The effect of ownership structure on the value of JSE listed firms.

Abstract

While numerous studies have drawn attention to the effects of different ownership structures on firm value, previous investigations focused on managerial, state, family and institutional ownership as well as ownership concentration. Few empirical studies have been conducted on the influence of domestic and foreign ownership on firm value. This study adds to the body of knowledge by examining the effect of ownership structure (ownership concentration and the identity of owners) on the firm value of JSE listed companies in South Africa. It also investigates the effect of managerial ownership convergence-of-interest (suboptimal level) and the entrenchment effect (optimal level) on the firm value of JSE listed companies. These objectives were investigated with 187 firms on the JSE from 2004-2016 in static model using Ordinary Least Square, Random Effects and Fixed Effects estimations method and a dynamic model using Generalised Method of Moments estimation method for data analysis. After spotting on corporate governance practices and Black Economic Empowerment in South Africa, we find that managerial ownership and domestic ownership have a positive effect on firm value, and ownership concentration and foreign ownership have a negative influence on firm value. In addition, suboptimal level of managerial ownership has a positive effect on firm value and optimal level have a negative effect on firm value as expected on convergence of interest and entrenchment level. These findings hold after capturing for anomalies of heteroskedastic, unobserved individual effect, simultaneity and all the endogeneity issues, inherent in ownership structure which mark dynamic model in consideration. Our finding is contrary to agency theory and property right theory on the role of large shareholder and foreign investors to half free-riding problem of management that arises from separation of ownership and control. The results obtained suggest that local shareholders in the host country and management shareholding could help to strengthened firm monitoring and corporate governance practices to improve firm value. Local investors and director shareholding could help to reduce agency costs and to ease efficient loss that arise from separation of ownership and control irrespective of diverse institutional framework of the corporate environment. Furthermore, the finding managerial ownership on convergence of interest and entrenchment level findings show that an increase in management shareholding provides efficient monitoring at the low level and a high level of managerial ownership improves firm value while at the intermediate level it reduces firm value. The results obtained show that interaction of manager shareholding reduces agency cost at the low level and higher of managerial ownership and increase monitoring cost at intermediate level.