Ownership Concentration and Firm Performance in India

Abstract

Ownership concentration (OC) is considered an important corporate governance mechanism because owners with concentrated shareholding influence the operations and management of a company. The ownership structure in developing countries is quite different from that in the developed markets; thus, we provide empirical evidence from an important emerging market like India. This study used panel data models and instrumental variables (IV) techniques using generalised method of moments (GMM) on a large sample of 11,136 firm-year observations to get efficient and reliable results. The endogeneity of OC has not been examined in India before. In this article, OC is measured by Herfindahl’s index as suggested by Demsetz and Lehn (1985) and Leech and Leahy (1991) . Other Indian studies in this area have used promoter shareholding as a proxy of OC. After controlling for endogeneity, we find that OC affects both market and accounting performance of a company, positively. The results suggest that concentrated ownership reduces agency costs as blockholders actively monitor the management of the company, thereby leading to better firm performance.