Effect of Ownership Diversity on Financial Distress: Evidence from Colombo Stock Exchange

Abstract

Ownership diversity is defined as the distribution of ownership and control among various categories of shareholders. Many organizations' ownership structures have become increasingly diversified in terms of race, nationality, gender, and socioeconomic level in recent years. Globally, there's little consensus on how ownership diversity affects financial distress. Using the agency theory and entrenchment hypothesis, this study investigates how the diversity of ownership affects the financial distress of business firms. This research makes a contribution to the empirical literature by applying panel data analysis on 181 non-financial companies from 2012 to 2019 on the Colombo Stock Exchange of Sri Lanka. The study uses Herfindahl-Hirschman Index to measure ownership diversity. In contrast, Altman Z Score Analysis, Emerging Market Score, and Interest Coverage Ratio measure financial distress. The results of the logistic regression models demonstrate that ownership diversity significantly and positively affects financial distress. This signifies that the diversified ownership structure raises the agency cost as it incurs high monitoring costs to monitor diverse shareholders, leading to financial distress within business firms.