Ownership Concentration and Firm Value: A Study from the Indian Corporate Sector

Abstract

This paper contributes to understanding corporate governance issues in emerging economies by examining how blockholders influence firm value. Using a much disaggregated and uniform database from the Indian corporate sector for the year 2001, we examine the interaction between ownership structure and firm value in the following ways. Unlike most existing research, which studies the aggregate level of ownership, we include a wider set of mechanisms, such as identity and ownership concentration of outside blockholders controlling at least 5 percent of total equity of the firm. We analyze the role played by these shareholders with substantial voting power in situations when equity holding is less compared to the more concentrated holdings of promoters. We also attempt to see if these investors coordinate among themselves to constrain insiders from expropriating corporate resources. We find a significant curvilinear relationship between firm value and the fraction of voting rights owned by insiders. The curve slopes downward until insider ownership reaches approximately between 45 percent and 63 percent, then slopes upward. Empirical results on ownership concentration by minority blockholders do not support the monitoring hypothesis of these investors. Furthermore, the coordinated behavior of the largest two minority blockholders has an increasing (decreasing) impact on firm value when the collective control is located in the lower (higher) range. The coordination problem worsens if the largest two are private corporate bodies.

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