Ownership Structure &

Financial Performance

Ahter SönmezTarık Temelkök

Introduction

•In the academic literature, we have seen that there has been continuos debate about this topic but not a total consensus

•We will base our hypotheses suggesting that there exists a causal relationship between them

Why it’s important?

We’re trying to answer:

•What should be the most efficient ownership structure?

•How does ownership concentration influence the performance ?

•Knowing the relationship between ownership structure and financial performance could help the investors to gain value by optimizing the firm’s ownership structure !!

Two sides of the Coin

•+, Ownership concentration would prevent certain problems that can emerge out of divergence of interests

•-, Separation between professional management and ownership can be beneficial

Professional Management

•complex organizational structures could be handled

•risk can be diversified among shareholders

•large funds to acquire specific assets can be obtained

Academical Theory Behind

•Transaction Cost Theory (Originally1937)

•Corporate Governance Theory

•Principle-Agent Theory

•preference of the principal is profit maximization

•preference of the agent is utility maximization

Source: Luzhen Chen, Msc Thesis, Aarhus School of Business. Aarhus University

More on the subject

•Ownership structure is believed to influence firm performance through its influence on the principal-agent relationships

•The literature review on ownership structure is divided into two themes:

•ownership concentration

•owner identity

Source: Luzhen Chen, Msc Thesis, Aarhus School of Business. Aarhus University

Ownership Concentration vs.

Owner Identity•Ownership concentration

provides quantitative information about the capital right of the largest shareholders

•Owner identity information provides qualitative information about the character of the controlling shareholders

Firm Performance Criteria

•Firm Valuation

•Firm profitability & efficiency

•Growth

•Risk (Sector)

Criteria Calculation

•Firm valuation is measured by Tobin’s Q

•Firm profitability is measured by Return on Equity (ROE & ROA)

•Firm growth: we look at assets

Source: Luzhen Chen, Msc Thesis, Aarhus School of Business. Aarhus University

Analysis

Methodology•We have comprehensively researched

academic sources for the topic (Jstor, Google Scholar)

•This review of the literature yielded different and inconsistent results and no total consensus among the researchers

•We decided to make our own model and analysis (for Turkey)

Methodology con’t• We chose non-financial Turkish firms quoted in Istanbul Stock

Exchange between 2009-2012

• Yearly data, of 17 companies

• We modeled the ownership structure as an endogenous relationship, with respect to 16 variables (12 independent, 4 dependent)

• About concentration of shareholders

• Percentage of shares owned by management

• Other financial variables (more on the coming up slides)

• We collected data and entered them manually in excel tables & E-Views software

• We applied statistical techniques

• Ordinary least square regression (OLS)

Endogenous vs. Exogenous Ownership• Endogenous structure (factor) means that

ownership is determined “inside” the firm

• Exogenous structure (factor) means that ownership is determined “outside” the firm

• size of the industry

• the regulatory climate

• risk involved

• the degree of financial leverage

List of Companies• Anadolu Efes İçecek

• Arçelik Aş.

• Banvit

• Boyner Mağzacılık

• Carefour

• Derimod

• Doğuş Otomativ

• Ezcacıbaşı Yapı

• Enka İnşaat

• Ereğli Demirçelik

• Karsan Otomativ

• Türk Hava Yolları

• Tuborg

• Turkcell

• Türk Telekom

• Ülker

• Vakko

Source of Data

•Kamuyu Aydınlatma Platformu (KAP.gov.tr)

•Individual Websites of the Companies Analyzed

•Websites of Financial Information

Manually Collected & Entered Data

Common Beliefs About Turkish Companies

That they are characterized by:

•high ownership concentration

•presence of dominant shareholders

•active financial intermediaries

•weak external control mechanisms & transparency

Analysis Models

• For performance criteria we have 4 models; ROA, ROE, Growth and Tobin’s Q

• ROAit = αit+β1S1it+ β2S2it+ β3S3it+ β4POit+ β5FIit+ β6MSit+ β7SAit+ β8Lit+ β9BDit+ β10Ait+ εit

• ROEit = αit+β1S1it+ β2S2it+ β3S3it+ β4POit+ β5FIit+ β6MSit+ β7SAit+ β8Lit + β9BDit+ β10Ait+ εit

• TobinQit = αit+β1S1it+ β2S2it+ β3S3it+ β4POit+ β5FIit+ β6MSit+ β7SAit+ β8Lit + β9BDit+ β10Ait+ εit

• Growthit = αit+β1S1it+ β2S2it+ β3S3it+ β4POit+ β5FIit+ β6MSit+ β7SAit+ β8Lit+ β9BDit+ β10Ait+ εit

By such nature of the Turkish companies; we selected the following criteria for the model:

•S1, biggest shareholder’ share

•S2, the biggest two shareholders’ share

•S3, the biggest three shareholders’ share

•PO, public shares

•FI, foreign shareholders’ shares

•MS, managers shares

•SA, sales

•L, leverage (debt/total assets)

•BD, Number of Board of Directors (Regular / Independent BoD)

•A, Company Age

The Model

Correlation Matrix

Regression

Results•According to the regression results,

ownership concentration has positive correlation with financial performance of a company in the model in which Tobin’s Q is dependent.

•Therefore, less shareholders there are in a company, better performance it tends to show

Results con’t

•Higher ownership concentration also means lower public share

•In the companies with high ownership concentration accordingly low public share, professionals tend to utilize the sources more productively

Results con’t

In four of the models,

•Foreign shares and managers’ shares have no significant effect on financial performance.

ConclusionsFrom our empirical results:

•Specific variables related to ownership structure have effect on financial performance

• It is important to take especially the ownership concentration and public share into account while studying the financial performance of companies

Conclusions con’t•In further studies, researchers can

deepen in investigating indirect control of shareholders:

•via holdings who own the companies

•via other members of the family

•via other companies/intermediaries

Questions

•Thank you...