Impact of Ownership Patterns and Firm Life‐Cycle Stages on Firm Performance: Evidence From India

Date01 January 2018
Published date01 January 2018
© 2018 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.22315
Impact of Ownership Patterns
and Firm Life-Cycle Stages on Firm
Performance: Evidence From India
Srividhya Sridharan and Medha Joshi
India is an emerg-
ing market and offers
an ideal setting to
study diversified
business groups.
There are hundreds
of business groups,
and every group has
diversified lines of
business; however,
each line of busi-
ness is organized as a
separate legal entity.
The legal framework
for Indian listed
corporations is well
regulated by the
Securities Exchange
Board of India
(SEBI). The listing
agreement of the
SEBI mandates all listed body
corporations to declare, on an
annual basis, their shareholding
pattern and audited financial
statements. This includes decla-
ration of cash flow statements
from operating, investing, and
financing activities. Numerous
initiatives by the SEBI have
considerably enhanced cor-
porate governance measures
among listed companies. Also,
SEBI guidelines and the clauses
35 and 40A of the listing agree-
ment require listed companies
in India to disclose their share-
holding patterns under the fol-
lowing categories:
Promoters Hold-
ings, which is
further classified
in three catego-
ries: Indian Pro-
moters, Foreign
Promoters, and
Persons Acting in
Holdings, which
is further catego-
rized as Institu-
tional holdings:
Mutual funds/
Unit Trust of
India (UTI),
banks, finan-
cial institutions,
insurance com-
panies, foreign
investors (FIIs), noninsti-
tutional such as corporate
bodies, individuals
(Indian public), and
When we look at the above
classification, specific questions
come to mind:
This article reexamines the relationship between
ownership patterns and firm financial perfor-
mance through the prism of firm life-cycle stages.
We use an unbalanced panel data set from the
S&P BSE 500 companies in the emerging Indian
market over nine years. We adopt multivariate
analysis with covariance to explore the relation-
ship between ownership patterns and firm perfor-
mance across various stages of a firm’s life cycle.
Empirical results suggest that firm life cycle is a
key indicator in the study of relationship between
ownership patterns and firm performance. Perfor-
mance is optimized by different patterns of owner-
ship over different life-cycle stages. Closely held
firms perform better than widely held firms, and
those with foreign promoter holdings outperform
in most life-cycle stages. © 2018 Wiley Periodicals, Inc.
Refereed (Double-Blind
Peer Reviewed)
118 The Journal of Corporate Accounting & Finance / January 2018
DOI 10.1002/jcaf © 2018 Wiley Periodicals, Inc.
Does the ownership pattern
have any significant impact
on a firm’s performance?
Which pattern of owner-
ship optimizes firm perfor-
Will there be a need for
ownership pattern to
change over life-cycle
stages of a firm in order to
optimize firm performance?
These are not idle ques-
tions. The shareholdings in var-
ious categories provide insight
into the control in the com-
pany. Promoter holdings show
the extent of ownership and
control promoters have over
running the business. More
diversified ownership and good
presence of institutional inves-
tors indicates the promoters
have very little freedom to take
random decisions that benefit
them without assessing the
impact on earnings of a firm
and its shareholders. As regards
firm life cycle, some firms die
an early death and some seem
to survive forever; some firms
mature in a few years and some
are unable to mature even after
a long period of time. The time
span a firm stays in a particular
life-cycle stage varies according
to the adaptability of the orga-
nization. Prior studies seem
to produce mixed results. The
underlying question is whether
the relationship between own-
ership patterns (OPs) and firm
performance can be reexamined
to produce more dependable
results by incorporating firm
life cycle (FLC) as a key factor.
A theory to examine the
ownership structure of a firm
was first proposed by Jensen
and Meckling (1976) in their
article titled “Theory of the
Firm: Managerial Behavior,
Agency Costs and Ownership
Structure.” In their article,
the authors specifically use
the term ownership structure
and bring out an important
dimension, namely, the relative
amount of ownership claims
held by insiders and outsiders.
Insiders here are the manage-
ment, and outsiders are inves-
tors who do not participate in
management of the firm. This
was one of the first attempts
to identify ownership structure
as a dimension for financial
research. Till then, firm struc-
ture meant the firm’s capital
structure (debt and equity).
They also prove that the value
of the firm indeed changes
when there is a change in the
structure of ownership because
of a change in the behavior of
the owner and manager toward
the firm.
There have been various
studies focusing on different
types of OPs. Some among
them are concentrated owner-
ship (closely held), dispersed
ownership (widely held), insti-
tutional ownership (held by
financial institutions), foreign
ownership (held by foreign
individuals, corporations, and
foreign institutional inves-
tors), state ownership (held by
central, state governments) to
name a few (Ang, Cole, & Lin,
2000; Demsetz & Lehn, 1985;
Nashier & Gupta, 2016; Shle-
ifer & Vishny, 1986; Yu, 2013).
An examination of OPs
across 49 countries in the world
shows that larger economies
have lower ownership concen-
tration and countries in which
investor rights are not so well
protected have higher owner-
ship concentration (Porta,
Lopez-de-Silanes, Shleifer, &
Vishny, 1998). It is found that
concentrated ownership and
family ownership is more domi-
nant than widely held corpora-
tions in developing nations.
Impact of Ownership on
The importance of deter-
mining the identity of the
owner, to examine impact on
company performance rather
than just look at ownership
concentration has been brought
out by Short (1994) and taken
forward to examine the identity
of the owner in large Euro-
pean companies by Thomsen,
Pedersen, & Kvist (2006). In
determining the identity of
the owner, the authors look at
who the largest shareholder of
the company is—banks, insti-
tutional investors (financial
and nonfinancial companies),
government, or family owned.
When the owner is a nonfinan-
cial institution, the impact on
firm performance is found to
be most favorable. The authors
use Granger causality tests
to examine the relationship
between block ownership and
firm performance. Block own-
ers are identified as sharehold-
ers who hold at least 5% of the
share capital. There seems to be
a need to break down OPs into
further subdivisions beyond
just concentrated ownership
and dispersed ownership. In
addition to initial work, some
researchers’ work focuses on
specific forms of ownership
concentration in firms and
their impact on firm perfor-
mance. These forms are dis-
cussed below.
Anderson, Mansi, and Reeb
(2003) state that founding fam-
ily ownership is a unique class
of shareholders. This particular
class of shareholders does not
diversify its holdings and passes
them on to future generations.

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