Academic journal article Australasian Accounting Business & Finance Journal

The Relationship between Ownership Structure Dimensions and Corporate Performance: Evidence from Bahrain

Academic journal article Australasian Accounting Business & Finance Journal

The Relationship between Ownership Structure Dimensions and Corporate Performance: Evidence from Bahrain

Article excerpt

Introduction

The relation between ownership structure and firm performance has been studied intensively by many researchers interested in corporate finance. This area of research is receiving a growing amount of interest due to the mixed results that have been obtained. Most studies were conducted in the Anglo Saxon market environment, however, those results cannot be generalized to other market environments due to the differences found in each one of them. Ownership structure is receiving much attention due to its correlation with agency theory and corporate governance. The mixed results may be justified because of the different dimensions found in ownership. The most important dimensions that will be focused on are ownership concentration and managerial ownership. This relation was discussed early (in 1932) when Berle and Means discussed the role of management and majority versus minority shareholders in the performance of a company. Traditional agency theory emphasises the potential conflict between unmonitored management and widely dispersed shareholders. The vast majority of studies conducted in USA focused on this conflict. However, in other market environments, like the European market and some emerging economies, ownership is much more concentrated which creates majority and minority shareholders creating a potential conflict that may affect the company performance, especially in the absence of laws and legislation that protect minority shareholders.

Recently the debate moved from the USA to other markets around the world to identify how ownership structure affects firm performance under the different market circumstances found outside the Anglo-Saxon markets. This study is concerned with exploring that relation in an emerging small market in the GCC, which is the Bahraini market. Few studies have been undertaken on that issue in the GCC and in the Bahraini market in particular. This study aims to cover this gap by providing evidence from Bahrain that contributes to the current ongoing debate on the relation between ownership and firm performance. This study gains in importance in view of the intensive efforts by the Bahrain Monetary Agency to promote Bahrain as an international financial centre (Hussain & Mallin, 2003). So, it is crucial to take a closer look at the Bahraini market that will benefit researchers, investors and law makers to improve the Bahraini market in serving the vision of the Bahraini Monetary Agency.

Related Literature and Hypothesis

The core of this study lies in agency theory and managerial entrenchment argumentation. It provides new empirical evidence in the ongoing research on ownership structure attempting to uncover the diverging interests of different kinds of shareholders and how this may affect company performance. Agency theory suggests that concentrated ownership will result in better monitoring of the management which makes ownership an important element in corporate governance. This, in turn improves company performance. Some studies such as Demesetz and Lehn, 1985; Demesetz and Vilalonga, 2001; Kumar, 2003; Rowe and Davidson, 2002 found that there is no significant relationship between concentrated ownership and company value. Other studies such as Pivovarsky, 2003; Sanda, Mikailu and Garba, 2005; Joh, 2002; Xu and Wang, 1997 found a significant relationship between the two variables. Some studies found a positive but insignificant relationship between the two variables (McConnell & Servaes, 1990).

Traditional agency theory claims that more concentrated ownership would enhance the ability of shareholders to monitor management of the company, preventing it from taking self-serving decisions affecting the performance of the company negatively. This claim may be true in market environments where laws and legislation protecting minority shareholders are strong like the USA. Concentrated ownership creates majority shareholders and minority shareholders with diverging interests and objectives. …

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