The impact of ownership concentration, and identity on company performance in the US and in Central and Eastern Europe

Abstract

PurposeThe purpose of this paper is to assess the relationship between ownership structure and company performance of public companies. The central tenet of the analysis is that separation of ownership and control has an adverse effect on the value of the firm, as information asymmetry between owners and managers is exploited by management.Design/methodology/approachA cross sectional regression is conducted using data on 669 companies, which were members of the S&P 500, BUX (Hungary), WIG (Poland), SBI (Slovenia), PX (Czech) indexes in the third quarter of 2005. Owners with at least 5 percent share ownership are collected from Reuters and Business and Company Resource Center databases.FindingsResults for CEE companies are in line with that of Earle et al. and also support Zwiebel's “space creation” concept. The negative effect of multiple shareholdings is due to collective action problems instead of alternative explanations such as manager repression. Companies in the CEE region have rather concentrated ownership, which implies that at least there is one blockholder with dominant stake allowing him to influence corporate decision making. The contribution to management control of the next largest blockholder generates tension between the two causing costs that exceed the benefits of control. Interestingly, enough in case of institutional investors as largest blockholders the formerly positive effect on performance became negative. This is in contradiction with the popular literature that emphasizes the beneficent role of institutional investors. Results for the US firms also show that dominant blockholders “create their own space” in another word when the ownership stake of the largest blockholder exceeds 10 percent the contribution of smaller owners to the monitoring and control of management is negative. This implies that even though the dominant blockholder is much smaller in size relative to the one in the CEE sample its willingness to cooperate is low. On the other hand, when the largest blockholder is not dominant the coalition of blockholders is able to create value by efficient monitoring. Institutional investor as dominant blockholder further enhances the efficiency of control, while decreases it when coalition consists solely from institutional investors.Originality/valueThe definition of ownership concentration outlined by Zwiebel is applied. To assess the effect of coalition of blockholders on company performance the concept determined by Earle et al. is used. Their notion is extended by differentiating between blockholder identity and the homogeneity of blockholder coalition, in order to scrutinize the consequence of shareholder activism.