Effect of Ownership Concentration on Firm Performance: Evidence From Sri Lankan Financial Sector

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.