0.520541 0.522333 0.526318 0.542559 0.553198 Adj R-sq 0.384996 0.385924 0.390563 0.393322 0.416368 0.427750 p <.10; * p <.05; ** p <.01; *** p <.001. The t-statistic for each coefficient is reported in parentheses. N = 334. The description of the variables is provided in Table 1.

278 Georgeta Vintilă and Ştefan Cristian Gherghina / Procedia Economics and Finance 15 ( 2014 ) 271 279 Table 5 Estimation results for panel least squares regression models of Tobin s Q ratio on the ownership concentration and control variables 1 2 3 4 Intercept 0.443566 (0.240961) 0.445471 (0.241513) 0.445674 (0.245970) 0.612571 (0.335970) C2 0.248800 0.160430 (0.543241) (0.129160) C2 2 0.083826 (0.076562) C3 0.825801 * -0.090872 (2.068497) (-0.079502) C3 2 0.873410 (0.855939) Ln(TotalAssets) 0.022748 0.024902-0.018925-0.015070 (0.100614) (0.109090) (-0.084001) (-0.066844) Leverage 1.064844 *** 1.064177 *** 1.060009 *** 1.052893 *** (5.928264) (5.906343) (5.961220) (5.911720) Sales 0.085526 0.085616 0.066563 0.066086 (1.097015) (1.095954) (0.854560) (0.847971) YearsListed -1.159996 *** -1.160995 *** -1.219449 *** -1.230859 *** (-4.356480) (-4.346726) (-4.643741) (-4.678773) F-statistic 3.883561 *** 3.815852 *** 3.998033 *** 3.949262 *** R-sq 0.517218 0.517229 0.524467 0.525804 Adj R-sq 0.384036 0.381681 0.393286 0.392664 p <.10; * p <.05; ** p <.01; *** p <.001. The t-statistic for each coefficient is reported in parentheses. N = 334. The description of the variables is provided in Table 1. 5. Summary and concluding remarks This study researches the influence of ownership concentration on firm value for a sample of companies listed on the Bucharest Stock Exchanghe (BSE), over the period 2007-2011. Firm value was measured through industry-adjusted Tobin s Q ratio and we considered the ownership of the first, the second, and the third largest shareholder, as well the sum of their holdings. By employing multivariate regression models for panel data, unbalanced, with fixed effects, we found a positive influence of the percentage of shares held by the second largest shareholder, while the percentage of shares held by the third largest shareholder positively influences firm value, but down to a level of holdings of 13.08 percent. Besides, we identified a positive influence of the sum of holdings of the three largest shareholders on firm value. However, our findings are influenced by the context of an underdeveloped Romanian capital market, being supported Zwiebel, 1995 pursuant which large shareholders will tend to create its own space, discouraging other blockholdings from forming. References Balasubramanian, N., Black, B. S., Khanna, V., 2010. The relation between firm-level corporate governance and market value: A case study of India, Emerging Markets Review 11(4), p. 319-340.

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