CORPORATE CONTROL AND FIRM PERFORMANCE: DOES THE TYPE OF OWNERS MATTER? Muhammad Agung Prabowo* Universitas Sebelas Maret, Surakarta, Indonesia Abstract: The paper extends the ownership study by examining the different types of large shareholders in relation to its impact on organizational outcome in Indonesia using a dataset consisting of 190 non-financial companies listed in Jakarta Stock Exchange in 2002. The study investigates the effect of family ownership, foreign blockholder, domestic institutional shareholders, and the board of directors on firm performance. The results confirm the different impact of different large shareholders type on firm performance. Controlling family ownership is more likely to exacerbate agency problems while the presence of foreign investor is related to superior firm performance. Domestic blockholders is insignificantly related to firm performance. However, the interaction effect between family and domestic blockholders ownership is negatively related to firm performance, offering empirical evidence to the existence of interlocking blockholders in Indonesia to deprive minority shareholders from their rights. Keyword: Corporate Governance, Large Shareholders, Board Structure, Firm Performance JEL Classification: G32, G35
This version: March, 2010 Do not quote without written permission in advance
* Program Studi Akuntansi, Gedung IV Fakultas Ekonomi, Universitas Sebelas Maret. Jl. Ir. Sutami 36A, Surakarta, 57126, INDONESIA, email: firstname.lastname@example.org.
CORPORATE CONTROL AND FIRM PERFORMANCE: DOES THE TYPE OF OWNERS MATTER?
1. Introduction The structure of corporate ownership has been argued as being is the most important dimension of governance mechanism as it determines the distribution of control among contracting parties. The structure forms the nature of agency conflict specific to the firm and accordingly the very purpose of corporate governance portfolio adopted by the firm (Shleifer & Vishny 1997). In the dispersed firms, agency problem is related to the conflict between insider manager and outside shareholders. In contrast, the problem stems from utility maximizing behaviour of majority shareholders that diverges from those of minority shareholders whenever the corporate ownership is concentrated.
Traditionally, the structure incorporates the level of shareholding and the type of large shareholders. The level of shareholding has been claimed as potentially helping to create the convergence of interest between those of agent and principal (Jensen & Meckling 1976). However, higher shareholding provides majority owners with sufficient voting power to entrench themselves that leads to the expropriation of minority shareholders associated with the private benefit of control (La Porta et al. 1999; La Porta et al. 2000; Claessens et al. 2002). The type of large shareholders has been associated with different demand of governance configuration that potentially that results in different organizational outcome (Johnson & Greening 1999; Dahlquist & Robertsson 2001; Jiambalvo, Rajgopal & Venkatachalam 2002; Gillan & Starks 2003). Nevertheless, literature addressing this issue fails to document the individual impact of different 3
shareholders types on firm performance simultaneously. Accordingly, the effect of the multiple types of large shareholders on firm performance remains an open empirical question.
The paper extends the blockholder study in relation to Indonesian context that has been proven as having a unique institutional setting. Particularly, the study investigates the effect of family ownership, foreign blockholder, domestic institutional shareholders, and the board of directors on the organizational outcome. The results confirm the different impact of different large shareholders on firm performance. Controlling family ownership is more likely to exacerbate agency problems while the presence of foreign investor is related to superior firm...
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