Rethinking the Relationship Between Ownership and Corporate Performance

We provide new evidence regarding the relationship between ownership and corporate performance by modelling the relationship between changes in these variables. The paper commences by confirming the results reported by Demsetz and Villalonga (2001) when modelling the relationship between ownership and performance levels. Fitting a generalised nonlinear model that nests models advanced previously does not provide support for the existence of non-linearity in the levels relationship documented by earlier research. We proceed to model changes in ownership as multi-dimensional and endogenously determined, modelling changes in blockholdings, changes in closely held shares and changes in performance as a joint endogenous system. GMM standard errors are calculated for both individual equations and for the joint system of the three endogenous variables. Results show that changes in performance, as measured by changes in Q, are highly positively statistically dependent on changes in blockholdings. This finding is consistent with increased blockholdings being associated with greater monitoring of management and an increased chance of a takeover attempt.