The relationship between ownership concentration and performance in Czech Republic

Abstract

Theory suggests that low ownership concentration is associated with agency costs and highly concentrated ownership structures induce controlling owners to pursue private benefits. Both situations are likely to be associated with negative effects on corporate performance. A number of studies have tested the relationship between ownership concentration and performance empirically, failing to provide any consistent results. While most research has been devoted to study cases of developed countries, the literature on Central and Eastern European countries does not provide better perspectives. The goal of this paper is to explore the relationship between ownership concentration and performance in the case of Czech firms. The research sample contains 34,284 companies and their financial data in the period of 2007-2015. Using linear regression analysis, an inverted U-shaped relationship was found between the Herfindahl index and profitability while controlling for firm size, capital structure, and industry affiliation. No evidence of a linear relationship. Based on one of the largest samples of firms, it is suggested that more concentrated ownership reduces the principal-agent problem and supports performance, but only to a certain extent, where the potential principal-principal problem can still prevail. Moreover, performance is maximized when there is a controlling owner. The findings can be used by policy makers when designing ownership structures.