Corporate governance: ownership structure and firm performance - evidence from Thailand

Corporate governance has succeeded in attracting a good deal of public interest because of its importance for economic development and society in general. Shleifer and Vishny (1997, p. 737) note "corporate governance deals with the way in which suppliers of finance to corporations assure themselves of getting a return on their investment". Corporate governance has been a subject of continuing debate since Berle and Means (1933) suggested that the growing dispersion of ownership can give rise to separation of ownership and control. Jensen and Meckling (1976) argued that the existence of the separation ownership and control leads to a conflict of interests between ownership and firm performance (agency problem), which can intensively affect a firm's performance. As a result, corporate governance mechanisms are demanded. One possible corporate governance mechanism that can alleviate agency problems is 'ownership structure'. Ownership structure, including ownership concentration and managerial ownership, it is argued in this respect, can control a firm's management and impact on maximizing shareholders' and stakeholders' wealth. Several studies examined to see whether there is a relationship between ownership structure and firm performance. The outcomes of this research, however, are inconclusive. In Thailand, it is argued that ownership structure, particularly family ownership and managerial ownership, is one of the causes of the decline in firm performance and the financial crisis. The evidence on the relationship between ownership structure and firm performance in the case of Thailand, however, is scarce and needs further in-depth examination. This study examines the relationship between ownership structure and firm performance of 243 Thai firms for the period prior to the financial crisis (1993-1996). Firm performance is measured using market returns and accounting profitability. The results show that controlling ownership, including family-controlling ownership, is positively related to firm performance during this period. There is evidence to support the view that managerial ownership is positively related to firm performance; in fact, such positive relationship is derived from managerial-family ownership. Moreover, there is little evidence on a non-linear relationship between managerial ownership and firm performance. This relationship, however, is significant between managerial-non-family ownership and market returns. This study also conducts further analysis of the relationship between ownership structure and firm performance on the period after the crisis (1998-2000). This enables an assessment of whether the effect of ownership structure and firm performance is different between the period prior to and after the crisis. The results show that, overall, the association between ownership structure and firm performance in these two periods is similar. However some of the results of the period after the crisis are less significant than those found prior to the crisis. The results show that controlling ownership, including family-controlling ownership, is positive and significant to profitability, but it is less significant for market returns. Also, the relationship between managerial ownership and firm performance in the period after the crisis (1998-2000) is less significant compared to that found in the period prior to the crisis (1993-1996). In fact, managerial family ownership firms perform better than non-managerial ownership firms. Interestingly, there is a non-liner relationship between managerial ownership and market returns during this period. This relationship is also found between managerial-family ownership and profitability.