Ownership concentration, corporate governance and firm performance: Evidence from Pakistan

Abstract

The study investigates the determinants of ownership concentration, the effect of ownership concentration on the firm's performance with the sample of sixty representative firms from different manufacturing sectors of the Pakistan's economy during 2003 to 2008. The results suggest that firms where ownership is concentrated they do not adopt better governance practices and disclose less, however board composition has positive and significant role. The firm specific factors affect the concentration of ownership more, the more investment opportunities provides greater incentives for ownership concentration, however, size has opposite effect and leads to diverse ownership to get wider access to funds and share ownership. The results reveal that in Pakistan corporations have more concentration of ownership which is the response of weak legal environment. The concentration of ownership by top five block-holders seems to have positive effect on firms' profitability and performance measures. The family, foreign and director ownership also has positive affect on firm performance, however firm performance is not effected by financial institutions' ownership. The broad implication that emerges from this study is that ownership concentration is an endogenous response of poor legal protection of the investors and seems to have significant effect on firm performance. It requires implementation of corporate governance reforms at most at par with real sector and financial sector reforms.