Academic journal article Asian Social Science

Ownership Structure Variation and Firm Efficiency

Academic journal article Asian Social Science

Ownership Structure Variation and Firm Efficiency

Article excerpt

Abstract

Firms with different ownership structures could be argued to have different levels of efficiency. Highly concentrated firms are expected to be more efficient as this type of ownership structure may alleviate the conflict of interest between managers and shareholders. In Malaysia, public-listed firms have been found to have highly concentrated ownership structure. However, whether this evidence holds for every industry has not been established. Hence, the objective of this paper is to investigate whether there are variations in ownership structure and firm's efficiency across sectors. To achieve this objective, the frequency distributions of ownership structure were calculated and firms' efficiency scores for consumer products, industrial products, construction and trading/services sectors were measured. Data Envelopment Analysis (DEA) under the assumptions of constant returns to scale (CRS) and variable returns to scale (VRS) was employed to estimate firms' efficiency scores. A sample of 156 firms listed on the Kuala Lumpur Stock Exchange (KLSE) was selected using the stratified random sampling method. The findings have shown that there are variations in firm ownership structure and efficiency across sectors.

Keywords: ownership structure, firm efficiency, DEA

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Firm ownership structure in Malaysia has changed as business organizations flourish and the national economy grows. In addition, it has also changed due to economic transition, industrialization and privatization policies implemented by the government over the past four decades. As a result, size of firms have expanded and caused susbstantial changes in the dispersion, redistribution and concentration of ownership structure. Ramli (2010), for instance, has found that ownership structure in Malaysia is concentrated and large shareholders are in control. He found that the largest shareholders or a shareholder group owns around 40% of companies' paid-up capital. In addition, according to the study by Claessens, Djankov, Fan and Lang (2000) on corporations in nine East Asian countries, Malaysia has the third highest concentration of control after Thailand and Indonesia.

In general, firms with different ownership structure are argued to have different levels of efficiency. Highly concentrated firms will be more efficient because this type of ownership structure may alleviate the conflict of interests between managers and shareholders. This statement is mainly grounded in the very well-known principal-agency problem model by Jensen and Meckling (1976). The principal-agency problem argues that managerial share-ownership may reduce managerial incentives for privileges, expropriating shareholders' wealth or engaging in other sub-optimal activities. This subsequently helps in aligning the interest of managers and shareholders and consequently lowers agency costs and increases firm value. Regarding diffused shareholding, this kind of ownership structure does not provide adequate control to the shareholders due to the lack of capacity and motivation to monitor management decisions. Hence, the model predicts that larger managerial ownership stakes should lead to better firm performance.

The study by Abdul Samad (2002) reveals the existence of a high concentration of ownership in Malaysia. His study on the public-listed companies in Malaysia found that the means of shareholdings of the largest shareholders and the five largest shareholders to be about 30% and 60%, respectively. This finding indicates that companies on the Kuala Lumpur Stock Exchange (KLSE) are less diffused but are dominated by companies with concentrated shareholders, typically families or government-owned or promoted institutions.

Therefore, in view of the previous evidence of high ownership concentration of firms in Malaysia, this study attempts to investigate the variation in ownership structure and the variation in efficiency of the public-listed firms in Malaysia. …

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