Impact of Ownership Concentration on the operating Performance of Pakistani Firms Abstract Author

In this research, we scrutinize the affect of ownership structure on company performance. The relationship between ownership structure and performance has always been the area under discussion in the literature of corporate finance. The discussion on this area was started with the thesis of Berle and Means (1932). They argued that defuse ownership is inversely correlated with performance of a company. Most of the earlier studies found a positive relation among ownership concentration and firm’s performance (Cubin and Leech 1983, Short 1994). Literature suggested that the Objective of the concentrated ownership is to enjoy the incentives of monitoring (Shleifer and Vishny, 1997). Therefore the firms that are related to high class technology based or involver intensive R&D have defused ownership structure because in these types of firms outside monitoring is very much difficult (Zeckhauser and Pound, 1990). According to Shleifer and Vishny (1997) there is a tradeoff when an investor invests a large share in one firm. On one side ownership concentration has the incentives of monitoring while on the other side it increases the portfolio risk so. On the same way Demsetz (1983) stated that ownership is an endogenous outcome of cost and benefits of ownership. In support of this Demsetz and Lehn (1985) empirically proved that there is no relation between ownership structure and firm’s performance. In consistent with Demsetz and Lehn (1985), McConnell and Servaes (1990) found no impact of ownership concentration on firm’s performance by taking Tobin’s Q as a measure of performance but they empirically proved that institutional ownership is positively correlated with firm’s performance. Lloyd, Hand and Modani(1987) examined that the companies with concentrated ownership have higher company market value to sales ratio. Nesbitt (1994), Smith (1996) also found the results consistent with McConnell and Servaes (1990) they found institutional ownership positively influence the firm performance. Aghion and Tirole (1997) showed the different picture they stated that concentrated ownership increases the monitoring which may reduces the manger’s initiative. So in this way ownership could be adversely affect the firm’s performance. On the same pattern Burkart et al. (1997) argued that excessive monitoring and interference by the share holder could be costly because it may decrease the manager’s initiative. Another argument has been given by Shleifer and Vishny (1997) they stated that large share holder may try to serve their own interest instead of firm’s Impact of Ownership Concentration on the operating Performance of Pakistani Firms