Does Ownership Structure Affect Corporate Performance? Evidence from the Market for Asset Sales

Abstract

(ProQuest: ... denotes formulae omitted.)IntroductionThe purpose of this paper is to determine whether ownership structure affects firm performance. This requires that firms be classified into various ownership types and that circumstances are found where differences among types of firms are reflected in their behavior. Three ownership structures are identified from previous literatures, viz., firms with large outside shareholders, firms with large inside shareholders and widely held firms.Firms are then compared with regard to effects of the acquisition or sale of an asset on their stock price. If there is no observed difference in the stock price effect (announcement effect) between the ownership types, then the conclusion would be that ownership structure is not seen to be a factor affecting firm performance (at least in this case). But if (as will turn out to be the case) firms with large block outside shareholders experience a greater announcement effect than either widely held or large inside shareholder firms, then ownership structure does influence firm performance.Performance is measured by the market's reaction to the announcement of the asset sale for both buying and selling firms. The market's reaction is recorded in an 'event study', a study of the changes in the stock price (and therefore the market value) around the announcement of the transaction. Observed changes are then compared to what would be expected if there were no event or transaction. If a transaction is seen to be in the best interests of shareholders, there will be a positive change in the stock price. If the change in stock prices are greater for firms with large outside shareholders than other ownership structures, that would be evidence that such firms are viewed by the market as making better deals than other firms. This may result from the incentive of the large outside shareholder to monitor management.A negative announcement effect would result if the transaction is not perceived to maximize shareholder wealth which may be the case in widely held firms, where effective control is with the management, and the possibility exists whereby the selling or buying decision might not benefit the shareholders, but benefits the management. To see whether the market assesses any difference between the different ownership structures, the changes in stock prices are compared across the three types of firms. The development of the sample was extremely laborious and involved several steps. First, a sample of interfirm asset sales was compiled (by hand). Using two different data sources, this sample was partitioned into different ownership categories, then an announcement date was identified. An event study was then used to compute Abnormal Returns (ARs) for various event windows around the announcement date. The ARs should differ between the ownership structures, if the ownership structure affects the market's assessment of a transaction. The main result of the investigation is that firm performance is affected by ownership. The large outside shareholder sample has a positive significant market reaction which is significantly greater than that for the widely held and large inside shareholder samples for the buying firms. Of the latter two samples, only the widely held sample return is significant and both the market reactions are negative.With the large outside shareholder sample again having a significant and positive market reaction that is greater than that experienced by both the widely held and large inside shareholder samples, the results are similar for the selling firms. The only one difference from that of buying firm sample results is that the market reaction for the widely held selling firm sample is not significant.Positive ARs that are greater than those of both widely held and large inside shareholder firms are experienced by firms with large outside shareholders (buyers and sellers). There is on average a positive market reaction to the presence of a large outside shareholder that is significantly greater than that experienced by large insider shareholder firms and widely held firms. …

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