THE RELATIONSHIP BETWEEN OWNERSHIP STRUCTURE AND FIRM

PERFORMANCE: AN EMPIRICAL ANALYSIS OF LISTED COMPANIES IN KENYA

Vincent O. Ongore, PhD
Kenya Revenue Authority,
P.O. Box 48240-00100, airo!i, Kenya
vincent.ongore"#ra.go.#e
Abstract
$he %tu&y inve%tigate& the e''ect% o' o(ner%hi) %tructure on )er'or*ance o' +i%te& co*)anie% in Kenya
u%ing agency theory a% an ana+ytica+ 'ra*e(or#. O(ner%hi) %tructure (a% o)erationa+i,e& in ter*% o'
o(ner%hi) concentration -)ercentage o' %hare% o(ne& !y the to) 'ive %hareho+&er%. an& o(ner%hi) i&entity
-actua+ i&entity o' %hareho+&er%.. /ea%ure% o' )er'or*ance (ere Return on A%%et%, Return on 01uity an&
Divi&en& 2ie+&. 3orty t(o -out o' 'i'ty 'our. +i%te& co*)anie% (ere %tu&ie& u%ing !oth )ri*ary an&
%econ&ary &ata. Re+ia!i+ity o' &ata (a% te%te& u%ing 4ron!ach5% A+)ha, (hi+e $o+erance an& Variance-
6n'+ation 3actor (ere u%e& to te%t *u+ti-co+inearity. 7%ing Pear%on5% Pro&uct /o*ent 4orre+ation an&
8ogi%tic Regre%%ion, the %tu&y 'oun& that O(ner%hi) 4oncentration an& 9overn*ent O(ner%hi) have
%igni'icant negative re+ation%hi)% (ith 'ir* )er'or*ance. On the other han&, 3oreign O(ner%hi), Di''u%e
O(ner%hi), 4or)oration O(ner%hi), an& /anager O(ner%hi) (ere 'oun& to have %igni'icant )o%itive
re+ation%hi)% (ith 'ir* )er'or*ance. $he *ain contri!ution o' thi% )a)er i% there'ore, t(o'o+&. 3ir%t, it
&i%)e+% the +ong-he+& )o%ition that concentrate& o(ner%hi) %u))ort% 'ir* )er'or*ance. :econ&, it i&enti'ie%
ty)e% o' o(ner%hi) i&entitie% that are goo& 'or 'ir* )er'or*ance, an& tho%e that ha*)er it.

Key Wors: O(ner%hi) :tructure; O(ner%hi) 4oncentration; O(ner%hi) 6&entity; 3ir*
Per'or*ance; Agency $heory.
!"#" INTRODUCTION AND RESEARCH OB$ECTI%E
$hi% )a)er inve%tigate% the re+ation%hi) !et(een o(ner%hi) %tructure an& )er'or*ance o' +i%te&
'ir*% in Kenya. $he country ha% ex)erience& tur!u+ent ti*e% (ith regar& to it% cor)orate
governance )ractice% in the +a%t t(o &eca&e%, re%u+ting in genera++y +o( cor)orate )ro'it% acro%%
the econo*y. 4oinci&enta++y, thi% )icture i% 'air+y (e++ re)+icate& g+o!a++y in the %a*e )erio&.
3ro* the g+o!a+ )er%)ective, the hi%tory o' cor)orate governance %y%te*% i% no( (e++
&ocu*ente&. Accor&ing to 9o*e, -200<., the )a%t one &eca&e or %o ha% ho(ever, (itne%%e&
%igni'icant tran%'or*ation% in cor)orate governance %tructure%, +ea&ing to increa%e& %cho+ar+y
intere%t in the ro+e o' !oar& o' &irector% in &riving cor)orate )er'or*ance. Ari%ing 'ro* *any
high )ro'i+e cor)orate 'ai+ure%, cou)+e& (ith genera++y +o( cor)orate )ro'it% acro%% the g+o!e, the
cre&i!i+ity o' the exi%ting cor)orate governance %tructure% ha% !een )ut to 1ue%tion. :u!%e1uent
re%earch -:h+ei'er an& Vi%hny, 1==>; :h+ei'er, 2001; ?en%en, 2000. ha% thu% ca++e& 'or an
inten%i'ie& 'ocu% on the exi%ting cor)orate governance %tructure%, an& ho( they en%ure
accounta!i+ity an& re%)on%i!i+ity.
$he no( (e++-)u!+ici,e& ca%e% o' 0nron 4or)oration, A&e+)hia, @ea+th :outh, $yco, 9+o!a+
4ro%%ing, 4en&ant an& Aor+&4o*, a*ong other%, have re)eate&+y !een )ut 'or(ar& a% ty)ica+
1
%can&a+% that Bu%ti'y cor)orate governance re'or* an& the nee& 'or ne( *echani%*% to counter
the )erceive& a!u%e o' )o(er !y to) *anage*ent. /on#% -1==8. argue% that the nu*erou% ca%e%
o' cor)orate 'ai+ure% are an in&ict*ent o' the e''ectivene%% o' the exi%ting cor)orate governance
%tructure%.
6nitia++y, the%e 'inancia+ %can&a+% a))eare& )ri*ari+y to !e an A*erican )heno*enon, ari%ing 'ro*
overheate& 7.:. %toc# *ar#et%, exce%%ive gree&, an& a (inner-ta#e-a++ *in&%et o' the A*erican
%ociety. Over the )a%t ten year%, ho(ever, it ha% !eco*e c+ear that the vice o' *anageria+ 'rau&,
accounting irregu+aritie% an& other governance a!u%e% i% a g+o!a+ )heno*enon, a''+icting *any
non-7.:. co*)anie% inc+u&ing Par*a+at, Viven&i, @o++inger, Aho+&, A&ecco, $V A,teca, Roya+
Dutch :he++, :ei!u, 4hina Aviation, a*ong other high )ro'i+e ca%e%. Re+ate& to the%e &i%c+o%ure%
o' a++ege& gro%% cor)orate *a+'ea%ance, there (a% a+%o a *ore (i&e%)rea& ero%ion o' %tan&ar&%
throughout the g+o!a+ *ar#et%, (ith 1ue%tiona!+e an& unethica+ )ractice% !eing acce)te&. $he net
e''ect ha% !een to un&er*ine the 'aith %hareho+&er% an& inve%tor% have in the integrity o' the
(or+&5% ca)ita+ *ar#et%.
Re%earcher% in cor)orate governance -Dona+&%on, 200<; @u%e, 200<; 3rentro), 200C. have
re)orte& that there i% %ti++ +ac# o' concurrence on the i&ea+ cor)orate governance %tructure that
cou+& %a'eguar& %hareho+&er%5 a%%et% (hi+e )ro*oting (ea+th creation venture%. $he cor)orate
governance &e!ate ha% +arge+y centere& on the )o(er% o' the Boar& o' Director% vi%-D-vi% the
&i%cretion o' to) *anage*ent in &eci%ion *a#ing )roce%%e%.
$he tra&itiona+ a))roach to cor)orate governance ha% ty)ica++y ignore& the uni1ue in'+uence that
'ir* o(ner% exert on the !oar&, an& !y exten%ion, the to) *anage*ent, to !ehave or *a#e
&eci%ion% in a )articu+ar (ay. 4on%e1uent+y, %tu&ie% on cor)orate governance -4u!!in an& 8eech,
1=82; /on#%, 1==8; ?en%en, 2000; :h+ei'er, 2001; 3rentro), 200C; Dona+&%on, 200<; @u%e, 200<.
have not co*)rehen%ive+y i&enti'ie& an& &ea+t (ith the co*)+exitie% that are inherent in cor)orate
governance )roce%%e%. Perha)%, thi% i% (here the greate%t )ro!+e* o' cor)orate governance +ie%.
O(ner )re'erence% an& inve%t*ent choice% are in'+uence& !y, a*ong other 'actor%, the extent to
(hich they can ta#e ri%#%. $o the extent that o(ner% have econo*ic re+ation% (ith the 'ir*, their
)riority (ou+& !e to )rotect their intere%t% even though thi% *ay +ea& to +o( inve%t*ent return%,
an& genera++y +o( )ro'ita!i+ity. 6n thi% regar&, $ho*%en an& Pe&er%en -1==>. argue that !an#%
(hich )+ay a &ua+ ro+e a% +en&er% an& o(ner% (ou+& not 'avor high ri%# venture% (ith great
)otentia+ 'or return% %ince %uch a )o+icy i% ini*ica+ to +oan re)ay*ent. 9overn*ent *ay a+%o )+ay
the &ua+ ro+e o' regu+ator an& o(ner. 3or each o' the%e o(ner% -%ta#eho+&er%., )re'erence%
regar&ing co*)any %trategy (i++ invo+ve a tra&e o'' !et(een the )ur%uit o' %hareho+&er va+ue an&
other goa+% -@i++ an& ?one%, 1=82.. A++ the%e i%%ue% have !een ignore& in the ongoing &e!ate on
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cor)orate governance %tructure, an& in%tea& the ro+e o' the Boar& exa+te& a% the )anacea to a++ the
cor)orate governance )ro!+e*%.
$hu%, the cor)orate governance 'ra*e(or# in it% current 'or* i% evi&ent+y +ac#ing in a *onitoring
%y%te* or contract, a+igning the ro+e o' the 'ir* o(ner%, !oar& o' &irector% an& *anager%E intere%t%
an& action% (ithin the (ea+th creation an& (e+'are *otivation o' %ta#eho+&er%. $hi% )a)er,
there'ore, )ro)o%e% a *ore vi!rant conce)tua+ 'ra*e(or# -3igure 1. that can he+) u% !etter
un&er%tan& the cor)orate governance )heno*enon.
F&'(re !: Cor)orate *o+er,a,ce Moe-
C
O(ner%hi) %tructure ha% a &irect !earing on the ri%#-ta#ing orientation o' the 'ir*. Agency
)ro!+e*% ari%e (henever inve%t*ent i&ea% an& )re'erence% o' )rinci)a+% -o(ner%. are at variance
(ith tho%e o' their agent% -8eech, 1=8F.. @ence the !oar& o' &irector% act% a% the inter*e&iary
!et(een the )rinci)a+% an& their agent%, an& i% charge& (ith 'our *ain re%)on%i!i+itie%G +ea&er%hi);
%te(ar&%hi); *onitoring; an& re)orting !ac# to the )rinci)a+%. $he e''ectivene%% o' the !oar&
he+)% in, a*ong other (ay%, *onitoring an& contro++ing *anageria+ &i%cretion.
Broa&+y %)ea#ing, there are t(o %ource% o' in'+uence% on *anageria+ &i%cretion. A)art 'ro* the
interna+ in'+uence% -i*)o%e& !y the !oar&. there are externa+ in'+uence% that )ertain to the ro+e o'
*ar#et% in *onitoring an& &i%ci)+ining *anager% -?en%en, 1=8=.. $he *o%t %igni'icant *ar#et-
re+ate& con%traint% ari%e 'ro* *anageria+ +a!or *ar#et%, )ro&uct *ar#et% an& 'inancia+ *ar#et%.
/anageria+ +a!or *ar#et% )o%e *u+ti-&i*en%iona+ threat to ine)t *anager% in the 'or* o'
i**inent ta#e-over or a!%or)tion !y !etter- *anage& 'ir*%, re)+ace*ent o' the *anage*ent tea*
or %i*)+y !eing !+ac#-+i%te&"
/anageria+ ine)titu&e, *ore o'ten than not, +ea&% to )oor 'inancia+ *anage*ent an& ero&e%
con'i&ence o' )otentia+ cre&itor% -Bro(n 9overnance, 6nc., 2004.. $he%e con%traint% i*)o%e on
*anager% extra vigi+ance a% they exerci%e their &i%cretion. Other 'actor% that *o&erate *anageria+
&i%cretion inc+u&e intangi!+e -i&io%yncratic. re%ource%, 'ir* +everage, %i,e, an& in&u%try %tructure.
De*%et, an& Vi++a+onga -2001. 'oun& out that there (a% a %igni'icant )o%itive re+ation%hi)
!et(een cor)orate )er'or*ance an& intangi!+e re%ource% a*ong A*erican co*)anie%. 6ntangi!+e
a%%et% are 'ir*-%)eci'ic characteri%tic% that are uni1ue to, an& in'+uence )er'or*ance o' an
organi,ation.
Re%ource Ba%e& Vie( -RBV. ho+&% that 'ir*% can earn %u%taina!+e %u)ra-nor*a+ return% i' an&
on+y i' they have %u)erior intangi!+e re%ource% that are )rotecte& !y %o*e 'or* o' i%o+ating
*echani%* )reventing their &i''u%ion throughout in&u%try -/i++er, 200C.. Accor&ing to Aerner'e+t
-1=84. an& Ru*e+t -1=84., the 'un&a*enta+ )rinci)+e o' the RBV i% that the !a%i% 'or a
co*)etitive a&vantage o' a 'ir* +ie% )ri*ari+y in the a))+ication o' the !un&+e o' va+ua!+e
re%ource% at the 'ir*5% &i%)o%a+. $o tran%'or* a %hort-run co*)etitive a&vantage into a %u%taine&
co*)etitive a&vantage re1uire% that the%e re%ource% are heterogeneou% in nature an& not )er'ect+y
*o!i+e -Barney, 1==1; Petera', 1==C.. 0%%entia++y, the%e va+ua!+e re%ource% !eco*e a %ource o'
%u%taine& co*)etitive a&vantage (hen they are neither )er'ect+y i*ita!+e nor %u!%tituta!+e
(ithout great e''ort -@oo)e%, 200C; Barney, 1==1.. 6n a nut%he++ there'ore, to achieve the%e
%u%taina!+e a!ove average return%, the 'ir*5% !un&+e o' re%ource% *u%t !e va+ua!+e, rare,
i*)er'ect+y i*ita!+e an& non-%u!%tituta!+e -Barney, 1==1..
4
$he extent to (hich externa+ an& interna+ 'actor% a''ect *anageria+ &i%cretion (i++ &e)en& on,
a*ong other 'actor%, the *anager5% +ocu% o' contro+, )erce)tion o' &i%cretion an& the a*ount o'
)o(er that )eo)+e )erceive the *anager to )o%%e%%. $he re+ation%hi) !et(een +ocu% o' contro+ an&
ho( *anager% vie( their &i%cretion i% )ractica++y i*)ortant to the extent that the variation in
)erceive& &i%cretion i% %y%te*atica++y re+ate& to con%e1uentia+ *anageria+ or organi,ationa+
outco*e% -0i%enhar&t an& Bourgeoi%, 1=88.. One %uch outco*e i% *anageria+ )o(er, &e'ine& a%
the a!i+ity to in'+uence other%. /anageria+ )o(er i% i*)ortant !ecau%e it% u%e i% e%)ecia++y +i#e+y
at the %trategic a)ex o' the 'ir* &ue to the a*!iguity an& uncertainty %urroun&ing %trategic i%%ue%
-0i%enhar&t an& Bourgeoi%, 1=88; 3in#e+%tein, 1==2; $u%h*an, 1=>>..
4hi+& -1=>2. re)orte& that *anageria+ )o(er i% a )o%itive )re&ictor o' *anageria+ e''icacy, the
'ir*E% %trategic choice% an& )er'or*ance a*ong *anu'acturing 'ir*% in 0uro)e. ote(orthy
a!out the conce)tua+i,ation o' *anageria+ )o(er i% that a *anager *u%t !e a!+e to recogni,e
hi*%e+'Hher%e+', an& !e recogni,e& !y other%, a% )o(er'u+ in or&er to in'+uence the%e other%
-P'e''er, 1=81, 1==2.. $hi% con&ition i% %igni'icant %ince it conce)tua+i,e% *anageria+ )o(er a%
theoretica++y an& )ractica++y &i%tinct 'ro* )erceive& *anageria+ &i%cretion. 3or exa*)+e,
*anager% *ay )erceive the*%e+ve% a% having *uch &i%cretion an& a% )o(er'u+, they are not
)o(er'u+ -P'e''er, 1==2.. $hu%, *anageria+ )o(er i% an inter)er%ona+ )heno*enon, (herea%
)erceive& &i%cretion i% an intra )er%ona+ )heno*enon.
$he re+ation%hi) !et(een +ocu% o' contro+ an& ho( *anager% vie( their &i%cretion i%
%y%te*atica++y re+ate& to con%e1uentia+ *anageria+ or organi,ationa+ outco*e% -0i%enhar&t an&
Bourgeoi%, 1=88.. One %uch outco*e i% *anageria+ )o(er, &e'ine& a% the a!i+ity to in'+uence
other%. /anageria+ )o(er i% i*)ortant !ecau%e it% u%e i% e%)ecia++y +i#e+y at the %trategic a)ex o'
the 'ir* &ue to the a*!iguity an& uncertainty %urroun&ing %trategic i%%ue% -0i%enhar&t an&
Bourgeoi%, 1=88; 3in#e+%tein, 1==2; $u%h*an, 1=>>..
."#" THEORETICAL BACK*ROUND AND INFORMIN* LITERATURE
$hi% )a)er argue% that the ri%#-ta#ing orientation o' )rinci)a+% have a &irect !earing on the ty)e o'
inve%t*ent &eci%ion% that *anager% (i++ )re'er. 3ir* o(ner%hi) %tructure i% thu% &i%cu%%e& in
ter*% o' the actua+ i&entitie% o' the o(ner% a% (e++ a% )ercentage% o' %hareho+&ing !y the%e
%hareho+&er% -o(ner%hi) concentration..
2.1. Ownership Identity and Firm Performance
$he )ertinent +iterature on cor)orate governance )ay% *uch attention to the i%%ue o' %hareho+&er
i&entity -:h+ei'er an& Vi%hny, 1==>; Ae+ch, 2000; Iu an& Aang, 1==>.. $he cite& author% argue
<
that the o!Bective 'unction% an& the co%t% o' exerci%ing contro+ over *anager% vary %u!%tantia++y
'or &i''erent ty)e% o' o(ner%. $he i*)+ication i% that, it i% i*)ortant, not on+y ho( *uch e1uity a
%hareho+&er o(n%, !ut a+%o (ho thi% %hareho+&er i%, that i%, a )rivate )er%on, *anager, 'inancia+
in%titution, non-'inancia+ in%titution enter)ri%e, *u+ti-nationa+ cor)oration or govern*ent.
6nve%tor% &i''er in ter*% o' (ea+th, ri%# aver%ion an& the )riority they attach to %hareho+&er va+ue
re+ative to other goa+%.
O(ner )re'erence% an& inve%t*ent choice% are in'+uence& !y %hareho+&er intere%t% that the
o(ner% *ay have in a&&ition to their o(n intere%t% -4u!!in an& 8eech, 1=82; ic#e+, 1==>; @i++
an& ?one%, 1=82; @an%*ann, 1=88; 1==F." $o the extent that o(ner% have their econo*ic re+ation%
(ith the 'ir*, con'+ict% o' intere%t *ay ari%e. 3or exa*)+e, !an#% *ay )+ay a &ua+ ro+e a% +en&er%
an& o(ner%, govern*ent a% regu+ator% an& o(ner% -$ho*%en an& Pe&er%en, 1==>." 3or each o'
the%e %ta#eho+&er%, )re'erence% regar&ing co*)any %trategy (i++ invo+ve a tra&e o'' !et(een the
)ur%uit o' %hareho+&er va+ue an& other goa+%.
A %i*i+ar tra&e-o'' i% i*)+ie& 'or cor)orate o(ner% %uch a% *u+ti-nationa+ )arent co*)anie% that
*ay (ant to %acri'ice +oca+ )ro'it *axi*i,ation 'or g+o!a+ intere%t o' the organi,ation" A*ong the
&i''erent o(ner%hi) 'or*%, *anageria+ o(ner%hi) %ee*% to !e the *o%t controver%ia+ a% it ha%
a*!iva+ent e''ect% on 'ir* )er'or*ance" On one han&, it i% con%i&ere& a% a too+ 'or a+ign*ent o'
*anageria+ intere%t% (ith tho%e o' %hareho+&er%, (hi+e on the other han&, it )ro*ote%
entrench*ent o' *anager%, (hich i% e%)ecia++y co%t+y (hen they &o not act in the intere%t o'
%hareho+&er% -/or# et al, 1=88; :tu+,, 1=88..
$ho*%en an& Pe&er%en -2000. )o%it that the re+ation%hi) !et(een o(ner%hi) concentration -a% a
)roxy 'or %hareho+&er contro+ over *anager%. an& 'ir* )er'or*ance &e)en&% on the i&entity o'
the +arge -contro++ing. %hareho+&er%. One )o%%i!+e inter)retation o' thi% 'in&ing i% that &i''erent
ty)e% o' %hareho+&er% have &i''erent inve%t*ent )rioritie%, an& )re'erence% 'or ho( to &ea+ (ith
*anager%5 agency )ro!+e*%. $he overa++ i*)act o' *anageria+ o(ner%hi) on cor)orate
)er'or*ance &e)en&% on the re+ative %trength% o' the incentive a+ign*ent an& entrench*ent
e''ect%.
Regar&ing govern*ent -%tate. o(ner%hi), there i% *uch *ore unani*ity in the aca&e*ic circ+e%.
:tate o(ner%hi) ha% !een regar&e& a% ine''icient an& !ureaucratic. De A+e%%i -1=80, 1=82. &e'ine%
%tate-o(ne& enter)ri%e% a% J)o+itica+K 'ir*% (ith genera+ )u!+ic a% a co++ective o(ner. A %)eci'ic
characteri%tic o' the%e 'ir*% i% that in&ivi&ua+ citi,en% have no &irect c+ai* on their re%i&ua+
inco*e an& are not a!+e to tran%'er their o(ner%hi) right%. O(ner%hi) right% are exerci%e& !y
%o*e +eve+ in the !ureaucracy, (hich &oe% not have c+ear incentive% to i*)rove 'ir* )er'or*ance.
Vic#er% an& 2arro( -1=88. con%i&er the +ac# o' incentive% a% the *aBor argu*ent again%t %tate
F
o(ner%hi)" Other ex)+anation% inc+u&e the )rice )o+icy -:ha)iro an& Ai++ig, 1==0., )o+itica+
intervention an& hu*an ca)ita+ )ro!+e*% -:h+ei'er an& Vi%hny, 1==4..
:tate o(ner%hi) o' 'ir*% i% not (ithout %o*e !ene'it% to the %ociety. $ra&itiona++y, )u!+ic
enter)ri%e% are ca++e& u)on to cure *ar#et 'ai+ure%. A% %ocia+ co%t% o' *ono)o+y )o(er !eco*e
%igni'icant, %tate contro+ %ee*% to !e *ore econo*ica++y &e%ira!+e a% a (ay o' re%toring the
)urcha%ing )o(er o' the citi,enry -At#in%on an& :tig+it,, 1=80.. 9enera++y %)ea#ing, ho(ever,
e*)irica+ evi&ence %ugge%t% that )u!+ic 'ir*% are high+y ine''icient in co*)ari%on to )rivate one%
-/eggin%on, et al, 1==4., even in )ur%uing )u!+ic intere%t%. $here are %evera+ rea%on% 'or %uch
o!%erve& )oor )er'or*ance o' %tate-o(ne& 'ir*%.
Accor&ing to :h+ei'er an& Vi%hny -1==4., %tate-o(ne& 'ir*% are governe& !y !ureaucrat% or
)o+itician% that have extre*e+y concentrate& contro+ right%, !ut no %igni'icant ca%h '+o( right%
%ince a++ the )ro'it% generate& !y the 'ir*% are channe+e& to the govern*ent exche1uer to 'inance
the nationa+ !u&get. $hi% i% aggravate& !y )o+itica+ goa+% o' !ureaucrat% that o'ten &eviate 'ro*
)ru&ent !u%ine%% )rinci)+e% -Re)ei, 2000.. :uch enor*ou% ine''iciency o' %tate 'ir*% ha%
)reci)itate& a (ave o' governance tran%'or*ation% in econo*ie% aroun& the (or+& in the +a%t t(o
&eca&e% through heightene& )rivati,ation o' %tate-o(ne& 'ir*%.
6n their ana+y%i% o' )o+itica+ contro+ o' %tate-o(ne& 'ir*%5 &eci%ion *a#ing )roce%%e%, Boyc#o,
:h+ei'er an& Vi%hny -1==F. argue that tran%'erring contro+ right% 'ro* )o+itician% to *anager% -i.e.
increa%ing *anageria+ &i%cretion. can he+) i*)rove 'ir* )er'or*ance +arge+y !ecau%e *anager%
are *ore concerne& (ith 'ir* )er'or*ance than are )o+itician%. Ban#% an& other 'inancia+
in%titution% are *o%t +i#e+y to !e ri%# aver%e !ecau%e o' their concern (ith )ro'it *axi*i,ation.
An organi,ation that i% heavi+y +everage& +ac#% the ca)acity to )ur%ue ri%#y inve%t*ent o)tion% a%
the%e (ou+& Beo)ar&i,e their chance% o' honoring +oan re)ay*ent %che&u+e%, e%)ecia++y in +o%%
*a#ing %ituation%. Ban#% (i++ a+%o try to &i%courage 'urther in&e!te&ne%% a% *ore +oan% *ight
+ea& to +i1ui&ity )ro!+e*% an& )erha)% in%o+vency -@an%*ann, 1=88." Pu!+ic co*)anie%, on the
other han&, can %u))ort 'urther in&e!te&ne%%, i' it )ro*i%e% to i*)rove the 'inancia+ )o%ition o'
the 'ir* an& %hareho+&er va+ue in the +ong-run.
Regar&ing &i''u%e %hareho+&ing, it i% c+ear 'ro* the re+evant +iterature on agency )ro!+e* that thi%
#in& o' o(ner%hi) %tructure (i++ not give a&e1uate contro+ to the %hareho+&er% &ue to +ac# o'
ca)acity an& *otivation to *onitor *anage*ent &eci%ion% -?en%en an& /ec#+ing, 1=>F.. @ence
the contro+ o' the 'ir* revert% to un&erhan& &ea+ing% ai*e& at aug*enting their inco*e. $hi%
in%i&er &ea+ing *ight co*)ro*i%e co*)any )er'or*ance" /anagerHin%i&er o(ner%hi), on the
other han&, ha% attracte& a +ot o' attention an& intere%t 'or a (i&e variety o' rea%on%. /uch o' the
intere%t ha% 'ocu%e& on the )otentia+ 'or !etter econo*ic )er'or*ance, )articu+ar+y through
>
enhance& *otivation an& co**it*ent 'ro* e*)+oyee% (ho have a &irect %ta#e in the re%i&ua+
inco*e o' the 'ir*. :trong *aBoritie% o' the )u!+ic !e+ieve that *anager-o(ner% (or# har&er an&
)ay *eticu+ou% attention to the 1ua+ity o' their (or# than non-o(ner%, an& are *ore +i#e+y than
out%i&e %hareho+&er% to in'+uence 'ir* )er'or*ance. $here have a+%o !een %ocia+ argu*ent% 'or
*anagerHin%i&er o(ner%hi) o' 'ir*%, !a%e& on it% )otentia+ to !roa&en the &i%tri!ution o' (ea+th,
&ecrea%e +a!or-*anage*ent con'+ict, an& enhance %ocia+ cohe%ion an& e1ua+ity !y &i%tri!uting the
'ruit% o' econo*ic %ucce%% *ore (i&e+y an& e1uita!+y -9ate%, 1==8..
$he e''ect o' 'oreign o(ner%hi) on 'ir* )er'or*ance ha% !een an i%%ue o' intere%t to aca&e*ic%
an& )o+icy *a#er%. Accor&ing to 9org an& 9reena(ay -2004., the *ain cha++enging 1ue%tion in
the internationa+ !u%ine%% %trategy i% the outco*e gaine& 'ro* 'oreign o(ner%hi) o' 'ir*%. 6t i%
*ain+y acce)te& that 'oreign o(ner%hi) )+ay% a crucia+ ro+e in 'ir* )er'or*ance, )articu+ar+y in
&eve+o)ing an& tran%itiona+ econo*ie%. Re%earcher% -Ay&in, :ayi* an& 2a+a*a, 200>. have
conc+u&e& that, on average, *u+ti-nationa+ enter)ri%e% have )er'or*e& !etter than the
&o*e%tica++y o(ne& 'ir*%. 6t i% there'ore, not %ur)ri%ing that the +a%t t(o &eca&e% have (itne%%e&
increa%e& +eve+% o' 3oreign Direct 6nve%t*ent% in the &eve+o)ing econo*ie%.
$(o *ain rea%on% have !een )ut 'or(ar& to ex)+ain the )heno*enon o' high )er'or*ance
a%%ociate& (ith 'oreign o(ner%hi) o' 'ir*%. $he 'ir%t rea%on i% that 'oreign o(ner% are *ore +i#e+y
to have the a!i+ity to *onitor *anager%, an& give the* )er'or*ance-!a%e& incentive%, +ea&ing the
*anager% to *anage *ore %eriou%+y, an& avoi& !ehavior% an& activitie% that un&er*ine the (ea+th
creation *otivation% o' the 'ir* o(ner%. $he %econ& rea%on i% the tran%'er o' ne( techno+ogy an&
g+o!a++y-te%te& *anage*ent )ractice% to the 'ir*, (hich he+) to enhance e''iciency !y re&ucing
o)erating ex)en%e% an& generating %aving% 'or the 'ir*.
2.2. Ownership Concentration and Corporate Performance
$he e''ect o' o(ner%hi) concentration on co*)any )ro'ita!i+ity ha% !een %tu&ie& %ince Ber+e an&
/ean% -1=C2.. Other %tu&ie% co*)aring )ro'ita!i+ity o' *anagerLan& o(nerLcontro++e&
co*)anie%, o'ten categori,e& !y the %hare o' the +arge%t o(ner, genera++y 'oun& a higher rate o'
return in co*)anie% (ith concentrate& o(ner%hi) -4u!!in an& 8eech, 1=8C.. $he%e %tu&ie%,
ho(ever, (ere %eriou%+y +ac#ing a theoretica+ 'oun&ation. $hey neither u%e& nor )rovi&e& a theory
o' o(ner%hi) %tructure an& %ee*e& to i*)+y that %hareho+&er% cou+& )ro'it !y rearranging their
)ort'o+io%. $hi% )oint (a% e*)ha%i,e& !y De*%et, -1=8C. (ho argue& theoretica++y that the
o(ner%hi) %tructure o' the 'ir* i% an en&ogenou% outco*e o' the co*)etitive %e+ection in (hich
variou% co%t a&vantage% an& &i%a&vantage% are !a+ance& to arrive at an e1ui+i!riu* organi,ation
o' the 'ir*.
8
$ra&itiona++y, concentrate& o(ner%hi) ha% !een thought to )rovi&e !etter *onitoring incentive%,
an& +ea& to %u)erior )er'or*ance -8eech an& 8eahy, 1==1.. On the other han&, it *ight a+%o +ea&
to extraction o' )rivate !ene'it% !y the contro++ing %hareho+&er% at the ex)en%e o' the *inority
%hareho+&er% -/aher an& An&er%%on, 1===.. $he )rinci)a+-agent *o&e+ %ugge%t% that *anager%
are +e%% +i#e+y to engage in %trict+y )ro'it *axi*i,ing !ehavior in the a!%ence o' %trict *onitoring
!y %hareho+&er% -Pro(%e, 1==2; Agra(a+ an& Knoe!er, 1==F.. $here'ore, i' o(ner-contro++e&
'ir*% are *ore )ro'ita!+e than *anager-contro++e& 'ir*%, it (ou+& %ee* that concentrate&
o(ner%hi) )rovi&e% !etter *onitoring (hich +ea&% to !etter )er'or*ance.
9ug+er -1===. )rovi&e% a co*)rehen%ive %urvey o' e*)irica+ %tu&ie% o' the e''ect% o' o(ner%hi)
concentration on cor)orate )er'or*ance, !eginning (ith the )ioneering (or# o' Ber+e an& /ean%
-1=C2. to *ore recent (or# !y 8eech an& 8eahy -1==1., Pro(%e -1==2., Agra(a+ an& Knoe!er
-1==F., an& 4h0 -1==8.. Ba%e& on )ri*ary %tu&ie% 'ro* the 7: an& 7K, he 'in&% that a+though
the re%u+t% are a*!iguou%, the *aBority o' %tu&ie% 'in& that 'ir*% (ith concentrate& o(ner%hi)
ten& to %igni'icant+y out)er'or* *anager-contro++e& 'ir*%.
De*%et, an& 8ehn -1=8<. 'oun& no a%%ociation !et(een o(ner%hi) concentration an&
)ro'ita!i+ity -return on e1uity. in +arge 7: co*)anie% (hen contro++ing 'or &eter*inant% o'
concentration an& other varia!+e%. Accor&ing to %tan&ar& agency theory -:h+ei'er an& Vi%hny,
1==>., the choice o' a )rivate+y o)ti*a+ o(ner%hi) %tructure invo+ve% a tra&e o'' !et(een ri%# an&
incentive e''iciency. Other 'actor% #e)t con%tant, +arger o(ner% (i++ have a %tronger incentive to
*onitor *anager% an& *ore )o(er to en'orce their intere%t% an& thi% %hou+& increa%e the
inc+ination o' *anager% to *axi*i,e %hareho+&er va+ue. 9enera++y %)ea#ing, ho(ever, the
o(ner%5 )ort'o+io ri%# (i++ a+%o increa%e the +arger the o(ner%hi) %hare. $o the extent that
co*)anie% &i''er in ter*% o' 'ir* %)eci'ic ri%#, the )rivate+y o)ti*a+ %hare o' the +arge%t
%hareho+&er -o(ner. (i++ there'ore, vary. 3urther*ore, the nature an& co*)+exity o' activitie%
carrie& out !y in&ivi&ua+ 'ir*% *ay a+%o vary, an& %o *ay the *argina+ e''ect o' *onitoring on
the %hareho+&er va+ue o' in&ivi&ua+ 'ir*% -De*%et, an& 8ehn, 1=8<..
:*a++ %hareho+&er% *ay have an in%u''icient incentive to *axi*i,e tota+ %hareho+&er va+ue
!ecau%e the contro+ an& *onitoring gain% 'ro* +arge !+oc# %hareho+&ing% are %hare& (ith other
inve%tor%. An& i' one or a very %*a++ grou) o' %hareho+&er% atte*)t% to ac1uire a +arge o(ner%hi)
%ta#e, the gain% (i++ +arge+y !e ca)ture& !y the other %hareho+&er% (ho %e++ their %hare% at a
)re*iu* re'+ecting increa%e& &e*an& 'or the %hare% an& va+ue o' the 'ir*. $hi% in e''ect +ea&% to a
)o%itive e1ui+i!riu* e''ect o' o(ner%hi) concentration on co*)any )er'or*ance %ince co*)anie%
(ith +arge o(ner% (i++ &o !etter an& %ince *inority inve%tor% have in%u''icient incentive% to
change the o(ner%hi) %tructure. But (ith increa%ing o(ner%hi) %hareho+&ing, i*)rove&
=
incentive% (i++ have +e%% o' an e''ect on )er'or*ance i' the *argina+ e''ect o' *onitoring e''ort i%
&ecrea%ing -?en%en an& Ru!ac#, 1=8C.. Be%i&e%, a +arge o(ner%hi) %ta#e in a )articu+ar co*)any
in&icate% a +e%% than 'u++y &iver%i'ie& )ort'o+io on the )art o' the o(ner %o that the o(ner ri%#
aver%ion *ay in&uce the co*)any to tra&e o'' ex)ecte& return% 'or +o(er ri%#%. $hi% i% !ecau%e a
ri%#-aver%e inve%tor, (ho ha% *o%t o' hi% inve%t*ent% in a )articu+ar +ine o' a%%et%, i% a+(ay% (ary
o' the chance% o' hi% ca)ita+ !eing %u!%tantia++y re&uce& or even (i)e& out in a ho%ti+e inve%t*ent
environ*ent -:hort, 1==4..
3ina++y, the %e)aration !et(een o(ner%hi) an& *anage*ent !eco*e% !+urre& a% o(ner%hi) %hare
increa%e% (ith the a&&e& ri%# or o(ner Jentrench*entK &ue to )rivate !ene'it% o' contro+
-in'or*ation a&vantage%, )er#%, etc. -6!i&, 1==4.. 3ro* the a!ove +iterature, an& in accor&ance
(ith /orc#, :h+ei'er an& Vi%hny -1=88., the 'o++o(ing hy)othe%i% i% %ugge%te&G $here i% a
)o%itive re+ation%hi) !et(een o(ner%hi) concentration an& 'ir* )er'or*ance.
/"#" METHODOLO*Y
$he re+ation%hi) !et(een o(ner%hi) %tructure an& 'ir* )er'or*ance (a% conce)tua+i,e& !a%e& on
)ertinent +iterature on cor)orate governance. O(ner%hi) :tructure (a% conce)tua+i,e& a%
co*)ri%ing o(ner%hi) concentration an& o(ner%hi) i&entity. O(ner%hi) concentration
-%hareho+&ing a!ove C0M. (a% &eter*ine& u%ing @er'in&ah+ 6n&ex, or the e1uity %ta#e o' %evera+
+arge%t inve%tor%, ty)ica++y the to) 'ive %hareho+&er% -De*%et, an& 8ehn, 1=8<.. 3our o(ner%hi)
categorie% (ere i&enti'ie&, na*e+yG 'oreign; in%titutiona+; govern*ent; an& &iver%e. 0ach o' the%e
o(ner%hi) i&entitie% ha% &i''erent ri%#-ta#ing orientation%, (hich in e''ect i*)act inve%t*ent
&eci%ion% an& 'ir* )er'or*ance &i''erent+y.
3.1. Measuring Corporate Performance
$hi% %tu&y u%e& Return on A%%et% -ROA., Return on 01uity -RO0., an& Divi&en& 2ie+& -D2. to
*ea%ure 'ir* )er'or*ance. $he%e *ea%ure% o' 'ir* )er'or*ance have !een u%e& exten%ive+y in
re%earch in cor)orate governance -8a''ont, 1=88; :cho+e%, 1==4; Iu an& Aang, 1==>; /i+gro*
an& Ro!ert%, 2000; @erac+eou%, 2001; Kennon, 200<..
ROA *ea%ure% ho( *uch )ro'it% a 'ir* can achieve u%ing one unit o' a%%et%. 6t he+)% to eva+uate
the re%u+t o' *anageria+ &eci%ion% on the u%e o' a%%et% (hich have !een entru%te& to the*. RO0
*ea%ure% the earning% generate& !y %hareho+&er%5 e1uity o' a )erio& o' ti*e, u%ua++y one year. 6t
enco*)a%%e% three *ain +ever% (hich *anage*ent can uti+i,e to en%ure hea+th o' the 'ir*G
)ro'ita!i+ity; a%%et *anage*ent; an& 'inancia+ +everage. D2 re'er% to the annua+ &ivi&en& )er
10
%hare &ivi&e& !y current %toc# )rice. D2 i% an ea%y (ay to co*)are re+ative attractivene%% o'
variou% &ivi&en&-)aying %toc#%.
3.1. Sampling pproach
A cen%u% a))roach (a% u%e&, an& thu% the %a*)+ing 'ra*e con%i%te& o' a++ +i%te& 'ir*% in Kenya.
7%ing the airo!i :toc# 0xchange @an&!oo#% -200F, 2008., <4 'ir*% (ere on the ro++, out o'
(hich %ix ha& not co*)i+e& their 'inancia+ re)ort% 'or the re+evant )erio& o' %tu&y. Another %ix
'ai+e& to ta#e )art in the %tu&y. $he 'ina+ %a*)+e there'ore, con%i%te& o' 'orty-t(o 'ir*%,
re)re%enting a!out >8 )ercent re%)on%e rate. $he %a*)+e co*)ri%e& t(o 'ir*% 'ro* the
Agricu+tura+ %ector -=.<M., %even 'ro* 4o**ercia+ :ervice% -1F.>M., ten 'ro* 3inance an&
6nve%t*ent -2C.8M., 'ourteen 'ro* 6n&u%tria+ an& A++ie& -CC.CM., an& %even 'ro* A+ternative
6nve%t*ent /ar#et -1F.>M..
3.2. !elia"ility nalysis
Re+ia!i+ity ana+y%i% (a% u%e& to a%%e%% interna+ con%i%tency -&egree o' ho*ogeneity a*ong the
ite*%.. 4ron!ach5% A+)ha coe''icient% (ere co*)ute& 'or 18 ite*% un&er !oar& e''ectivene%% an&
*anageria+ &i%cretion, an& the overa++ a%%e%%*ent (a% 0.8>. Accor&ing to unna++y -1=>8., a &ata
co++ection in%tru*ent (ith a goo& interna+ con%i%tency %hou+& have 4ron!ach5% A+)ha coe''icient%
that are higher than 0.>. $he ite*% (ere there'ore, 'oun& to !e high+y ho*ogeneou%.
0"#" DATA ANALYSIS AND RESULTS
$he &ata in thi% %tu&y (ere ana+y,e& u%ing Pear%on5% Pro&uct /o*ent 4orre+ation an& 8ogi%tic
Regre%%ion. $he re%u+t% (ere )re%ente& in t(o categorie%G 1. o(ner%hi) concentration an& 'ir*
)er'or*ance, an& 2. o(ner%hi) i&entity an& 'ir* )er'or*ance. $he genera+ 'or* o' the *o&e+%
u%e& (a%G
FIRM PERFORMANCE N b1OWNCONC O b2FORENOWN O b3INSTOWN O b4GOVOWN O
b5DIVOWN
AhereG-OWNCONCLO(ner%hi) 4oncentration; FORENOWNL3oreign O(ner%hi); CORPOWNL
O(ner%hi) !y 4or)oration%; MANOWNLO(ner%hi) !y /anager%; GOVOWNLO(ner%hi) !y
9overn*ent; DIVOWNLDiver%e O(ner%hi); MANDISCL/anageria+ Di%cretion.
11
Tab-e !: L&,ear Re'ress&o, Res(-ts 1or t2e e11ects o1 Pre&ctor %ar&ab-es o,
F&r3 Per1or3a,ce
I,&cator %ar&ab-e ROA ROE DY
Pre&ictor Varia!+e Para3eter
Est&3ates 456
Para3eter
Est&3ates 456
Para3eter
Est&3ates 456
O7,ers2&)
Co,ce,trat&o,
O(ner%hi)
concentration
-.>F1 -.F4< -.888
O7,ers2&)
Ie,t&ty
3oreign o(ner%hi) 1.<=8P 1.218P 1.<=2P
6n%titution
o(ner%hi)
1.012P .>>< .82F
9overn*ent
o(ner%hi)
- 0.>=8 -0.F1F -0.48C
Diver%e o(ner%hi) .=4FP .>8=P .>2C
Boar
E11ect&+e,ess
Boar& e''ectivene%% -.<<>P -.2C>P -.111
Ma,a'er
O7,ers2&)
/anagerHin%i&er
o(ner%hi)
1.00C .>=2 .241
P)Q0.0<
$he re%u+t% o' the 8inear Regre%%ion )re%ente& in ta!+e 1 in&icate that overa++, o(ner%hi)
concentration (a% negative+y an& %igni'icant+y re+ate& to a++ the three in&icator% o' 'ir*
)er'or*ance. $hi% (a% evi&ent 'ro* the !eta coe''icient% an& +eve+% o' %igni'icance o'
the re+ation%hi)%. $he &e)en&ent varia!+e%G Return on A%%et% -R N -.>F1, )Q0.0<., Return
on 01uity -R N -.F4<, )Q0.0<. an& Divi&en& 2ie+& -R N -.888, )Q0.0<. a++ recor&e&
%igni'icant negative corre+ation% (ith o(ner%hi) concentration.
12
Tab-e .: Lo'&st&c Re'ress&o, Res(-ts 1or t2e e11ects o1 Pre&ctor %ar&ab-es o,
F&r3 Per1or3a,ce 4Abo+e Mar8et A+era'e6
I,&cator %ar&ab-e Co-(3, !
ROA Abo+e Mar8et
A+era'e
Co-(3, .
ROE Abo+e Mar8et
A+era'e
Co-(3, /
DY Abo+e
Mar8et
A+era'e
Pre&ictor Varia!+e Para*eter
0%ti*ate% -R.
Para*eter
0%ti*ate% -R.
Para*eter
0%ti*ate% -R.
O(ner%hi)
4oncentration
-.CF0P -.08< -.102P
3oreign o(ner%hi) F.4CFP C.810 F.<>=
6n%titution
o(ner%hi)
4.888 2.<=< C.120
9overn*ent
o(ner%hi)
-1<.>=4 -1>.>>8 -1>.021
Diver%e o(ner%hi) F.041P <.0C8 C.>18
Boar& e''ectivene%% -.0CC -.042 -.0C<
/anagerH in%i&er
o(ner%hi)
<.01C 4.04= <.1F2
P)Q0.0<
Hy)ot2es&s H!: T2ere &s a )os&t&+e re-at&o,s2&) bet7ee, o7,ers2&) co,ce,trat&o,
a, 1&r3 )er1or3a,ce"
$he re%u+t% o' the 8ogi%tic Regre%%ion te%t% in $a!+e 2 in&icate that there i% a negative an&
%igni'icant corre+ation !et(een o(ner%hi) concentration an& Return on A%%et% -RN-0.CF0,
)Q0.0<. an& Return on 01uity -R N -.08<, )Q0.0<.. $he re%u+t% 'or Divi&en& 2ie+& -R N
-.102, )Q0.0<. (ere a+%o negative !ut not %igni'icant. $he%e re%u+t% +ea& to a reBection o'
the hy)othe%i% H!"
Hy)ot2es&s H.a: Ma,a'er 4I,s&er6 O7,ers2&) 2as a )os&t&+e e11ect o, 1&r3 )er1or3a,ce"
$he 8inear Regre%%ion re%u+t%G ROA -rN0.02F, )Q0.0<., RO0 -rN0.0C8, )Q0.0<. an& D2 -rN0.041,
)Q0.0<.. 8ogi%tic Regre%%ion re%u+t%G ROA -RN<.01C, )Q0.0<., RO0 -RN 4.40=, )Q0.0<. an& D2
-R N <.1F2, )Q0.0<.. $he re+ation%hi) (a% )o%itive an& %igni'icant, an& hy)othe%i% @2a (a%
acce)te&.
Hy)ot2es&s H.b: *o+er,3e,t o7,ers2&) 2as a ,e'at&+e e11ect o, 1&r3 )er1or3a,ce"
$he 8inear Regre%%ion re%u+t%G ROA -rN-.01>, )Q0.0<., RO0 -rN-.0<8, )Q0.0<.; D2 -rN-.0>>,
)Q0.0<.. 8ogi%tic Regre%%ion re%u+t%G ROA -RN-1<.>=4, )Q0.0<., RO0 -RN-1>.>>8, )Q0.0<. an&
D2 -RN-1>.021, )Q0.0<.. $he re+ation%hi) (a% negative an& %igni'icant, +ea&ing to acce)tance o'
the hy)othe%i% @2!.
Hy)ot2es&s H.c: O7,ers2&) by Cor)orat&o,s 2as a )os&t&+e e11ect o, 1&r3 )er1or3a,ce"
1C
$he 8inear Regre%%ion re%u+t%G ROA -rN-.01F, )Q0.0<., RO0 -rN-.014, )Q0.0<.; D2 -rN-.02=,
)Q0.0<.. 8ogi%tic Regre%%ion re%u+t%G ROA -RN4.888, )Q0.0<., RO0 -RN2.<=<, )Q0.0<. an& D2
-RNC.120, )Q0.0<..$he re%u+t% (ere )o%itive an& %igni'icant, +ea&ing to acce)tance o' the
hy)othe%i% @2c"
Hy)ot2es&s H.: D&11(se 4D&+erse6 o7,ers2&) 2as a ,e'at&+e e11ect o, 1&r3 )er1or3a,ce"
$he 8inear Regre%%ion re%u+t%G ROA -rN 0.012, )Q0.0<.; RO0 -rN0.02C, )Q0.0<.; D2 -rN0.0F1,
)Q0.0<.. Regre%%ion re%u+t%G ROA -RNF.041, )Q0.0<., an& RO0 -RN<.0C8, )Q0.0<.; D2 -RNC.>18,
)Q0.0<.. $he re%u+t% +e& to a reBection o' the hy)othe%i% @2&.
Hy)ot2es&s H.e: Fore&', O7,ers2&) 2as a )os&t&+e e11ect o, 1&r3 )er1or3a,ce"
$he 8inear Regre%%ion re%u+t%G ROA -rN0.044, )Q0.0<., RO0 -rN.0C>, )Q0.0<.; D2 -rN.041,
)Q0.0<.. 8ogi%tic Regre%%ion re%u+t%G ROA -RNF.4CF, )Q0.0<., RO0 -RNC.810, )Q0.0<; D2
-RNF.<>=, )Q0.0<., +ea&ing to acce)tance o' the hy)othe%i% @2e.
9"#" SUMMARY AND CONCLUSIONS
Prior re%earch ha% 'oun& %igni'icant +in#% !et(een o(ner%hi) %tructure an& 'ir* )er'or*ance.
:tu&ie% co*)aring o(ner%hi) concentration an& 'ir* )er'or*ance have o'ten 'oun& a higher rate
o' return in co*)anie% (ith concentrate& o(ner%hi). Other %tu&ie% have a+%o %ho(n that it i% not
on+y the a*ount o' e1uity he+& !y %hareho+&er% that *atter (hen %tu&ying 'ir* )er'or*ance !ut
a+%o the i&entity o' the %hareho+&er. $he 'in&ing% o' thi% %tu&y there'ore, a))eare& to contra&ict
the )o%ition he+& !y )ro)onent% o' o(ner%hi) concentration -/o+&oveanu S /artin, 2001;
Ku,net%ov S /urvyev, 2001; ?en%en S /ur)hy, 1==0; 3a*a S ?en%en, 1=8C; ?en%en S
/ec#+ing, 1=>F; Ber+e S /ean, 1=C2. (ho argue that o(ner%hi) concentration a''or&% the
%hareho+&er% the *otivation an& a!i+ity to *onitor an& contro+ *anage*ent &eci%ion%. $hi%, they
)o%it, en%ure% that *anager% *a#e &eci%ion% that %u))ort the (ea+th creation *otivation o' the
%hareho+&er%.
/anageria+ o(ner%hi) i% %een a% the *o%t controver%ia+ (here it% overa++ e''ect &e)en&% on the
re+ative %trength% o' the incentive a+ign*ent an& entrench*ent e''ect% -4ho, et al, 1==8..
Di''u%e+y o(ne& 'ir*% have !een %ho(n in )reviou% %tu&ie% to !e )oor )er'or*er% in )art &ue to
the 'act that &iver%eH&i''u%e %hareho+&er% +ac# the (here(itha+ an& *otivation to *onitor, contro+
an& rati'y *anage*ent &eci%ion%. $he a)o+ogi%t% o' %trict *onitoring an& contro+ ho(ever, 'ai+ to
c+ear+y a))reciate the 'act that u+ti*ate+y, the %hareho+&er% re+y on the *anager%5 creativity an&
innovation to &e+iver the &e%ire& %u)erior cor)orate )er'or*ance, an& inor&inate inter'erence o'
%hareho+&er% in the *anage*ent )roce%%e% (i++ certain+y un&er*ine cor)orate outco*e%. $he
14
+atter )o%ition i% %u))orte& !y Berg+oe' an& Von $ha&&en -1===. (ho )o%it that concentrate&
o(ner%hi) curtai+% the *anager%5 creativity to a great extent, an& there'ore 'orce *anager% to
a&here to on+y tho%e %trategie% that are 'avore& !y %hareho+&er%, even i' they genuine+y &ou!t the
e''icacy o' tho%e %trategie%.
$he re%u+t% o' thi% %tu&y a))eare& to vin&icate the +atter )o%ition, (hich e%%entia++y *ean% that
o(ner%hi) concentration ten&% to )+ace inor&inate *onitoring an& rati'ication )o(er% on
%hareho+&er%, *any o' (ho* *ay not nece%%ari+y un&er%tan& the !u%ine%% (e++, there!y
un&er*ining 'ir* )er'or*ance. $he conc+u%ion that *ay !e &ra(n 'ro* the %tu&y 'in&ing% i% that
in Kenya, o(ner%hi) concentration i% ini*ica+ to *anager creativity an& innovation, an& curtai+%
'ir* )er'or*ance.
$he ty)ica+ agency )ro!+e*% that are very +i#e+y to ari%e in %ituation% (here )ro'e%%iona+
*anager% contro+ the a%%et% o' a cor)oration in (hich they are not %hareho+&er% are a&ver%e
%e+ection -*i%ca+cu+ation%. an& *ora+ ha,ar& -'ai+ure% o' *anageria+ integrity.. 6t ha% !een argue&
that the%e )ro!+e*% o'ten ari%e !ecau%e *anager% +ac# the re1ui%ite *otivation to en%ure )ru&ence
%ince they &o not have a %ta#e in the re%i&ua+ inco*e o' the 'ir* -/o+&oveanu S /artin, 2001;
3a*a S?en%en, 1=8C.. Accor&ing to /or# an& co++eague% -1=88. an& :tu+, -1=88., *anageria+
o(ner%hi) i% the *o%t controver%ia+ an& a*!iva+ent 'or* o' 'ir* o(ner%hi), an& ha% *ixe&
e''ect% on )er'or*ance.
Aherea% o(ner%hi) !y *anager% *ay !e %een a% a %y%te* o' a+igning the intere%t% o' *anager%
(ith tho%e o' the %hareho+&er% in a (ay that enhance% cor)orate )er'or*ance, thi% 'or* o'
o(ner%hi) can a+%o +ea& to entrench*ent o' *anager%, (hich i% co%t+y (hen they cho%e to )ur%ue
their %e+' intere%t%. 6t ha% !een argue& that the overa++ i*)act o' *anageria+ o(ner%hi) on 'ir*
)er'or*ance &e)en&% on ho( (e++ the entrench*ent e''ect% an& incentive a+ign*ent are !a+ance&
-4u!!in an& 8eech, 1=82; ic#e+, 1==> @i++ an& ?one%, 1=82; @an%*ann, 1=88, 1==F.. $he
'in&ing% o' thi% %tu&y agree& to a %igni'icant extent (ith the argu*ent that *anageria+ o(ner%hi)
enhance% cor)orate )er'or*ance. 6n Kenya, *anager o(ner%hi) o' 'ir*% ha% !een actua+i,e&
through executive %hare o)tion%. $he 'in&ing% there'ore, %ugge%t that (hen *anager% a+%o &ou!+e
u) a% %hareho+&er%, they are *otivate& to (or# to(ar&% rea+i,ation o' the (ea+th creation
o!Bective o' the %hareho+&er% o' (ho* they are )art. On the other han&, *anager% (ho are not
%hareho+&er% are *ore +i#e+y to engage in in%i&er &ea+ing% a% a (ay o' enhancing their )er%ona+
(ea+th an& )re%tige.
$here i% near convergence that 9overn*ent o(ner%hi) o' 'ir*% +ea&% to !ureaucracy an&
ine''iciency that negative+y i*)act% 'ir* )er'or*ance -ic#e+, 1==>.. /any re%earcher% -De
A+e%%i, 1=80, 1=82; Vic#er% an& 2arro(, 1=88; :ha)iro an& Ai++ig, 1==0; :h+ei'er an& Vi%hny,
1<
1==>. have argue& that %tate-o(ne& enter)ri%e% are )o+itica+ 'ir*% (ith citi,en% a% the
%hareho+&er%, !ut the%e citi,en% have no &irect c+ai* to the re%i&ua+ inco*e o' tho%e 'ir*%. $he
citi,en% thu% ce&e their o(ner%hi) right% to the !ureaucracy (hich &oe% not have c+ear incentive%
to i*)rove )er'or*ance o' the cor)oration%. Other% -ic#e+ et al, 1==>. have attri!ute& the
)reva+ent )oor )er'or*ance o' 9overn*ent o(ne& 'ir*% to the ten&ency o' tho%e 'ir*% not to
%trict+y a&here to govern*ent %tatutory re1uire*ent% an& regu+ation%. Po+itica+ *ani)u+ation an&
)oor hu*an re%ource )o+icie% are other 'actor% that have !een !+a*e& 'or the genera+ )oor
)er'or*ance o' %tate-o(ne& enter)ri%e% -:ha)iro et al, 1==0..
:ince the ear+y 1==05%, the Kenyan 9overn*ent ha% )ur%ue& a &e+i!erate )o+icy o' &ive%titure,
ai*e& at re&ucing %tate o(ner%hi) o' cor)oration% (ith a vie( to attracting )rivate %ector
)artici)ation in *anage*ent o' the '+e&g+ing %tate cor)oration%. 6t (a% envi%age& that thi% )o+icy
(ou+& in'u%e *o&ern *anage*ent %ty+e% into the )u!+ic %ector that (ou+& u+ti*ate+y i*)rove
)er'or*ance o' the%e co*)anie%. $he 'act that 9overn*ent o(ner%hi) o' 'ir*% (a% 'oun& to %ti++
i*)act 'ir* )er'or*ance negative+y i% )erha)% an in&ication that the &ive%titure )rogra* in
Kenya i% yet to reach a critica+ +eve+ (here it% va+ue can !egin to re'+ect on cor)orate
)er'or*ance.
Pertinent +iterature regar&ing the re+ation%hi) !et(een o(ner%hi) !y cor)oration% an& 'ir*
)er'or*ance e*)ha%i,e% that inve%tor% &i''er in the &egree to (hich they are )re)are& to ta#e
ri%#% -:h+ei'er S Vi%hny, 1==>; Ae+ch, 2000; Iu S Aang, 1==>.. 3ir* o(ner% *a#e inve%t*ent
choice% that are in'+uence& !y their intere%t% an& )re'erence%.
Ahen a 'ir* ac1uire% %hare% in another 'ir*, the %hareho+&er% o' the 'ir%t 'ir* exten& their
inve%t*ent )re'erence%, intere%t% an& ri%# ta#ing !ehavior to that ne( 'ir*. $he intere%ting thing
a!out 'ir* o(ner%hi) !y other 'ir*% in Kenya i% that the ho+&ing 'ir*% are ty)ica++y +arge
cor)oration% (ith the a!i+ity to reorgani,e their !ranchHa''i+iate o)eration% to !ai+ out non-
)er'or*ing a''i+iate%. /o%t o' the%e ho+&ing 'ir*% have a+%o re)orte& goo& )er'or*ance &uring
the )erio& o' %tu&y. $he goo& )er'or*ance o' the 'ir*% they o(n i% there'ore, con%i%tent (ith the
&ocu*ente& )ractice !y 'ir*% to exten& their inve%t*ent )re'erence% an& ri%#-ta#ing !ehavior to
the 'ir*% they ac1uire.
Regar&ing the i*)act o' &iver%e o(ner%hi) on 'ir* )er'or*ance, the 'in&ing% o' thi% %tu&y a))ear
to contra&ict tho%e o' )reviou% re%earcher% -3a*a an& ?en%en, 1=8C; ?en%en an& /ec#+ing 1=>F;
Ber+e an& /ean, 1=C2. (ho have argue& that agency )ro!+e*% are *ore %evere in &i''u%e+y he+&
'ir*% &ue to +ac# o' ca)acity to co++ective+y *onitor the activitie% o' *anager%, a %ituation that
give% *anager% un+i*ite& +ee(ay to run the a''air% o' the cor)oration in their o(n %e+' intere%t.
$hi% argu*ent, ho(ever 'ai+% to a))reciate that %hareho+&er-*anager% (i++ a+*o%t invaria!+y
1F
&e*on%trate *ore co**it*ent to the 'ir* than (i++ their counter)art% (ho are not %hareho+&er%
%ince the +atter have no %ta#e in the re%i&ua+ inco*e o' the 'ir*.
A+though %o*e re%earcher% have ten&e& to 'avor concentrate& o(ner%hi) over &iver%e o(ner%hi),
the rea+ity i% that the agency co%t% incurre& in *onitoring *anager% -e%)ecia++y i' they are not
%hareho+&er%. are huge, an& *ay un&er*ine 'ir* )er'or*ance. $hu%, it i% a +ot chea)er 'or
*anager% to !e a!+e to *a#e in&e)en&ent &eci%ion% that %u))ort %hareho+&er o!Bective% than have
%hareho+&er% to i*)o%e i*)ru&ent i&ea% on the*. $he i*)ort o' the %tu&y 'in&ing% i% that in
Kenya, *anager% (or# !etter in an environ*ent (here they are a''or&e& an o))ortunity to o(n
%hare% o' the 'ir*, then a++o(e& 'reehan& to exerci%e their )ro'e%%iona+ Bu&g*ent (ithout un&ue
in'+uence 'ro* %hareho+&er%. $hi% arrange*ent (or#% !e%t in a &i''u%e+y he+& 'ir*. 6t can a+%o !e
argue& that the high )er'or*ing !+ue chi) co*)anie% have high +i#e+ihoo& to attract *ore
in&ivi&ua+ inve%tor% to !uy their %hare%, there!y &iver%i'ying %hareho+&ing%. $he hy)othe%i% @2& i%
there'ore, reBecte& on the !a%i% o' the %tu&y 'in&ing%.
$he *o%t &e'initive re%u+t% (ere on the re+ation%hi) !et(een 'oreign o(ner%hi) an& 'ir*
)er'or*ance. $he %igni'icant )o%itive re+ation%hi)% have vin&icate& the +ong-he+& !e+ie' that on
average, 'oreign o(ne& co*)anie% )er'or* !etter than their counter)art% (ith &o*inant +oca+
o(ner%hi). $ho*%en an& Pe&er%en -1==>. )o%it that )re'erence% regar&ing co*)any %trategie%
(i++ o'ten invo+ve a tra&e-o'' !et(een the )ur%uit o' %hareho+&er va+ue%, orientation an& other
goa+%. :ucce%%'u+ co*)anie% (ith an internationa+ )re%ence ten& to !e +arge, (ith (e++ e%ta!+i%he&
*anage*ent %y%te*% that are re)+icate& -(ith *ini*a+ cu%to*i,ation. in a++ their !ranche% an&
a''i+iate% a!roa&.
:"#" IMPLICATIONS OF THE FINDIN*S
1. T2ere &s a s&',&1&ca,t ,e'at&+e re-at&o,s2&) bet7ee, o7,ers2&) co,ce,trat&o, a,
1&r3 )er1or3a,ce. $he *onitoring an& contro+ %choo+ o' thought argue% that the 'ree-
ri&er )ro!+e*% a%%ociate& (ith &i''u%e o(ner%hi) &o not ari%e (ith concentrate&
o(ner%hi), %ince the *aBority %hareho+&er ca)ture% *o%t o' the !ene'it% a%%ociate& (ith
thi% *onitoring. $hi% 'oun& out that the rever%e i% actua++y true in the Kenyan context.
$he i*)+ication i% that (hen *ore than C0 )er cent or *ore o' %hare% are concentrate& on
a 'e( han&% -i.e. 'ive %hareho+&er% or +e%%., there i% a ten&ency 'or the %hareho+&er% to !e
over,ea+ou% in their *onitoring, contro++ing an& rati'ication ro+e% over *anager%. $hi%
%ti'+e% *anager%5 creativity an& innovation, an& u+ti*ate+y a''ect% 'ir* )er'or*ance
a&ver%e+y. 6t i% even (or%e (hen the %hareho+&er% +ac# %)eci'ic an& genera+ #no(+e&ge
a!out the !u%ine%% o' the 'ir*. $he re%u+t% o' the %tu&y have there'ore, %ho(n there i% &ire
1>
nee& to rea%ona!+y &iver%i'y %hareho+&ing a% a (ay o' attracting *ore %#i++% an&
co*)etencie% a*ong the %hareho+&er% that can !e ta))e& to i*)rove 'ir* )er'or*ance.
At the %a*e ti*e, the *anager% %hou+& !e )rotecte& 'ro* unnece%%ary &irect inter'erence
!y the %hareho+&er%.
2. T2ere &s a )os&t&+e re-at&o,s2&) bet7ee, &,s&er o7,ers2&) a, 1&r3 )er1or3a,ce" 6t
ha% !een argue& that (hen *anager% o(n %hare% in their co*)any, they !eco*e *ore
co**itte& to the organi,ation %ince they have a %ta#e in the re%i&ua+ inco*e o' the 'ir*,
an& are +i#e+y to !ear the co%t o' *i%*anage*ent. $hi% co**it*ent tran%+ate% to %u)erior
)er'or*ance. 6n 'act, the %tu&y rea''ir*e& thi% )o%ition a*ong +i%te& co*)anie% in Kenya.
Ahat (a% not e%ta!+i%he& !y the %tu&y ho(ever i% the critica+ +eve+ o' %hareho+&ing,
!eyon& (hich there (ou+& !e acce+erate& 'ir* )er'or*ance ari%ing 'ro* co**it*ent o'
*anager%.
C. T2ere &s a s&',&1&ca,t ,e'at&+e re-at&o,s2&) bet7ee, 'o+er,3e,t o7,ers2&) a, 1&r3
)er1or3a,ce" 9overn*ent o(ner%hi) ha% !een roun&+y critici,e& 'or contri!uting to
genera++y )oor )er'or*ance o' 'ir*%, &ue to exce%%ive !ureaucracy, tri!a+i%*, ne)oti%*,
)oor hu*an re%ource )o+icie%, )o+itica+ ex)e&iency in a))oint*ent% an& +ac# o' re%)ect
'or +a(% an& regu+ation% o' the country. $he current %tu&y ha% con'ir*e& thi% +ong-he+&
)o%ition. $he i*)+ication i% that govern*ent %hou+& in'u%e )rivate %ector-+i#e
*anage*ent %y%te*% an& )rogre%% the &ive%titure )rogra* to attract *ore )rivate
in&ivi&ua+% an& in%titution% to co-o(n the %tate cor)oration%.
4. T2ere &s a )os&t&+e re-at&o,s2&) bet7ee, o7,ers2&) by cor)orat&o,s a, 1&r3
)er1or3a,ce" Previou% %tu&ie% have 'oun& a*!iguity in the re+ation%hi) !et(een
o(ner%hi) !y cor)oration% an& 'ir* )er'or*ance, &ue *ain+y to the &i''erence% in
inve%t*ent )re'erence% an& %hareho+&er%5 goa+%. :o the goo& )er'or*ance i% attri!uta!+e
to the inve%t*ent choice% an& orientation o' the )arent co*)anie%, an& not nece%%ari+y the
a!i+ity o' *anager%. $he re%u+t% are a )ointer that co*)anie% that are )er'or*ing )oor+y
nee& to care'u++y cho%e %trategic )artner% to )ro) u) their )oor )er'or*ance.
<. T2ere &s a )os&t&+e re-at&o,s2&) bet7ee, &+erse o7,ers2&) a, 1&r3 )er1or3a,ce"
$he g+o!a+ tren& to(ar& &i''u%e o(ner%hi) ha% con'oun&e& *any re%earcher%, %ince it
un&er*ine% the )o)u+ar !e+ie' that *anager% are inherent+y %e+'-%ee#ing an& can ea%i+y
(rec# the organi,ation i' +e't (ithout c+o%e *onitoring. $he 'in&ing% have !rought a ne(
&i*en%ion that e*)ha%i,e% *anageria+ &i%cretion 'or creativity an& innovation, an& +e%%
*onitoring !y %hareho+&er%. $hu%, &i''u%e o(ner%hi) o' 'ir*% )rovi&e% a goo&
environ*ent 'or exce++ent )o+icie% to !e &eve+o)e& an& i*)+e*ente& !y *anager%. $he
18
*anager% are there'ore !e%t in'or*e& regar&ing a+ternative u%e% 'or the inve%tor%5 'un&%.
A% a re%u+t, the *anager% en& u) (ith %u!%tantia+ re%i&ua+ contro+ right% an& &i%cretion to
a++ocate 'un&% a% they choo%e. $he &o(n%i&e o' thi% argu*ent i% that it )re%u*e% that
*anager% are hone%t, an& a+(ay% )re)are& to (or# in the o!Bective intere%t o' the
%hareho+&er%, a )o%ition that i% o'ten not true. $he 'act that *anager% have *o%t o' the
contro+ right% can +ea& to )ro!+e*% o' *anage*ent entrench*ent an& rent L%ee#ing
!ehavior !y *anager%. $hi% %tu&y ha% %ho(n that *anager% (or# !e%t (hen they have
%u''icient +atitu&e 'or innovation an& creativity, that i%, +e%% *onitoring !y )rinci)a+%.
:" T2e )os&t&+e a, s&',&1&ca,t re-at&o,s2&) bet7ee, 1ore&', o7,ers2&) a, 1&r3
)er1or3a,ce a))ear% to have gaine& univer%a+ acce)tance acro%% the g+o!e &ue to a
nu*!er o' 'actor%. 3ir%t, 'oreign o(ne& co*)anie% have acce%% to *anage*ent %y%te*%
(ho%e e''icacy ha% !een te%te& in *any context%. $he *a%%ive re%ource !a%e an& !ai+-out
)+an% 'or '+e&g+ing a''i+iate% are other 'actor% that enhance )er'or*ance o' 'oreign o(ne&
'ir*%. @o(ever, the a!i+ity o' the%e co*)anie% to re-organi,e their g+o!a+ o)eration% to !e
a!+e to a%%ign *ore co%t% to har%h tax regi*e% an& )ro'it% to tax haven% in a !i& to re&uce
their overa++ tax +ia!i+ity, i% the *o%t &a*ning 'eature o' 'oreign o(ner%hi).
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