Chapter 46

Nonlinearity Between Ownership

Concentration and Firm Value

Hamizah Hassan, Salwana Hassan, Norzitah Abdul Karim,

and Norhana Salamuddin

Abstract The main objective of this study is to examine the nonlinear relationship
between ownership concentration and firm value. The issue of dynamic
endogeneity between the two variables is investigated in this study. Empirically,
there is no evidence of nonlinearity between ownership concentration and firm
value. The result also suggests that dynamic endogeneity is not serious in influenc-
ing the relationship between ownership concentration and value of Malaysian firms.

Keywords Nonlinear • Ownership • Firm value • Endogeneity

46.1 Introduction

Corporate governance is a system or structure by which the firm via its board of
director applies the process of making managerial decision in corporate affairs. It
must include the interests of all the internal and external stakeholders. Good
corporate governance is very much associated with the financial performance of a
corporation. As such there are several corporate governance mechanisms used in
order to determine performance, specifically financial performance, and one of
them is ownership concentration (OC). Large shareholders are able to actively be
involved in monitoring managers, thus affecting future performance. Interesting
enough, the firm’s current performance also somehow affects its future actions

H. Hassan (*) • N. Abdul Karim

Faculty of Business Management, Universiti Teknologi MARA, Shah Alam,
Selangor, Malaysia
e-mail: hamiza013@salam.uitm.edu.my; norzitah@salam.uitm.edu.my
S. Hassan
Faculty of Business Management/Accounting Research Institute,
Universiti Teknologi MARA, Shah Alam, Selangor, Malaysia
e-mail: salwana@salam.uitm.edu.my
N. Salamuddin
Arshad Ayub Graduate Business School/Institute of Business Excellence,
Universiti Teknologi MARA, Shah Alam, Selangor, Malaysia
e-mail: norhanas@salam.uitm.edu.my

© Springer Science+Business Media Singapore 2016 523

J. Pyeman et al. (eds.), Proceedings of the 1st AAGBS International Conference on
Business Management 2014 (AiCoBM 2014), DOI 10.1007/978-981-287-426-9_46
524 H. Hassan et al.

including corporate governance, indicating the dynamic relationship between the

factors.
OC is measured by the amount of shares owned by investors that can either be
individual or institutional investors. They can have a strong monitoring power
toward the firm’s decision as a form of incentive to protect their investment. As a
result both managers and board of director are very concerned with the preferences
and interests of the substantial shareholders. This indicates a strong governance
power, that is, those with large shareholding have the role to monitor the firm’s
management.
Firm value or firm performance can be measured using both accounting and
market-based performance measures. Good corporate governance will boost the
value of a firm. It is therefore the objective of this paper to investigate the nonlinear
relationship between ownership concentration and firm value among nonfinancial
corporations in Malaysia.

46.2 Literature Review

Ownership concentration is the amount of stock owned by individual investors in a

corporation, and it is the indicator to determine power. According to [1], ownership
concentration can be categorized as closely held if it has at least one shareholder
who controls at least 20 % of the firm’s equity. Firm value is financial performance
that acts as an indicator for the financial well-being of a firm. It can be measured
either using market-based performance measure such as stock price [2] or
accounting-based performance measures like profitability [3] or ROA, ROE, and
Tobin’s Q [4, 5]. Many studies were carried out in different countries to investigate
the relationships between ownership concentration and financial performance that
include [6] in the Brazilian capital market, [7] in Israel, [8] in Iran, [9] in India, [2]
in China, and [10] in Korea. However, the mixed results obtained encouraged us to
study the relationship within the Malaysian nonfinancial firms.
The negative relationships between OC and performance have been revealed by
some evidences from these studies [6, 8, 9, 11]. This is caused by historically weak
institutional framework and high concentration of control rights that is still present
in the Brazilian capital market.
Results from other studies evidenced nonlinear relationships between the vari-
ables, and they are either quadratic, cubic, U-shaped, or inverted U-shaped rela-
tionship. Manawaduge et al. [3] found U-shaped association between OC and firm
value in Sri Lankan companies that suggests the existence of market anomalies
common to most emerging markets. This U-shaped relationship between ownership
concentration and firm performance was also found in [2 and 12]. On the other
hand, [13, 7, and 14] found inverted U-shaped relationship between insider own-
ership and corporate performance.
Similar finding by [15] where OLS and 2SLS regressions were performed on a
sample of 183 firms listed at the Karachi Stock Exchange over the period 2003–
46 Nonlinearity Between Ownership Concentration and Firm Value 525

2008 revealed that both the market- and accounting-based measures of performance
are negatively related to the ownership percentage of incumbent managers. Among
the control variables, Tobin’s Q increases with growth opportunities and tangibility
of assets, whereas it decreases with firm size, market risk, firm-specific risk, and
ownership percentage of institutional shareholders. This is also supported by [16]
who found a nonlinear relationship between ownership concentration and firm
performance in firms with high (low) concentrated ownership structure, respec-
tively. Further, [4] on a panel data analysis of 68 nonfinancial firms listed on
Istanbul Stock Exchange (ISE) with a total of 544 firm-year observations over the
entire 1994–2005 period found a nonlinear relationship between the retained
proportion of the insiders’ share holdings after IPO and the dependent variables
(OPROA, ROA, and Tobin’s Q).
It is, therefore, in this study the relationship between OC and firm value within
the Malaysian nonfinancial firms is to be identified.

46.3 Data and Methodology

A. Data

This study uses data that consists of all listed firms on Bursa Malaysia for the period
of 2007–2012 obtained from OSIRIS, Thomson ONE Banker, Bursa Malaysia
website, and the firms’ websites. In accordance with the usual practice, firms in
the financial sector are excluded from the study, as well as foreign firms that may
have different ownership structures. After excluding the missing observations of the
dependent and independent variables, the final sample comprises 367 firms for tests.
The dependent variable of this study is firm value and the proxy used is Tobin’s
Q (Q), which is measured by the sum of year-end market capitalization and book
value of total debt and book value of preferred shares scaled by book value of total
assets. As for the independent variable, ownership concentration, we use the total
percentage of ordinary shares owned by a firm’s largest shareholder (OC1) and the
largest five shareholders (OC5). Ownership concentration might have dual effects
on firm value, either serving as an effective monitoring mechanism on managers
[17, 18] or tending to expropriate on small shareholders [19]. The former will result
in a positive effect on firm value, while the latter will have a negative impact.
Several control variables are used in the tests as suggested in the literature that
firm value is influenced by:
1. Board characteristics: We use three characteristics: (a) board independence
(IND) measured by the proportion of outside members in the board, (b) CEO
duality (DUAL) that takes 0 if the CEO is also the board chairman and 1 other-
wise, and (c) managerial ownership (MANOWN) estimated by the percentage of
shares owned by the executive directors. The hypotheses for board independence
526 H. Hassan et al.

and managerial ownership are that these two variables have a positive effect on
firm value, while the CEO duality has a negative effect.
2. Debt (D): This study uses debt ratio as the proxy measured by book value of total
debt scaled by book value of total assets. Debt might have a positive effect on
firm value if it serves as a disciplinary device in mitigating ownership concen-
tration’s expropriation on small shareholders. As such, debt can also play a role
as an effective monitoring mechanism [19]. On the other hand, if debt is seen to
increase the agency cost of debt, it will result in a negative effect on firm
value [16].
3. Investment (INV): Investment could also represent the production capability of a
firm. Hence, investors might anticipate good future prospects for the firm, thus
enhancing firm value [20]. It is estimated by the capital expenditure scaled by
book value of total assets.
4. Firm size (SI): Size might negatively affect firm value as, if size is too large,
there is a possibility that the firm has a high agency cost and difficulties in
monitoring, which would reduce firm value. This hypothesis follows [21]. To
control for this effect, we use natural log of book value of total assets.
5. Firm age (AGE): Age is expected to have a negative effect on firm value, as
young firms are seen to have better growth prospects [22]. This study uses
natural log of number of years since the firm’s incorporation to control for
firm age.
6. Growth opportunities (GROWTH): It is estimated by the current value of sales
less lagged value of sales scaled by lagged value of sales. The hypothesis is
growth opportunities positively affect firm value.
7. Change in assets turnover (AT): Firm value can be positively influenced by
change in assets turnover as a high turnover of assets indicates that the firm is
efficient in generating income [23]. It is measured by sales scaled by assets
change, where it is defined as current value of sales scaled by book value of total
assets less lagged value of sales scaled by book value of total assets.
8. Profitability (ROA): Profitability is expected to have a positive effect on firm
value. We use return on assets as the proxy estimated by earnings before interest
and taxes scaled by book value of total assets.
9. Dividend (DIV): This study uses dividend yield to control for this variable. Firm
value is expected to be positively influenced by the dividend.

B. Estimation Model

The following equation is estimated in order to test our hypotheses:

Qit ¼ α0 þ α1 OCit þ α2 OC2it þ α3 INDit þ α4 DUALit þ α5 MANOWNit

þ α6 Dit þ α7 INVit þ α8 SIit þ α9 AGEit þ α10 GROWTHit ð46:1Þ
þ α11 ATit þ α12 ROAit þ α13 DIVit þ Xit
46 Nonlinearity Between Ownership Concentration and Firm Value 527

where i and t denote firm and year, respectively. The dependent variable is Q which
is Tobin’s Q, while the independent variables are the linear and quadratic functions
of ownership concentration, OC and OC2, respectively. The board characteristics
variables are IND, DUAL, and MANOWN which denote board independence, CEO
duality, and managerial ownership, respectively. The following are the control
variables: D, INV, SI, AGE, GROWTH, AT, ROA, and DIV are debt, investment,
firm size, firm age, growth opportunities, change in assets turnover, profitability,
and dividend, respectively. Xit is the error terms. Firm-specific effects ηi and time-
specific effects ωt are used to control the unobservable firm specific and time
specific, respectively. Hence, the error terms Xit are transformed into
ηi þ ωt þ εit , where εit is the random disturbance. The hypotheses refer to indepen-
dent and control variables as described in the previous section.

C. Estimation Methods

This study uses two types of estimation in order to meet the objectives of the study
which is to investigate the dynamic endogeneity issue. As such, two-way fixed
effects (FE) and two-step system generalized method of moments (GMM) are
employed. The former only controls the unobserved heterogeneity across firms
and over time, whereas the latter not only controls the unobserved heterogeneity
across firms and over time but also the dynamic endogeneity and simultaneity
effects. Results of both estimations are compared. If there are consistencies, the
interrelationships between variables of interest are not influenced by the dynamic
endogeneity issue, and vice versa. This method is used in previous studies, for
instance, [24, 20]. To take into account the panel-specific autocorrelation and
heteroskedasticity, Huber-White corrected robust standard errors is used in FE
estimation, whereas Windmeijer corrected robust standard errors is used in GMM
estimation.
In addition to the GMM estimation, the instrument set is tested for validity by
conducting an analysis based on the Hansen test [25] of the full instrument set and
the difference-in-Hansen test of a subset of instruments for overidentifying restric-
tions (H0 ¼ valid instruments). As the estimator assumes that there is no serial
correlation in the error term, εit, tests for serial correlation are conducted where the
residuals in the first differences (AR1) should be correlated, but in the second
differences (AR2), there should be no serial correlation [26].
528 H. Hassan et al.

46.4 Findings and Discussion

A. Descriptive Statistics

Table 46.1 presents the summary statistics of the variables used in this study.
Tobin’s Q shows a mean value of 0.75, as well as minimum and maximum values
of 0.07 and 7.69, respectively. Applying the essential interpretation, the mean of
Tobin’s Q found in this study indicates that, on average, the market value of the
Malaysian firms is 0.75 lower than the value of the firms’ total assets.
As can be seen in the table, the mean value of ownership concentration of the
largest shareholder is 28.06 %. This suggests that the largest shareholder of
Malaysian firms has a fairly concentrated ownership. Setia-Atmaja [1] defines
ownership concentration by categorizing the sample firms as closely held or widely
held firms. Firms are categorized as closely held if a firm has at least one share-
holder who controls at least 20 % of the firm’s equity. In addition, the largest
shareholder’s ownership concentration also ranges from a minimum of 0.42 % to a
maximum of 86.81 %.
With regard to the ownership concentration of the largest five shareholders, the
mean value is 53.2 %. This verifies that half of the total percentage of shares is
already in the largest five shareholders’ hands. It also suggests that the largest five
shareholders have a fairly concentrated structure of ownership. The minimum and
maximum values of the largest five shareholders’ ownership concentration are
8.57 % and 99.98 %, respectively.
For the board characteristics, it shows that the mean values of board indepen-
dence and managerial ownership are 0.44 % and 12.42 %, respectively. The results
indicate that almost half of the board members are nonexecutive directors, and the

Table 46.1 Summary descriptive statistics

Mean Std. dev Minimum Maximum
Tobin’s Q 0.75 0.58 0.07 7.69
Largest shareholder (%) 28.06 16.14 0.42 86.81
Largest five shareholders (%) 53.20 16.58 8.57 99.98
Board independence 0.44 0.13 0.11 0.89
Managerial ownership 12.42 16.57 0 74
CEO duality 0.10 0.30 0 1
Debt ratio 0.23 0.16 0 0.82
Investment 3.88 5.25 0 73.40
Firm actual age 24.48 16.66 1 98
Growth 10.81 50.05 94.73 776.51
Change in assets turnover 0.78 0.60 0.02 5.53
ROA 0.05 0.09 0.70 0.75
Dividend 1.84 2.39 0 17.02
Total assets (RM millions) 1,100.97 635.19 1 2,200
46 Nonlinearity Between Ownership Concentration and Firm Value 529

ownership of the Malaysian firms are not concentrated in the managers’ hands.
Also, the minimum (maximum) values of board independence and managerial
ownership are 0.11 (0.89) and 0 % (74 %), respectively.
The mean for the other control variables used in this study are debt ratio 0.22,
investment 3.88, firm actual age 24.48, growth 10.81, change in assets turnover
0.78, ROA 0.05, dividend 1.84, and total assets representing firm size 1,100.97.

B. Regression Analysis

The study first conducts the nonlinear tests by using the FE estimation and followed
by the GMM estimation as presented in this section. Table 46.2 presents the
findings of the test using the FE estimation, while Table 46.3 exhibits the findings
using GMM estimation. In both tables, Panel A states the regression estimates
obtained by using OC1 as a measure of ownership concentration and Panel B states
the estimates using OC5 as a measure of ownership concentration.
In both Tables 46.2 and 46.3, it is found that OC1 and OC5 have a nonlinear
association with Tobin’s Q as the coefficients of both OC1 and OC5 linear and
quadratic functions are positive and negative, respectively. This inverse U-shaped
nonlinear association suggests that, at a low level, a positive association between
ownership concentration and firm value is found, and, at a high level of ownership
concentration, they are negatively related. However, there is no firm evidence that
the ownership concentration is nonlinearly related with firm value, as both linear
and quadratic functions of the explanatory variable are insignificant. The exception
is for the quadratic function of the largest five shareholders’ ownership concentra-
tion, found to be negatively significantly associated with firm value at the 10 %
level. This indicates that at a high level of ownership concentration, the largest five
shareholders expropriate the small shareholders by extracting the firm wealth at the
expense of the latter. Nevertheless, this evidence is only found when using the FE
estimation, and the significance disappears when GMM estimation is employed.
This suggests that the negative quadratic function of the largest five shareholders in
the FE estimation is biased, and after taking into account dynamic endogeneity
issue, it is no more significant.
For the board characteristics, only the managerial ownership is found to be
significantly related to firm value in Panel B when using the GMM estimation.
The positive relationship between managerial ownership and firm value suggests
that by giving ownership of the firm to managers, it aligns the interests of managers
and shareholders in maximizing values.
For the other control variables in Table 46.3, it is found that debt, change in
assets turnover, and return on assets are positively associated with firm value at the
1 % significance level. These indicate that (1) debt plays an effective role as a
disciplinary mechanism in mitigating agency problem II between large and small
shareholders, (2) firms are efficient in generating income, and (3), as been expected,
profitability has a positive effect on firm value. In addition, the significantly
530 H. Hassan et al.

Table 46.2 FE estimation Panel A Panel B

Variable Q Q
OC1 0.002
[0.58]
OC12 0.000
[0.84]
OC5 0.006
[1.60]
OC52 0.000*
[1.92]
IND 0.153 0.156
[1.27] [1.32]
DUAL 0.067 0.068
[0.39] [0.39]
MANOWN 0.002 0.002
[1.55] [1.50]
D 0.437*** 0.425***
[2.93] [2.87]
INV 0.001 0.001
[0.63] [0.60]
SI 0.069* 0.067*
[1.67] [1.68]
AGE 0.32*** 0.32***
[3.41] [3.39]
GROWTH 0.000 0.000
[0.62] [0.69]
AT 0.196*** 0.198***
[3.54] [3.61]
ROA 0.762*** 0.760***
[3.54] [3.54]
DIV 0.006 0.006
[1.21] [1.26]
R-squared 0.15 0.15
F statistics 11.74 11.45
[P-value] [0.00] [0.00]
Time effects Included Included
Firm effects Included Included
Model and variables employed are explained in the previous
section. Robust t-statistics are presented in parentheses. Constant
terms are not reported for convenience. *** and * denote statis-
tical significance at 1 % and 10 % levels, respectively

negative relationship between size on one hand and age on the other hand with firm
value is found at the 10 % and 1 % levels, respectively. For the size variable, it
suggests that larger firms have higher agency costs as well as greater difficulties of
46 Nonlinearity Between Ownership Concentration and Firm Value 531

Table 46.3 GMM estimation

Panel A Panel B
Variable Q Q
OC1 0.029
[1.65]
OC12 0.000
[1.33]
OC5 0.012
[0.52]
OC52 0.000
[0.40]
IND 0.266 0.026
[0.54] [0.05]
DUAL 0.058 0.223
[0.20] [0.81]
MANOWN 0.005 0.009**
[1.02] [1.98]
D 0.490 0.415
[1.15] [1.02]
INV 0.000 0.003
[0.08] [0.37]
SI 0.148** 0.165**
[2.09] [2.29]
AGE 0.045 0.031
[0.64] [0.47]
GROWTH 0.000 0.000
[0.50] [0.16]
AT 0.203** 0.240*
[2.00] [1.94]
ROA 0.606 0.921
[0.72] [1.46]
DIV 0.015 0.006
[0.77] [0.29]
AR(1) 1.91 2.02
[P-value] [0.05] [0.04]
AR(2) 1.23 1.49
[P-value] [0.22] [0.14]
Hansen test 41.39 53.40
[P-value] [0.93] [0.57]
Difference-in-Hansen test 34.17 40.58
[P-value] [0.79] [0.53]
F statistics 30.54 32.40
(continued)
532 H. Hassan et al.

Table 46.3 (continued)

Panel A Panel B
Variable Q Q
[P-value] [0.00] [0.00]
Time effects Included Included
Firm effects Included Included
Model and variables employed are explained in the previous section. All variables on the right-
hand side are treated as endogenous variables. Robust t-statistics are presented in parentheses.
Constant terms are not reported for convenience. ** and * denote statistical significance at 5 % and
10 % levels, respectively

monitoring either firm managers or large shareholders, depending on which type of

agency problem the firm is facing. As for age, it indicates that young firms are
having better growth prospects as compared to older firms, supporting the hypoth-
esis of a negative association between age and firm value.
After controlling for the endogeneity issue, Table 46.3 exhibits that only size and
change in assets remain significantly related with firm value, while debt, age, and
return on assets are insignificant. This indicates that endogeneity does influence the
relationship between debt, age, and return on assets with firm value. It should be
noted that the association between size and firm value turns to be positive which
suggests that the hypothesis is not evidenced after taking into account the dynamic
endogeneity issue. Thus, larger firms are valued higher by the market and vice
versa. This study also suggests that board independence, CEO duality, investment,
growth, and dividend are not significant determinants of firm value.

46.5 Conclusion

The objective reported in this study is to investigate the nonlinear relationship

between ownership concentration and firm value. Therefore, the study is able to
answer the question of whether large shareholders through their concentration of
ownership monitor firm managers and/or expropriate small shareholders. While
undertaking this empirical approach, the study also examines whether dynamic
endogeneity issue is an important determinant of the relationship between owner-
ship concentration and firm value in Malaysian firms.
In general, this study fails to find evidence of nonlinearity between ownership
concentration and firm value. Hence, it fails to compute on the inflection point of
the ownership concentration, although an inverse U-shaped relationship is found.
The study concludes that dynamic endogeneity is not a serious issue in influencing
the relationship between ownership concentration and firm value in Malaysian
firms. This study contributes to the knowledge of corporate governance and corpo-
rate finance literature by investigating the nonlinear relationship between owner-
ship concentration of the largest shareholders and firm value in the most recent
46 Nonlinearity Between Ownership Concentration and Firm Value 533

Malaysian context by taking into account dynamic endogeneity issue. For future
avenue, other proxies of ownership concentration could be employed as well as
other estimation methods.

Acknowledgment This research is funded by ERGS, Universiti Teknologi MARA (UiTM),

under contract number 600-RMI/ERGS 5/3 (62/2012).

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