Corporate Ownership and Firm Value: A Gmm-Based Dynamic Panel Data Approach

Abstract To establish the relationship between corporate ownership and firm value, static as well as Arellano-Bond dynamic panel model based on Generalised Method of Moments (GMM) are applied on a set of panel data consisting 112 Indian manufacturing firms listed in BSE 200 Index of Bombay Stock Exchange for the period of 2011-18. A significant and positive effect of domestic promoters, foreign promoters and institutional ownership on Tobin’s Q is established. Regarding ownership concentration, a U-shaped relationship between ownership of large shareholders and ownership of largest shareholder and firm value is evidenced. At lower level of concentration, the effect on firm value is found to be negative indicating joint effect of ‘expropriation of minority shareholders’ and ‘misaligned interests’ of majority owners with the firm. For ownership concentration by large owners and the largest one owner, the effect on firm value is found to be positive after a threshold of 70 and 52 percent respectively. This signifies improved alignment of interests and efficient monitoring of managerial opportunistic behaviour and dismantling of owners-managers agency problem at higher level of concentration. Stricter external regulatory mechanism is suggested as a complimentary force to internal governance to ensure protection of minority shareholders’ interest and improved firm valuation.