Article2013

Ownership structure, capital structure, and performance of group affiliation

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Corporate Finance and Governance Family Business Performance and Succession Corporate Governance and Financial Management

Abstract

Purpose This study seeks to examine how agency problems and internal capital markets in group‐affiliated firms are mutually influenced by the ownership structure, capital structure, and performance. It also aims to examine the endogeneity in group affiliation. Design/methodology/approach Using panel data, this study employs two‐stage least squares regression with the instrumental variable technique to examine the relationship among capital structure, ownership structure, and performance of group‐affiliated firms. Simultaneous equation models are constructed to identify the effects of interdependent decisions. Findings The empirical results indicate a U‐shaped relationship between insider ownership and performance. Moreover, the alignment of ownership and control rights determines the relationship between ownership structure and performance for group‐affiliated firms. The capital structure decisions of group‐affiliated firms are independent of firm performance and insider ownership, supporting the view that capital structure decisions of group‐affiliated firms are determined by the overall characteristics of the business group, rather than those of the individual firms. Practical implications Business groups can reduce the agency problems that occur in group affiliation by increasing the insider ownership (after a certain tunneling point), debt financing, and dividend payout. Originality/value Previous studies have paid little attention to the effects of the agency problem and the internal capital market on group affiliation. Whether endogeneity is a consequence of the common characteristics of group affiliation or a result of the simultaneity existing among ownership structure, capital structure, and performance is also unknown. This paper fills some of these gaps.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1978Measuring the efficiency of decision making units 1984Corporate financing and investment decisions when firms have information that investors do not have 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1984Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis 1957The Measurement of Productive Efficiency 1996Agency costs of free cash flow, corporate finance, and takeovers 1988Management ownership and market valuation

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