Does Endogenously-Determined Ownership Matter on Performance?

LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT

Literature review

Ownership structure is considered one of the core internal mechanisms of corporate governance; hence, the relationship between ownership structure and performance has been widely debated in the finance literature. Numerous studies, mainly based on the assumption that ownership is exogenous, document a causal relationship between ownership and performance. Some support the existence of a linear relationship (Jensen and Meckling, 1976), whereas others endorse a non-monotonic relationship. For instance, to capture possible nonlinearity, Morck et al. (1988) first apply a piecewise linear regression model and find a significant non-monotonic relationship between managerial ownership and performance. Following Morck et al. (1988), several studies (e.g., Hermalin and Weisbach, 1991; Holderness et al., 1999) demonstrate the low-level positive relationship between performance and insider ownership, and the high-level negative relationship between performance and ownership concentration, implicitly suggesting that the negative effects of concentrated ownership outweigh its beneficial effects. Recently, some studies (e.g., Anderson and Reeb, 2003; Adams and Santos, 2006) have documented the significant cross-sectional relationship between insider share ownership and corporate value. Contrary to the belief that managerial control is purely detrimental, these studies find that it has positive effects on the performance of financial institutions over at least some range. McConnell et al. (2008) first account for the endogeneity of ownership structure and finally find that cross-sectional changes in firm value are characterized by a curvilinear relationship. The results are consistent with a causal interpretation of the empirical relationship between insider ownership and firm value.

Some papers discuss the impact of institutional investor ownership on corporate performance. Pound (1988) proposes three hypotheses on the relationship between the shareholding of institutional investor ownership and corporate performance: the efficient monitoring hypothesis, the conflict of interest hypothesis, and the strategic alignment hypothesis. These hypotheses all suggest a positive or negative effect. Subsequent studies examine the relationship but provide a distinct point of view. McConnell and Servaes (1990) examine the cross-sectional relationship between Tobin's Q and management equity ownership; they find a significant curvilinear relationship for insider ownership and a positive relationship for block holders and institutional investor ownership, consistent with the efficient monitoring hypothesis. In contrast, other studies (e.g., Barnhart and Rosenstein, 1998; Faccio and Lasfer, 2000) find the opposite or show the absence of such significant relationship. Interestingly, Cornett et al. (2007) find a significant relationship