Ownership concentration, corporate risk-taking, stock liquidity and firm performance

Abstract

This dissertation aims to explore an important mechanism of corporate governance in underdeveloped institutional contexts. The theoretical argument is that corporate ownership concentration serves as an effective governance mechanism substituting for shortfalls in institutional quality. Vietnam is the selected research venue because it fully embodies the aspects of a weak institutional environment characterized by ownership concentration, stock illiquidity, and poor investor protection. Firstly, the Vietnamese economy in transition has an increasingly high level of concentrated ownership and an inadequate level of legal enforcement. In this context, ownership concentration may be an effective mechanism of corporate governance that curbs agency problems between minority and majority shareholders. Corporate risk-taking (i.e., riskiness choices in corporate investment decisions) is a potential mechanism via which ownership concentration influences firm performance. Secondly, Vietnam with a typical frontier market of equities warrants a potential research venue for examining the illiquidity and valuation effects of ownership concentration. Given that international investors are currently paying more and more attention to the neglected area of emerging markets, a thorough investigation of the relationship between ownership concentration, stock liquidity, and market valuation should be essential. In particular, the dissertation delves into the critical premises of the existing literature on the relationship between ownership concentration and firm performance. Firm performance is interpreted in terms of accounting profitability and market valuation. The dissertation presents in-depth investigations into the risk-taking and liquidity mechanisms underlying the relationship between concentration and performance. The first argumentation line is about the nexus between ownership concentration, corporate risk-taking and firm performance. With the setting of Vietnamese environment with weak minority shareholder protection, the dissertation has found ownership concentration as a significant determinant of firm performance. While it may appear that ownership concentration has a convex impact on firm profitability, ownership concentration typically induces a non-monotonic effect on firm valuation. In the market recognition of firm risk-taking in investment opportunities, a nonlinear effect of ownership concentration is also observed. Among the robust results, it finds compelling that the valuation effect is inconclusive before combined equity holdings reach a certain threshold beyond which market valuation increases exponentially with ownership. This log-linear effect can be interpreted as a more profound dominance of the monitoring incentives of large shareholders over the potential expropriation of minority shareholders at higher levels of concentration. The finding reconciles the mixed results of previous studies and contributes to understanding corporate governance practices in frontier markets. The second argumentation line is about the association of ownership concentration with stock liquidity. Contextualizing Vietnam as a typical frontier market, the main finding is the firms with more concentrated ownership have stocks less liquid (higher transaction costs) or less tradable (lower trading volume and share turnover). This effect implies both real friction and informational friction channeling the impact of ownership concentration on stock liquidity. In other words, changes in ownership concentration have an adverse impact on stock liquidity due to consequent alterations in trading behavior and informational environment. The results are robust to the different types of blockholders, alternative measures of ownership concentration and stock liquidity, and various regression estimators. For corporate managers, market investors, and policymakers, the findings from the dissertation have crucial implications.