Abstract:
Concentrated ownership generally leads to concentration of power among few dominant
shareholders and can result in increased agency costs and poor firm performance. However, some
literature argues that owner-managers in firms with concentrated ownership have better incentives
to enhance firm value. Given this conflict in empirical findings, this study investigates whether
ownership concentration affects firm performance using data gathered from 2015 to 2019 from 66
firms listed under banks, diversified financials, and insurance sectors in the Colombo Stock
Exchange (CSE). Herfindahl-Hirschman Index (HHI), 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. In line with the predictions in stewardship theory, the findings of this study suggest that
higher ownership concentration improves firm performance. Use of HHI to measure ownership
concentration and a frequently excluded sector as a sample remains as the key contributions of this
study.
