Ownership Concentration, Firm Risk taking and Performance: Evidence from Developing Economy of Pakistan

Abstract

Ownership structure has a substantial impact on corporate decision-making and plays a significant part in the corporate governance framework. Ownership structure can accomplish a significant purpose in aligning interest of managers and owners. The legal protections provided to shareholders in a country have a significant impact on ownership concentration. From 2008 to 2018, data on 225 non-financial companies were obtained from the Pakistan Stock Exchange in order to analyze the effects of ownership concentration on business risk-taking and performance. Results postulated that Single large shareholder negatively affect corporate risk taking in act to preserve their personal benefits and support conservative investment policy. Presence of Multiple large shareholders proved to be a significant cause of internal governance mechanism, such firm’s charades higher risk taking profile because agency conflict between Single large shareholder and other shareholders were unfriendly and multiple large shareholders can enforce value exploiting risky investments by their voting power. Individual ownership (diffused ownership) is significantly negative associated with risk taking and performance measures. Diffuse ownership imparts power to managers because disperse owners cannot directly monitor managers’ practices and monitoring cost is very high. In such case mangers take those decisions which are in their personal favor and therefore favor low risk portfolio. Multiple conflicts between management and diffuse shareholders ultimately results in poor performance of the firm.