Report R2.20 Research on Ownership and Performance of Indian Manufacturing Companies Seminar Leader: B. Venakata Phani, IIM Calcutta phani[at]iimcal.ac.in The seminar focused on the phenomenon of insider ownership, in the context of a research project that investigated the relationship between the presence of insider-ownership and corporate performance of companies in India. In many Asian economies where family-owned businesses thrive, owners or promoters often also act as managers. The control these insider-owners exert in running the firm, often does not match their financial stake in the company. In India, this discrepancy in the control and cash flow rights of the insiders have been further exacerbated by protectionist policies of the government and a weak regulatory framework. This provides opportunities for expropriation of a firm's resources by insiders at the expense of the other stakeholders. Literature on the topic is divided on how performance varied with respect to insider ownership. While some studies claimed that insider ownership enhanced performance others found the opposite to be true. In the context of the Seminar Leader’s study that sought to inspect this relationship in the Indian context, the following research issues were examined. 1. Opting for doctoral studies and choosing the research problem By sharing his experiences with a family run firm, the seminar leader threw light on the factors that led him to opt for doctoral studies and the choice of the particular research problem. Many family-owned businesses in India are managed by insiders and the issues associated with insider ownership in India are different from those in other countries. Thus, there was a need to analyze insider ownership in the Indian context. 2. Defining constructs "Insiders" were identified as owners, excluding the general public, banks, and financial institutions. This was a categorization based on the researcher’s intuitive judgment of the situation. Performance was taken to be financial performance based on accounting measures. 3. Defining the research question The researcher formulated the research question as: “What is the relationship between insider ownership and performance of the firm?” The hypotheses postulated sought to gain insight into how insider ownership varies with, overall efficiencies, operational efficiencies, residual income, capital structure, and market perception of the firm. 3. Selecting a timeframe The period of time considered for the study was from 1989-2000. This was selected, based on the observation that during this period, the Indian economy was undergoing a transformation from a planned economy to a market economy. The researcher divided this time period into four distinct phases and aggregated data accordingly. This division was based on the premise that these periods represented different phases in this transition. Various regulatory mechanisms were put in place by the concerned agencies during each of these phases. 4. Choosing sample The sample chosen for the study consisted of Indian private limited companies listed in the CMIE database, that do not have foreign collaborations. This was done because of the assessment of the researcher that companies with foreign collaborations were usually more professionally managed and insider ownership of the variety that was studied would not be present among them. 5. Choosing variables Performance was taken to be a function of size of the firm, age of the firm and insider ownership. The first two control variables were arrived at after extensive literature review that found a number of studies indicating the presence of a relationship between these variables and performance. 6. Selecting appropriate measures for the variables Performance was assessed using the following measures: Return on Assets, Profit Margin, Asset-Turnover Ratio, Interst Cover, Manpower Ratio, Reinvestment Rate, Debt-Equity Ratio, Corporate Debt-Total Debt Ratio, and Foreign Borrowings-Total Debt Ratio. The researcher did not use standard market based measures for assessing performance because of the highly volatile nature of Indian markets accentuated by recurrent crises during the period of study. The non-availability of market data for majority of firms in the sample and the speculative nature of market transactions were other deterrents. "Total sales" was taken as a measure of size of the firm and the age of the firm was calculated from the date of incorporation. 6. Analyzing data Since three variables influenced the independent variable in the empirical model employed for the study, multiple linear regressions were used to ascertain the relationship between variables. There was some discussion on the conditions to be fulfilled by the data for linear regression to be used. One of these was the condition of linearity. In the study, sales data was linearized by considering the logarithm of the sales amount. It was pointed out that other devices of linearisation like a sales index could also be used. 7. Obtaining results The data analysis revealed that the presence of insider ownership did not have a significant relationship with the performance of the firm. 8. Interpreting results The above outcome was attributed to the unique nature of ownership and governance structures of Indian companies where family-controlled businesses were the norm rather than the exception. Unlike business families elsewhere in the world, in India some ethnic communities had a considerable influence on the conduct of its members. The consequences of disapproval from the community would be long-lasting. This ensured that shareholder interests were the priority even in insider owned firms in India. Though the results indicated the unlikelihood of misappropriations detrimental to shareholder interests, it did not rule out misappropriations altogether. It was suggested that the state was the victim of the widespread expropriations that insider owners resorted to. 9. Setting directions for future research Ways of going beyond the current study were also discussed. One option could be by taking a behavioral approach that could examine the motivational aspects leading to misappropriation. During the discussions, the presence of stakeholders other than the shareholders was also pointed out. For example, local communities are also stakeholders as certain corporate decisions have profound impact on their ways of life. The scope of the concept of "performance" in the current study was limited to maximizing shareholder wealth. This could be expanded, considering the interests of other stakeholders as well. The change in the presence of insider ownership as protectionist policies are removed and the institutional, legal and regulatory framework strengthened could also be studied further. Although companies account for a comparatively small portion India’s economic activity, researchers often find it convenient to study them, as financial data are easily available. This approach to research was questioned and the need to go beyond data availability as a decision factor for selecting a researchable problem was asserted. Reference Phani, B. V. (2004). Insider ownership, corporate governance, and corporate performance. Unpublished manuscript.
Xavier Institute of Management, Xavier Square, Bhubaneswar 751013, India Research World (ISSN 0974-2379) http://www1.ximb.ac.in/RW.nsf/pages/Home |
