Ownership structure and corporate financial performance in an emerging market: a dynamic panel data analysis

Purpose This study examines the impact of ownership structure on firm financial performance, for 146 manufacturing firms listed at the Pakistan Stock Exchange (PSX) for the period 2003-2012. Design/methodology/approach The theoretical background of the present study is based on the agency theory. Ownership structure is measured by institutional shareholdings, insider shareholdings, foreign shareholders and government shareholdings, while return on assets (ROA), return on equity (ROE), market-to-book ratio (MBR) and Tobin's Q (TQ) are used as proxies of corporate financial performance. The dynamic panel generalized method of moments (GMM) method is employed to cater for the issue of endogeneity. Findings We find that institutional ownership exerts a significant positive impact on ROE and MBR, which suggests that institutional investors play a significant role in improving the financial performance of the sample Pakistani. Furthermore, the results reveal a significant positive relationship of insider ownership with ROA, ROE, MBR and TQ, which is consistent with the prediction of agency theory that concentration of insider ownership aligns the interest of shareholders with those of the managers and hence improves performance. A significant positive association of government shareholdings with ROA and ROE was also found. Therefore, policymakers may encourage government ownership in firms, which can help to improve corporate financial performance. Originality/value The present study contributes to the existing literature on ownership structure and corporate financial performance in an emerging market like Pakistan. It is worth mentioning that the institutional setup and corporate governance structure in Pakistan is yet at an evolving stage. Findings of this study may provide useful insights to corporate managers and investors about the relationship between ownership structure and financial performance of firms from the manufacturing sector in Pakistan.