Can Ownership Concentration Reduce Firm Performance? Evidence From Firms Listed in the Colombo Stock Exchange Under Banks, Diversified Financials and Insurance Industry Groups

Abstract

Concentrated ownership generally leads to concentration of power within few dominant investors and can result in increased agency costs and poor performance. However, corporate governance literature provides conflicting empirical evidence on this topic. For example, some studies argue that owner-managers in firms with concentrated ownership have better incentives to enhance firm value. Therefore, this study investigates whether ownership concentration affects firm performance using data gathered over 2015 to 2019 from 66 firms listed under banks, diversified financials, and insurance sectors in the Colombo Stock Exchange. Herfindahl- Hirschman Index, calculated based on the proportion of shareholdings of the ten largest shareholders, was used to measure ownership concentration. Firm performance was measured using Tobin’s Q. A fixed-effects panel regression was used to assess the effect of ownership concentration on the firm performance while controlling for firm size and leverage. The findings suggest that higher ownership concentration improves performance supporting the stewardship theory.