Ownership Structure, Firm Performance, and Stock Liquidity: Empirical Evidence from Indian Listed Firms

Abstract

This study empirically examines the determining factors of ownership structure, and its effect on corporate performance and stock liquidity of Indian listed firms. This study covers two distinct market conditions such as pre-crisis and post-crisis period by considering FY 2008- 09 as the crisis year. Pre-crisis period covers 08 years from FY 2000-01 to FY 2007-08, while post-crisis period covers 08 years from FY 2008-09 to FY 2016-17. Non-financial listed firms from NSE are employed, where 316 companies for pre-crisis and 403 companies for post-crisis period. This study employs panel modelling approaches like static and dynamic panel models for the examination of hypotheses.
Concentrated ownership mostly prevails in Indian corporates, while promoters or founders are found to be largest owners and they dominate the space of management policy making. According to agency perspective, India has agency issues between major and minor owners, unlike Anglo-Saxon countries. Empirical findings indicate that concentration level improves with better legal framework during the pre-crisis period, while superior profitability and industry life cycle improves concentration level during post-crisis period. Mostly, promoters are interested in the firms‟ profitability, growth opportunity and leverage. While institutional investors are mostly driven by bigger firms and better growth options irrespective of the different market conditions.
Ownership concentration is ineffective in influencing the profitability and market value during pre-crisis phase, while it improves profitability through their active engagement during post-crisis phase. Engagement by promoters improves the profitability during both the study periods and boosts the stock returns during post-crisis phase. Foreign institutions adversely influence profitability during pre-crisis period, while no effect in post-crisis period. Foreign players favourably affect market value during both the periods, while their activism negatively influences stock return during pre-crisis stage but have a positive impact during the post-crisis period. Remarkably, domestic institutions are found to be completely ineffective in influencing both the financial and market performance.
Ownership concentration adversely affects the stock liquidity during both stages of the economy while promoters have a declining effect during post-crisis period. Foreign institutions have an adverse effect on stock liquidity during both the market conditions, whereas domestic institutional engagement has no effect during both the periods. Retail investors‟ participation has an incremental effect on stock liquidity regardless of market conditions.
This research adds many contributions to the ownership literature. The use of two broad structure of ownership such as ownership concentration and identities would definitely widen the existing ownership studies. Determinants of corporate ownership structure is innovative for Indian market. Further, work on the determining factors of promoters and institutional ownership will add novelty to the current governance literature. Next, consideration of two distinct market conditions to find the time-dependent and time-independent determining factors is completely novel. The use of GMM improves the robustness of the findings by reducing the endogeneity issues, which is contemporarineous.