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Large publicly listed companies are commonly managed by professional managers rather than owners.

However the appointment of these professional managers on the basis of agency theory would create a potential conflict of interest between shareholders and their agents. The dispersed nature of shareholding of large publicly listed companies would require companies to establish and structure a control mechanism for the purpose of monitoring corporate management because no one shareholder has the incentive to monitor management on his/her own.

According to (Mayer 2000) there are two models of ownership structure: one is the Insider System and the other is the Market-based System. The insider system is used in Continental European countries such as Germany, and in Japan and Asian countries, while the Market-based system is used by Anglo-American corporations in the US and the UK (Bebchuk 1999; Mayer 2000).

In both models, a company would start as a private company owned, controlled and managed by its founder. It requires capital and therefore issues shares. In the insider system it can raise these funds in the form of non-voting equity, sell shares to related firms and ensure that control remains in the hands of a small number of parties. As the company grows and expands, new large investors purchase stakes, minority stakes are sold off to companies that are purchased and the complex network and pyramids of the insider ownership structure system starts to emerge. The whole process is explained in Fig 2.1.

Figure 2.1: Continental Europe Evolution of Control - Insider Ownership System

Source: (Mayer 2000)

In the Anglo-American corporations, particularly in the UK, a company sells equity on the stock market and when more than 50 per cent of the voting rights are sold, control is transferred to the market. Other companies cannot purchase stakes of more than 30 per cent in the company without making full bids. Share blocks are therefore sold off and both ownership and control become dispersed in the hands of outside individuals and financial institutions (Figure 2.2) Concentrated Ownership Concentrated Control Non-voting Shares Pyramids Dispersed Ownership Concentrated Control 29

Figure 2.2: Anglo-American Evolution of Control - Outsider Ownership System

Source: (Mayer 2000)

In the "Insider System", control is concentrated in the hands of a small number of individual investors with differences of interests and agendas. In the "Outsider System", shareholdings are dispersed and voting is not concentrated in a few hands. In the "Insider System", firm control is concentrated in the hands of a small number of individual shareholders. Such ownership structure demonstrates two different theoretical arguments which have an impact on the firm.

One augment, based on agency theory, is that such organisational setups would positively impact on corporate performance thorough a reduction in the agency cost. Managers have a tendency to work towards their own personal best interests by way of allocating firms’ resources towards themselves and that may conflict with those interests of outside shareholders (Jensen & Meckling 1976). Furthermore (Baysinger & Butler 1985a; Berle & Means 1932; Fama, EFa & Jensen 1983; Gompers 2003; Jensen & Meckling 1976; Shleifer & Vishny 1986), managers are motivated by the widely dispersed ownership structure to dispossess corporate shares in a way that negatively affects the wealth of shareholders (Core, Holthausen & Larcker 1999; Berle & Means 1932; Fama, EFa & Jensen 1983; Jensen & Meckling 1976; Shleifer & Vishny 1986)

Concentrated Ownership Concentrated Control

One share: One vote Minority investor

protection

Dispersed Ownership Dispersed Control

On the other hand, the existence of large shareholders with large equity stakes or controlling shareholders is assumed to negatively harm a firm because the controlling shareholders' interests may not align with those of non-controlling shareholders (Porta, Lopez‐De‐Silanes & Shleifer 1999; Shleifer & Vishny 1997).

Controlling shareholders may use a company's resources for their own interests, such as paying themselves unnecessary high salaries and dividends or appointing their family members in top executives positions and in the board of directors without considering their competencies and other relevant factors (Wiwattanakantang 2001). (Demsetz, H 1983) was the first to challenge the assumptions of agency theory, arguing that there should be no relationship between ownership structure and company performance, and that ownership structure should be considered as an endogenous outcome of decisions that reflect the level of influence of shareholders. Demsetz, Harold and Lehn (1985a) also did not find any relationship between profit rates and various measures of ownership concentration in a sample of 511 US firms. Demsetz, H (1983) suggested that diffusion of ownership structure provides a better chance for corporations to survive when they are under pressure for large equity capital, but that there is no particular equity/ownership structure that is optimal to increase the performance. On the contrary (Shleifer & Vishny 1997) observed the significant role of large shareholders and its positive impact on the share prices of firms.

Mehran (1995) established that there was a positive relationship between managerial equity ownership and company performance, while Zeckhauser and Pound (1990) observed a relationship between large shareholders and future performance and suggested that a large body of shareholders can be an indicator of positive future performance. Conversely, (Porta, Lopez‐De‐Silanes & Shleifer 1999) found that when the majority shareholders effectively control a corporation, their policy may result in expropriation of minority shareholders by not paying dividends and transferring profits to companies that they own and control. Morck, Shleifer and Vishny (1988b) examined the relationship between ownership structure and firm performance using Tobin’sq as a performance measure and obtained a non-linear relationship between insider ownership and firm performance. The study found a positive relationship between ownership structure and Tobin’s q between 0 and 5 per cent of board ownership, a negative relationship between 5 and 25 per cent, and a positive relationship thereafter. Nevertheless these findings are not confirmed by accounting-based measures. (McConnell & Servaes 1990) investigated the relationship between Tobin’s q and the structure of equity ownership and found a significant curvilinear relationship between Tobin’s q and the

fraction of common stock owned by corporate insiders between 0 to the range of 40-50 per cent and a negative relationship when exceeding 50 per cent. The study also found a positive relationship between Tobin’s q and the fraction of shares owned by institutional investors.

Zeitun and Tian (2007) found empirical evidence of positive effects of ownership concentration on company performance in terms of both accounting-based measures and market-based measure using a sample of publicly-listed companies in Jordan. The positive effect of ownership concentration had a stronger influence on the accounting-based measure of performance than on the market-based measure of performance. In a study of 249 large banks in 20 countries in the Middle East and North Africa (MENA),(Kobeissi 2004) found a positive relationship between ownership concentration and performance in the banking sector.

Ownership structure is an important factor in corporations and that is evident by the empirical evidence from studies conducted in different contexts using different variables and measurement tools. However there has been no consensus on the relationship between ownership structure and performance, which keeps the door wide open for future research. According to Tricker and Bob (1998), ownership structures of publicly-listed corporates around the globe are often complex and to understand their corporate governance it is important to understand the ownership structure, which will indicate their potential to exercise power and influence. This suggests the significance of ownership structure in terms of shareholders and the role they can play in the company’s affairs. Shareholders can appoint board members, and oversee and appoint managers (agents) to run the company which would have an impact on its performance.