How Does Ownership Concentration Affect Firms’ Performance in Developed Economies?

Abstract

This paper analyzes the relationship between ownership concentration and firm performance in the context of different scales (large, medium, and small-cap) measured by market capitalization in 16 developed economies across the globe. Using a dataset comprising 12,751 annual observations of 850 publicly traded developed market companies from 2004 to 2018, the study uses a two-stage GMM estimation in the panel data set to mitigate first-order autocorrelation, heteroscedasticity, and endogeneity bias. The findings suggest that concentrated ownership enhances firm monitoring, mitigates agency conflicts, and boosts profitability. However, the results show that the role of concentrated ownership is more relevant to the profitability of large and medium-cap firms in developed economies than that of small-cap firms, which have no relationship between ownership concentration and firms’ performance. Due to the heterogeneous impact of concentrated ownership on the profitability of large, medium, and small companies, the results have practical implications for affected stakeholders to formulate appropriate strategies for positive outcomes. Furthermore, the analysis emphasizes the necessity of considering different market capitalization categories when evaluating this relationship, elucidating distinct characteristics and strategic priorities among large, medium, and small-cap firms. These insights emphasize the importance of corporate governance and financial management strategies for improving firm performance in developed economies, while also pointing to the persistent effect of past performance on current financial outcomes.

Keywords: Ownership concentration, Firms’ performance, Corporate Governance, Developed economies