The impact of ownership structures on the financial performance and corporate governance of JSE-listed firms.

Abstract

The ownership structure of a firm plays an important role in decision making and cost control, as ownership signifies a source of authority over the company’s operations, strategy, and financial decisions. The evolution of finance has resulted in increased globalisation and increasingly open markets, which has consequently led to ownership structures of companies becoming more widely distributed among various types of owners. The ownership structure has significant implications for several fundamental aspects of firms, most notably, its financial performance. In addition to the financial performance of firms, the composition of ownership structures also holds significant importance for corporate governance systems, as owners have the capacity to influence the level of compliance that firms demonstrate towards corporate governance policies. This thesis, therefore, investigates the impacts of different ownership identities (managerial, foreign, institutional, government and family) on both the financial performance and corporate governance of companies listed on the Johannesburg Stock Exchange (JSE). The study uses panel data for non-financial JSE-listed firms, covering the 18-year period from 2004-2021. Financial performance is measured with Return on Assets (ROA), Return on Equity (ROE), Earnings per Share (EPS), and Tobin’s q. The study provides a novel contribution to corporate governance research by constructing a reliable and valid index and corresponding subindices to measure the corporate governance compliance of JSE-listed firms. The main index is predicated on the provisions of the King Reports that pertain to the categories of board characteristics and structure, accounting and auditing, and risk management and internal audit. These three categories form the subindices that are used to measure the individual compliance of provisions relating to boards, audit committees, and risk management committees. The reliability and validity of these constructs are confirmed by the Cronbach’s alpha test and the Principal Component Analysis (PCA), respectively. The study adopts the system Generalized Method of Moments (GMM) approach to estimate the impact of ownership structures, as it accounts for endogeneity, thus ensuring unbiased results. The results for ownership and financial performance revealed that managerial ownership shared a positive relationship with ROE, but a negative relationship with Tobin’s q. Similarly, foreign ownership had a positive impact on ROE, while institutional ownership had a negative effect on EPS. Lastly, family ownership was associated with a decline in Tobin’s q. The study also makes an original contribution to ownership research in South Africa by discovering a non-linear inverse U-shaped relationship between foreign ownership and ROE, with an optimal value of 39.6%. This infers that foreign ownership positively affects ROE when shareholdings are below 39.6%. However, when foreign ownership exceeds this threshold, firm performance is eroded. Regarding the analysis of ownership structure and corporate governance, the results showed that managerial ownership exhibited a negative effect on the board characteristics and structure subindex, while foreign ownership depicted positive effects on the main index and the accounting and auditing subindex. Regulators should therefore formulate policies that cultivate the benefits associated with managerial and foreign ownership, whilst also developing strategies to mitigate the negative effects of managerial, institutional, and family ownership.