1. Relationship between Ownership Structure and Company Performance
Evidence from Macedonian companies
KIRADZISKA, Snezana
October 2010

2. Executive Summary
This research project aims at exploring the relationship between ownership structure and
company performance in the Macedonian companies listed on the official market on the
Macedonian Stock Exchange during 2006 - 2009. The proposed hypothesis assumes that
more concentrated ownership structures enforce better monitoring on the professional
managers which results in better company performance.
New advanced econometrics was introduced in testing the hypothesis where endogeneity
of the ownership structure was considered. The empirical findings from the tests did not
support the proposed hypothesis.
To the best knowledge of the author this is originally the first research in this field in
Republic of Macedonia. It contributes in raising the awareness of corporate governance
practices in Macedonia as well as the agency problem in the post transition period.
This research donates the ongoing debate in the finance theory regarding the relationship
between ownership structure and company performance along with the other studies done
throughout the years.
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3. Content
1. Introduction ..................................................................................................................6
2. Literature review ..........................................................................................................9
2.1. Theoretical aspects ...................................................................................................9
2.1.1. Corporate Governance and Agency Theory .....................................................9
2.1.2. Ownership structure .........................................................................................10
2.1.3. Company Performance ....................................................................................13
2.1.4. Gaps in knowledge...........................................................................................15
2.2. Previous studies ......................................................................................................15
3. Methodology ................................................................................................................22
3.1. Data requirements ..................................................................................................22
3.2. Research Approach and Methodology....................................................................22
3.2.1. Collecting data .................................................................................................24
3.2.2. Data issues ......................................................................................................25
3.2.3. Selection of estimators.....................................................................................26
3.2.4. Empirical specification ...................................................................................28
3.2.5. Estimation results ............................................................................................32
4. Conclusions and Recommendations ..........................................................................35
5. Reflection on Learning ...............................................................................................37
BIBLIOGRAPHY ............................................................................................................38
APPENDIX 1....................................................................................................................42
APPENDIX 2....................................................................................................................43
APPENDIX 3....................................................................................................................44
APPENDIX 4....................................................................................................................45
APPENDIX 5....................................................................................................................46
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4. 1. Introduction
The relationship between ownership structure and company performance has been
debated for decades in the finance theory. The historic roots lie in the book of Adolf
Berle and Gardiner Means published in 1932. In their book The Modern Corporate and
Private Property authors explore the concentration of economic power by the large
companies in United States of America and the rise of a class of managers exercising
power no matter the shareholders and other stakeholders. This book was a result of the
economic events of 1920s, including the stock market crash of 1929. Furthermore,
Mizruchi (2004, p. 2) refers to the book of Berle and Means (1932) stating the issue that
the managers were seen as having interests not necessarily in line with those of the
shareholders meaning owners preferred that profits be returned to them in the form of
dividends, whereas managers preferred to either reinvest the profits or in more sinister
interpretations to further their own privileges in the form of higher salaries or “perks”.
Consequently their argument was that the unmonitored managers by largely dispersed
ownership structure can lower the value of the company. As the ownership and the
control were separated, the managers grew in those agents who had the power to destroy
or to build value and to distribute the wealth as well. In that time the term managerialism
emerged. As one of the approaches that critiqued managerialism was the agency theory.
According to Mizruchi (2004, p. 6) agency theory more than any approach has focused
on the complexities and difficulties of monitoring that arise when ownership is widely
dispersed. Significant contribution to the agency theory has been given by Jensen and
Meckling by acknowledging that managers have different motives than the owners and
that it is difficult to monitor the managers when the ownership structure is dispersed.
Throughout the years the Berle and Means (1932) argument has been tested by many
authors. Demsetz and Lehn (1985, p. 1176) with their article in the Journal of Political
Economy have openly critiqued the thesis of Berle and Means (1932) stating that the
ownership is structured in a way to maximize the owners value. The ongoing debate and
the number of studies testing the relationship have been a driver for this study as well.
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5. This research tests the relationship between ownership structure and performance in
Republic of Macedonia. To the best knowledge of the author, no prior research has been
done on this topic.
Republic of Macedonia as the other countries of Central and Eastern Europe in the last
twenty years has been a subject of the process of privatization. This meant transferring
the ownership structure from state to privately ownership. The companies were to
become key players of the market oriented economy. The ownership structure of the large
companies was not built by investor driven decision but it was enforced by the
circumstances of the process of privatization. Most of the shareholders were the
employees in the previous state owned companies. There was a need for corporate
restructuring and managing in a way companies to be competitive on the domestic and
the global market.
The current corporate governance practices were implemented with the new Company
Law in 1996. Today, the Macedonian market, even though small, is characterized with
the key market players: the Macedonian Stock Exchange (MSE) with its regulation,
Securities Exchange Commission (SEC) as a regulator as well as investors who are
motivated for gaining a profit or a dividend. The real shareholding does exist today in
Republic of Macedonia. Its further development depends on the capability of the
companies, regulators and other institutions to strengthen the corporate governance
issues.
This issue has a social background regarding the accountability of the managers of the
large companies not only towards shareholders but to the society as well. Due to the
recent events of corporate failures, managers’ accountability has raised debates. The
unmonitored managers in the widely dispersed ownership structure can exercise power in
their own benefit and influence politics. Consequently, the personal driver of the author
for research in this field is the importance of corporate governance issues in Republic of
Macedonia in order to motivate higher accountability of the Macedonian managers
towards the shareholders.
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6. The research objective of this paper is to examine the relationship between the ownership
structure and performance in the Macedonian companies. The test will be done by using
advanced statistical methods. The assumption is that the more concentrated ownership
structure provides better monitoring of the managers which results in better performance.
Consequently it is testing the Berle and Means (1932) hypothesis as well.
In the beginning, the literature was reviewed by studying theories, exploring definitions
and by analyzing the studies conducted. The studies and tests conducted trough the
decades have shown different results for supporting or critiquing the Berle and Means
(1932) theory. In the theoretical part, the definitions for the ownership structure and
performance will be explained. After the literature review the methodology for testing is
going to be analyzed. The analysis followed the logical pattern of doing the research.
Furthermore, details of the estimators which were used for the tests are presented. The
results achieved are analyzed and compared to theory. At the end, the thesis concludes by
providing recommendations for future studies and research.
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7. 2. Literature review
2.1. Theoretical aspects
2.1.1. Corporate Governance and Agency Theory
This study is closely related to the corporate governance issues and agency theory.
According to Johnson et al. (2005, p. 165) the governance framework describes whom
the organization is there to serve and how the purposes and priorities of the organization
should be decided upon. Furthermore, it refers to how an organization should function
and the distribution of power among different stakeholders. In recent years this concept
has gained much popularity as many corporate governance failures have emerged in the
finance and business world. The issue that has been observed is the separation of the
ownership and control in the companies. Managers are the agents for the principals
(shareholders) who have to work in maximizing the firm value and the shareholders
value. The agency theory presumes that there should be an incentive as a motivation the
“agents” to work in the best interest of the shareholders. But very often, the professional
managers, according to Johnson et al. (2005, p. 167) become very distant from the
ultimate beneficiaries of the company performance. This is the point where the agents
diverge to work in their own interest and not in the interest of the principal and the
conflict of interest arises.
Pike and Neale (2009, p.13) are proposing the ways to minimize the agency problem by
setting up and monitoring managers. Those include the following:
- auditing the accounts of the company;
- conducting management audits and imposing additional reporting requirements;
and
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8. - restrictive covenants imposed by lenders, such as ceilings on the dividend payable
on the maximum borrowings.
The above mentioned ways of monitoring the professional managers are called agency
costs which are undertaken in order to resolve the conflict of interest between the
managers and shareholders.
In their book Johnson et al. (2005, p. 210) refer to the Harvard Business School professor
Michael Jensen as to one of the proponents of agency theory which warns that there are
no “perfect agents” in the real world. He argues that either through their own self-interest,
or perhaps by error, managers can not be trusted to maximize shareholders interests.
Furthermore, Professor Michael Jensen explains that the best safeguard is to align
financially the managers’ interests with the shareholder goal of long-run value
maximization.
Today, modern corporations are characterized by very diffuse ownership structure.
According to Ross et al. (2005, p. 15) the diffuse ownership brings with it the separation
of ownership and control in the large corporations. Furthermore, in the literature there are
arguments that if the shareholders ownership is too diffuse and fragmented the effective
control is brought in question. Consequently, the more concentrated ownership structure
the better the monitoring of the professional managers which results in working in the
best interest of the shareholders and higher corporate performance. This is the root of the
many studies done in this field as is for this research which aims to prove whether there is
relationship between the ownership structure and company performance.
2.1.2. Ownership structure
Republic of Macedonia has undergone trough the processes of transition towards
functional market economy. In the socialist times the owner of the company was the
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9. state. After the introduction of the new Company Law in 1996 and adoption of the
privatization model in 1994, the previously state owned companies were transformed into
Joint Stock Companies (JSC) owned by various shareholders, which in Macedonian case
turned to be largely the previous managers or the employees. But in that time the
shareholders were not investors in a real sense of the word as they did not paid
adequately for what they received in exchange. There was an evident need for change in
the mentality and behavior of the shareholders and implementing a shareholder’s culture.
The awareness had to be raised that the companies had to generate profit on the market
and not to be seen as social units of the society. The need for improving the corporate
governance practices was more than evident. The next step was putting in place the 2004
Company Law which implemented the world trends and European tendencies mostly
regarding protection of the shareholders rights.
The subject of this empirical study are the Joint Stock Companies in Macedonia listed on
the official market on the Macedonian Stock Exchange. In the observed period of this
research (2006-2009) the number of listed companies is fixed to 36 per year. As the
corporate governance issue has a legal background, the definition of a Joint Stock
Company according the Macedonian Company Law [Article 270] is that it is a company
where the shareholders participate with contributions in the equity, which is divided into
shares. The shareholders are owners of the company and they are entitled to a part of the
annual profit, they have voting rights and they remain last for settlement if there is a
bankruptcy process of the company.
The managing of the JSC’s according to the Macedonian Company Law can be organized
in one or two tier boards. The members of the one tier boards of directors are executive
and non executive. The executives are responsible for the daily operations of the
company. The non executive members are actually supervising the work of the
executives. The two tier board recognizes two managing bodies: the managing board and
supervisory board. Legally the two boards should be complementary. According to
Belicanec and Nedkov (2008, p. 151) the harmonized and coordinated managing and the
supervisory board are responsible for balancing the company interests and the interests of
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10. the shareholders. Furthermore, the supervisory board should control the managing board
which should be working in shareholders’ best interest. This addresses the issue of
agency theory in the Macedonian companies as well.
In May 2004 the United States Agency for International Development (USAID)
conducted a research on all active Joint Stock Companies in Macedonia. The objectives
of the research were the current corporate governance practices in Macedonia. The
research addressed the issues like awareness of shareholders rights, need for
modernization of the registration process in Macedonia as well as understanding the new
Company Law as a mean for attracting finance. The interesting fact identified by the
research (2004, p.28) is that the ownership structure has been classified into the following
groups of owners in Macedonia:
- The government;
- Managers;
- Non executive members of the board of directors and supervisory boards;
- Individual investors;
- Employees; and
- The PIOM (Pension fund).
La Porta et al. (1998, p.8) used 10% threshold in his study to describe the controlling of
the company. If the there is a shareholder exceeding the 10% cutoff it is defined as an
ultimate controller. Consequently, the companies are divided into widely held companies
and companies with more concentrated ownership by ultimate controllers. To define a
control of companies, regarding this study a cutoff of 5% of the total shares is used in this
study. This threshold of 5% of the shares is used because legally it is a significant portion
of the voting rights which gives the shareholder right to propose items on the agenda of
the annual general meeting of shareholders that has already been called. Furthermore the
company has obligation for disclosing shareholders holding more than 5%.
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11. Given the data in Appendix 4, this research indicates that the average control right held
by the largest shareholders in the companies listed on the official market on the
Macedonian Stock Exchange to be 33% in 2006, 35% in 2007 and 2008 and 36% in
2009. The max values meaning the highest control right by one shareholder in 2006 is
72%, 76% in 2007, 92% in 2008 and 2009. The minimum values are 6% in the four
observed years. This research revealed that there is no Joint Stock Company in
Macedonia without an ultimate controller. These findings indicate concentrated
ownership structure.
2.1.3. Company Performance
The managing board is accountable for the daily operations of the company. Shareholders
expect that the company will achieve higher performance results seen trough the financial
ratios. The hypothesis of the thesis is following: the more concentrated ownership
structure of the company, the higher the performance.
As previously mentioned the researchers have used few performance indicators in their
studies. Demsetz and Lehn (1985) have used the post tax accounting profit / book value
of equity. Many others, such as Mc Connell and Servaes (1990), Hermalin and Weisbach
(1991), Cho (1998) and others have used the Tobin Q. According to Pike and Neale
(2009, p. 585) Tobin’s Q is a ratio which is produced by dividing market value of assets
by replacement value of assets. Ratio greater than 1 indicates that the firm has done well
with its investment decision because of which the company is overvalued by the market.
Demsetz and Villalonga (2001) give different perspectives to the two performance
measurements mostly used in the studies above mentioned: the accounting profit and
Tobin’s Q. In their article, Demsetz and Villalonga (2001, p. 4) explain that the two ratios
differ by the time perspective where the accounting profit is backward-looking and
Tobin’s Q is forward looking. The question is whether it is more reliable to use what the
management has accomplished or what the management will accomplish. The second
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12. difference is who actually measures the performance: for the accounting profit rate it is
the accountant who is constrained by the standards of his profession and the Tobin Q is
measured by the group of investors influenced by their optimism or pessimism.
Regarding this study the Return on Ordinary Shareholders’ Funds (ROSF) was used as a
performance measurement. According to Atrill and McLaney (2006, p. 174) the return on
ordinary shareholders’ funds compares the amount of profit for the period available to the
owners, with the owners’ average stake in the business during the same period. It is a
performance measurement showing how much the shareholders’ funds did generate
profit. It is a result of the daily operations of the management board. The shareholders’
want this ratio to be higher. The higher the ratio the higher hypothetically will be the
benefits for the shareholders. The findings in Republic of Macedonia show that after the
2008 crisis, the ROSF ratio has worsened in 2009. As already elaborated, according to
the initial thesis in the research, ROSF should be higher as the concentration of the
ownership is higher. The assumption is that the more concentrated ownership structure
imposes monitoring on the professional managers which tends to work for higher ROSF.
On the other hand widely dispersed ownership structure can not impose monitoring
mechanisms over the management and this situation provides them with a room for
working in their best interest not in shareholders’.
The second performance measurement used in the research is Sales Growth. This
indicator shows the increase in sales on annual basis. The companies in Republic of
Macedonia demonstrated a decrease in sales growth since 2006. The annual growth
percentages were as follows: 26% in 2006, 13 % in 2007, 12 % in 2008 and there was a
fall of -9% in 2009 as compared with 2008. There should be a positive relationship
between the sales growth and the concentrated ownership structure, as well as positive
impact of sales growth on ROSF.
The third measurement used is debt to equity ratio. According to Gibson (2007, p.241)
the debt ratio indicates the firm’s long term debt paying ability. It is computed as follows:
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13. Debt to equity ratio = long-term liabilities / total assets
According to Jensen and Meckling (1976, p.52) even in absence of the tax benefits debt
can be utilized if the ability to exploit potentially profitable investment opportunities is
limited by the resources of the owner. If capital is not raised the owner will suffer
opportunity loss of not undertaking the additional investments. Furthermore they explain
that even though the owner will bear the agency costs because of the debt he will need
the additional capital as long as the marginal wealth increments are greater from the
marginal agency costs of debt. This argues that the debt is increasing the value of the
company, assuming higher ROSF. Regarding the companies in Republic of Macedonia
this research indicates rather steady average debt to equity ratios of the listed companies:
0.21 in 2006, 0.21 in 2007, 0.24 in 2008 and 0.23 in 2009.
2.1.4. Gaps in knowledge
There is no research in Republic of Macedonia focusing on the research objectives from
this proposed study. There are studies related to corporate governance exploring other
issues but never has been the relationship between the ownership structure and
performance tested.
2.2. Previous studies
Many studies have analyzed the relationship between the organizational structure and the
financial performance of the companies.
Among the first authors seeking the relationship between the ownership structure and the
corporate performance are Berle and Means (1932). Berle and Means (1932) in the paper
of Fishman et al. (2008, p. 115) assert that as the ownership becomes increasingly
dispersed shareholders are becoming powerless to control the professional managers as
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14. they can not effectively carry out monitoring of management. Furthermore, they suggest
that the diffuseness of ownership and performance should have negative relationship.
Consequently, the more concentrated ownership structure will produce higher financial
performance measures.
In 1976 Jensen and Meckling reinforced the theory of Berle and Means (1932) in regard
to the agency theory, which is arguing against the irrelevance of the capital structure in
determining the market value of the company. Agency theory derives from the fact that
ownership and control in the company are separated where the managers are the agents
and should be working in the best interest of the principals – shareholders. The managers
are delegated the decision making process which require some incentives and control to
work in the best interest of the shareholders. These incentives and the control processes
cause costs which are called agency costs. According to the Jensen and Meckling paper
(1976, p. 5) the agency costs are the monitoring expenditures by the principal, the
bonding expenditures by the agent and the residual loss which is caused by the
divergence between the agents decisions and those decisions which would maximize the
welfare of the principal. Furthermore, the large shareholders can pressure managers not to
undertake activities that lower the value of shareholders and to increase the value of the
company.
In 1985, Harold Demsetz and Kenneth Lehn have provoked the hypothesis of Berle and
Means (1932) by conducting a research including 511 US corporations. They have used
five ownership measures which give an indication for firm’s concentration of the
ownership structure as % of stock held by top 5 shareholders, % of stock held by top 20
shareholders, Herfindahl measure of ownership structure, % of shares controlled by 5
largest families and % of stock controlled by institutional investors. The performance
measures are post tax accounting / book value of equity. The methodology used was the
Ordinary Least Square (OLS) which is not treating the ownership structure as
endogenous variable. The empirical study indicated no significant relationship between
the ownership concentration and the accounting profit rate which does not prove the
Berle and Means (1932) thesis. In their paper, Demsetz and Lehn (1985, p. 1176) are
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15. arguing that the structure of corporate ownership varies systematically in ways that are
consistent with value maximization. Furthermore, they are pioneers of the idea that the
ownership structure is endogenous and according to Fishman et al. (2008, p. 115) it
depends on the individual characteristics of the firm.
There are authors that have overlooked the endogeneity of the ownership structure in the
studies conducted. According to Fishman et al. (2008, p.115) those are Morck, Schleifer
and Vishny (1988) who found a significant non-monotonic relationship by using the
Piecewise Linear regression. The ownership measure was percent of stock held by
directors and the Tobin’s Q and accounting profit were used as performance measures.
McConnell and Servaes (1990) by using the OLS have found a significant curvilinear
relationship between the ownership structure and performance. They have analyzed two
samples in 1976 and 1986. They have come up with results indicating that with an
increase in the insider ownership (managerial equity ownership) by 10% the performance
is improved by 30%.
In 1991 Hermalin and Weisbach by using the Tobin’s Q and % of the stock held by
incumbent CEO and former CEOs still on BoD revealed significant non-monotonic
relationship. Welch (2003, p. 290) indicates that during the study they have treated the
ownership as endogenous.
Among the authors treating ownership as endogenous variable are Loderer and Martin
(1997). In their paper Fishman et al. (2008, p.115) state that Loderer and Martin (1997)
have treated both the performance and ownership as endogenous variable by using a
simultaneous equations framework. However the results indicated that insider ownership
fails to predict performance, but performance is a negative predictor of insider ownership.
Furthermore the concern is that the 3-system equation appears to be under-identified as
Martin and Loderer added a binary variable to the model to overcome the lack of
exogenous variables in the system.
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16. Another author that controlled the endogeneity of ownership is Cho (1998). He used two
measures: % of stock held by directors and Tobin’s Q. Welch (2003, p.290) in her article
presented that Cho (1998) using the Piecewise Linear Regression found that firm
performance affects ownership structure but not vice versa.
Himmelberg, Hubbard and Palia (1999) addressed the problem of endogeneity of
ownership structure. Using the Quadratic Piecewise Model they have found ownership to
have a quadratic relationship with performance. It is noteworthy that before this study
they did not control the endogeneity of the ownership and revealed that the changes in
ownership do not have a significant impact on the performance.
Similarly, Holderness, Kroszner and Sheehan (1999) conducted a study treating the
ownership as endogenous. They have found a significant positive relationship between
performance and ownership by officers and company directors between 0% and 5%.
In 2001, Demsetz and Villalonga were challenged by the hypothesis of Berle and Means
(1932) that there is an inverse correlation between the diffuseness of the ownership
structure and corporate performance. In their research Demsetz and Villalonga (2001,
p.4) are using the Tobin’s Q and accounting profit rate as performance measurement.
Regarding the agency theory they have taken the fraction of shares owned by the five
largest shareholders to represent the ability to control the professional management and
on the other side the fraction of shares owned by the management to represent the ability
of professional management to ignore the shareholders as an indication on the power held
by the parties that have different interests in the firm. Using the OLS regression and 2-
Stage Least Squares they found no significant relationship which is consistent with their
hypothesis. Consequently, in their article (2001, p.24) they argue that the findings support
the view that the market succeeds in bringing forth ownership structures, whether these
be diffuse or concentrated, that are of approximate appropriateness for the firms they
serve.
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17. In 2003 a study was conducted on the Australian companies by Emma Welch. Her
research is challenged by the contrasting hypothesis of Berle and Means (1932) and of
Demsetz and Villalonga (2001). In the first phase (OLS testing) of the research Welch
(2003, p.302) did not take into account the endogeneity of the ownership structure which
revealed that performance is statistically dependant on managerial ownership. However,
when endogeneity is taken into account there is no statistical dependence of performance
on either ownership measure. Welch (2003) fitted the results in the generalized nonlinear
model which is advanced and it indicated a limited evidence of a nonlinear relationship
between managerial share ownership and firm performance. Fishman et al. (2008)
publicized a research conducted on the Australian companies which confirms the
previous Australian study and also recommends more advanced methods for testing the
relationship between structure and ownership.
Claessens and Djankov (1999) conducted an empirical study on ownership and
performance in Czech Republic. Motivating fact of this study was the Czech voucher
scheme privatization. The results of the tests indicate that both profitability and
productivity changes are positively related with ownership concentration in a situation in
which ownership is exogenous to firm performance. In their paper, Claessens and
Djankov (1999, p. 19) explain that the study revealed that certain types of owners such as
foreign strategic investors and non bank funds are more strongly associated with
improvements of performance. Furthermore, Claessens and Djankov (1999, p. 1)
demonstrated that in transition economies, empirical studies found positive relationship
between concentrated ownership and both voucher prices and stock market prices in
Czech Republic and China as well as a positive relation between actual firm performance
and ownership concentration in Russia.
In 2007 Kapopoulos and Lazaretou conducted a research on the Greek companies
regarding the relationship between the ownership structure and performance in the
context of a small European market. Greece has a relatively small stock market in which
the issue of corporate governance does not have a long history and it is dominated by
family controlled firms. Kapopoulos and Lazaretou (2007, p. 153) explain that in their
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18. study they have treated the ownership as multidimensional and endogenous. The
empirical findings indicate that there exists a linear positive relationship between
profitability and ownership structure meaning both measures of ownership, managerial
fractions of shares and important shareholdings, positively influence Tobin’s Q.
Perrini, Rossi and Rovetta (2008) conducted a research in Italy which is another
contribution in the context of a small European market. Perrini et al. (2008, p. 312)
pointed out that using the data panel model they found that the ownership concentration
of the five largest shareholders is beneficial to firm valuation. Furthermore, this study
suggests new courses of research having in mind the power of shareholders and managers
as well as exploring the endogeneity of ownership and non-linearity issues.
A recent study has been done in Japan which was examining the influence of the
ownership structure on the corporate performance trough the history in the 20th century.
According to Miyajima et al. (2009, p. 24) the Japanese experiences suggest that
ownership structure influences corporate performance but not necessarily on a consistent
basis. They show that in the interwar period the ownership structure was an important
determinant of corporate performance. By contrast, they revealed that in the high growth
era and after the oil crises ownership structure influenced performance but to a much
smaller degree. Furthermore, Miyajima et al. (2009, p.1) found that in the bubble period
(the late 80s) and after the collapse of the bubble, performance grew more sensitive to the
ownership.
There are two contrasting theses in the studies conducted in this field. The one is of Berle
and Means (1932) giving arguments for the positive relationship between concentrated
ownership and corporate performance. On the other hand Demsetz and Lehn (1985) were
arguing that performance and ownership are not related. Some studies have been
extending the scope of the research implementing many other variables concerning the
organizational structure. The methods used in evaluating the relationship have been
differently chosen by various researchers. A significant issue in the studies is whether the
ownership structure is treated as an endogenous variable. This issue gives a new course in
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19. the research and leads to more consistent estimates. The researchers throughout the years
have been trying to adapt the research on the characteristics of their sample in order to get
the most precise results. The specific characteristics are the sample size, the number of
years for the data, the laws in the country where the research has been done impacting the
ownership structures, corporate governance tradition in the countries, industry sectors in
the country in which the research has been done. All of these factors influence the
determination of the variables and statistically modeling the research. Different authors
have taken different measures regarding ownership and performance as well as methods
used. The results have largely been mixed.
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20. 3. Methodology
3.1. Data requirements
In order to construct the statistical method for testing the hypothesis, data was needed for
the Joint Stock Companies listed on the official market on the Macedonian Stock
Exchange. On one side, the calculations of performance measures needed data for the
return on ordinary shareholders’ funds, sales growth and debt to equity ratio. On the other
hand, data was needed to construct the ownership structure ratio.
The performance measures were extracted from the annual audited financial statements
that all companies listed on the official market are obliged by law to disclose on the web
site of the Macedonian Stock Exchange (www.mse.org.mk).
The data for the ownership structure of the listed companies on the Macedonian Stock
Exchange was found from the Central Securities Depository (CSD). The CSD is the only
central register of securities which is responsible for the settlement of all tradings done on
the stock exchange. The depository has the data needed for the ownership structure of the
Macedonian companies. As the data were not disclosed anywhere a direct approach to the
CSD registers was needed. Further in the text the ways of collection of data will be
described.
3.2. Research Approach and Methodology
In the development of knowledge the principles of positivism as research philosophy
were used in this study. According to Saunders et al. (2003, p. 83) the researcher in this
tradition assumes the role of an objective analyst, coolly making detached interpretations
about those data that have been collected in an apparently value-free manner.
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21. Furthermore, they refer to Gill and Johnson (1997) that this philosophy puts emphasis on
a highly structured methodology on quantifiable observations that lend themselves to
statistical analysis. Positivists favor a scientific approach in using official statistics
because they give objective, reliable quantitative data.
In order to obtain quantitative results from this study the deductive research approach
was used. Sunders et al. (2003, p. 86) refer to Robson (1993) who lists five sequential
stages trough which the deductive research as this will progress:
- deducing a hypothesis from the theory;
- expressing the hypothesis in operational terms meaning identifying variables;
- testing the hypothesis;
- examining the specific outcome of the inquiry; and
- if necessary, modifying the theory in the light of the findings.
Furthermore, this is an explanatory study which analyses the relationship between the
defined variables. When thought of the research approach the author acted as the other
researchers in the previous studies using the deductive method in order to gain
knowledge but there is a difference in the methodological aspects when analyzing the
data gathered which will be explained further in the text.
This research required gathering large amount of data. The steps in which the research
was done were carefully planned. To obtain data from the Macedonian Stock Exchange
was time consuming and the answer from the Central Securities Depository was
unpredictable. The following steps were recognized during this research regarding the
data:
- Collecting data;
- Data issues;
- Selection of estimators;
- Empirical specification;
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22. - Estimation results.
3.2.1. Collecting data
For this study performance and ownership measures were needed. The performance
measures needed were Return on Ordinary Shareholders’ Funds, Sales Growth and Debt
to Equity given in appendix 1,2 and 3. As mentioned previously data needed to calculate
these ratios were to be found from the Macedonian Stock Exchange’s published data.
Before defining the number of companies that were subject to the data an explanation of
the organization of the Macedonian Stock Exchange is needed.
A company to be listed on the Macedonian Stock Exchange undergoes a process of
entering a security on the official market. It means being in compliance with the criteria
defined by the stock exchange where the company should disclose continuously price
sensitive information which can be of financial and non-financial nature. The companies
which have clear strategies and are in need for additional capital are listed on the
Macedonian Stock Exchange. As the process of privatization has been completed those
companies have accepted the challenges of the market oriented economy, tried in
changing the mentality of human resources and are aiming towards well structured and
organized companies achieving positive financial results. The management and the
shareholders become aware of the benefits of a listed company such as: possibility for
efficient new issues of shares, efficient system of reporting, higher ratings, higher
liquidity, protection of the shareholders, access to foreign stock exchanges. The criteria to
be listed on the official market is to submit audited financial statements from the last two
years, equity amounting to at least EUR 500,000 and number of shareholders at least 100
(www.mse.org.mk). Actually this is the background of the companies that are subject of
analysis for this study. The number of companies which are listed on the official market
is 36 for the observed period. The other companies which are registered on the stock
exchange are not listed and they undergo specific obligations for reporting according to
the Securities Law.
22

23. The 36 companies according to the transparency principals publish their annual financial
statements on the web page on the Macedonian Stock Exchange (www.mse.org.mk and
www.seinet.com.mk). Every year they publish the audited financial statements which
include the Balance Sheet, Income Statement, Cash Flow Report, Report for Changes in
the Equity and the accompanying Notes. This was the source of data for the performance
measures: Return on Ordinary Shareholders’ Funds, Sales Growth, Debt to Equity Ratio.
The data extracted from the financial reports was for the years 2006, 2007, 2008 and
2009. They are divided into several sectors: industry – 13 companies, construction - 2,
agriculture – 1, hospitality and tourism – 3, services – 7, trade – 5, banking – 5. The
process of collecting the data from the financial statements was time consuming as
manually for the 36 companies the performance measures were calculated. The
calculation was according the theoretical formulation given in the literature which was
previously explained in the text.
Regarding the collection of data for the ownership structure of those 36 companies a
direct contact was needed to the Central Securities Depository. A letter was written to the
officials in CSD explaining the purpose of the required data. The information required
was first, the number of shareholders owning shares under 5% and the shareholders of the
companies owning more than 5% of the companies given in appendix 4. The information
needed was for the years 2006, 2007, 2008 and 2009 in order to match the data for the
performance measures. In a week the official in the Central Securities Depository
positively answered to the requirement and gave the data on a CD to the author of this
research. Ethical issues were considered in accessing the data from this institution. The
confirmation from CSD is given in appendix 5.
3.2.2. Data issues
The empirical study is based on annual data for 36 companies listed on the Macedonian
Stock Exchange during the 2006-2009 period. Panel data analysis has been a commonly
used technique in microeconometrics and its popularity is often attributed to the use of
23

24. the full information content of both the time and spatial dimension. In accordance with
the theoretical guidance, data relate to four variables (ownership concentration ratio,
Return on ordinary shareholders’ funds, sales growth and debt to equity). Furthermore,
Gujarati (2003, p. 637) underscores that panel data estimation can take into account the
heterogeneity by allowing for individual -specific variables, provide more informative
data, more variability, less collinearity among variables, more degrees of freedom and
more efficiency. By studying the behavior of the cross-sectional units across time, panel
data analysis can provide valuable information on the dynamics of change, detect and
measure effects that simply cannot be observed in pure cross-section or pure time series
data.
3.2.3. Selection of estimators
The main empirical strategy to conduct the analysis is based on the generalized method of
moments (GMM). In particular, it is a dynamic panel-data estimator offering a variety of
advantages. GMM has large sample properties that are easy to characterize in ways that
facilitate comparison and can be used even with relatively short time series. The method
provides a natural way to construct tests which take account of both sampling and
estimation error.
In contrast with the first-differenced Arellano and Bond (1991) specification, the system
GMM creates a system of two equations for each time period: the first one is based on the
Arellano and Bond (1991) model in differences, in which differences are instrumented by
levels, and an additional one in which the original levels are instrumented with
differences (Roodman, 2006). One of the important innovations brought by the system
GMM is that it circumvents the main problem of difference GMM, which is associated
with the weak assumption that past levels of the variable are good instruments for first
differences. More precisely, for variables that may display a random walk, past changes
may be more predictive of current levels than past levels are of current changes. The
system GMM uses more moment conditions, because the explanatory variables expressed
24

25. in first differences are instrumented with lags of their own levels, and the explanatory
variables in levels are instrumented with lags of their own first differences.
Another advantage of the dynamic panel data models is their ability to address potential
endogeneity problems. In particular, relevant empirical studies (e.g. Demsetz and Lehn,
1985) identified the problem of endogeneity of ownership structure and company
performance. This implies that the ownership structure influences the performance, but
also the ownership affects company performance. An additional argument for favoring
the GMM estimation is that “even when coefficients on lagged dependent variable are not
of direct interest, allowing for the dynamics in the underlying process may be crucial for
recovering consistent estimates of other parameters” (Bond, 2002).
For the purpose of comparing results, an ordinary least squares (OLS) regression was
used in the empirical analysis. According to Lucey (2002, p.133) the method of finding
the line of best fit mathematically in which the line minimizes the total of the squared
deviations of the actual observation from the calculated line, is called least squares
method. According to Gujarati (2003, p. 58) the method of least squares under certain
assumptions has some very attractive statistical properties that have made it one of the
most powerful and popular methods of regression analysis. But as a strong argument in
limitation of using the OLS technique is that it does not address the problem of
endogeneity.
This study departs from the existing literature by employing a more advanced
econometric technique. In the previous studies the OLS technique has been used as an
estimator. Demsetz and Lehn (1985), McConnell and Servaes (1990), Demsetz and
Villalonga (2001) and Welch (2003) has used the OLS in testing their hypothesis. Morck,
Schleifer and Vishny (1988), Hermalin and Weisbach (1991) Craswell, Taylor and
Saywell (1997), Cho (1998) Himmelberg, Hubbard and Palia (1999) and Holderness,
Kroszner and Sheehan (1999) has used the Piecewise Regression. As well in their studies
Cho (1998), Demsetz and Villalonga (2001) and Welch (2003) are using the method of
two-stage least squares.
25

26. 3.2.4. Empirical specification
Given the previously discussed theoretical concepts between the ownership structure and
performance the empirical formulation takes the following form:
ROSFit = β 1 + β 2 DEit + β 3DummyDEit + β 4 SALESit + β 5 DummySALESit +
β 6 FIRSTit + β 7 DummyFIRSTit + Dummyit + µit
Where subscripts i and t denote the cross sectional units and the time period, respectively,
so that i = 1, 2,….36 (N=36) and t = 2006, 2007, 2008, 2009 (T=4). The beta 1
coefficient is the intercept and the remaining betas are denoting the slope coefficients.
The first variable is the Return on ordinary shareholders’ funds. The data as previously
mentioned was extracted from the audited financial reports. The calculation followed to
derive the indicator is, as follows: net profit at the end of the year/ ordinary shareholders’
funds. The ratio shows the ability of the management to generate profit on the funds from
the ordinary shareholders. According to the hypothesis that will be tested in this research
the more concentrated ownership structure the higher is the Return on ordinary
shareholders’ funds. Furthermore, the concentrated structure imposes closer monitoring
to the professional management for better results than the more diffuse ownership
structure. The more diffuse ownership leaves space for the professional management to
work for their best interest not for the shareholders.
Another variable used in the model as part of the performance measures is the Sales
growth. The variable measures the growth in sales in regard to the previous year
contemporaneous sales growth. Regarding the hypothesis, the expected movement of the
sales growth is positive with the more concentrated ownership structure. As with the
ROSF, the more closely monitored management by the more concentrated structure will
26

27. result in higher sales. Consequently, the higher sales growth the higher expected is the
return on ordinary shareholders’ funds.
The third variable employed in the statistical method was the Debt to equity ratio for the
Macedonian companies. The expected sign according to Jensen and Meckling (1976)
theory is positive. According to their theory the debt can be positively utilized and bring
benefits to the shareholders but to the point where the benefits exceed the costs.
Consequently, the concentrated ownership structure can oppose better monitoring in
utilizing the debt. This is also expected to influence positively on the Return on ordinary
shareholders’ funds.
Ownership concentration ratio is another important variable accentuated by the theory. It
measures the concentration of the first ownership owning more than 5% of the shares in
the company. When the data was received from the Central Securities Depository, an
investigation was made to check whether a company listed on the official market on the
Macedonian stock exchange for the period of 2006 – 2009 has a shareholder owning
more than 5% of the shares. The analysis showed that some of the companies in the
period of 2006 – 2009 had a second, third and even fourth shareholder owning more than
5% of the shares. But in order the research to be consistent the concentration ratio in this
research indicates the percentage of shares owned by the first shareholder with more than
5% of the shares. Demsetz and Lehn (1985) for the purpose in their research are taking
the % of shares held by top 5 shareholders and by top 20 shareholders, Morck, Schleifer
and Vishny (1988) took the percentage of shares controlled by company directors,
McConnell and Servaes (1990) took the percentage of shares held by insiders,
blockholders, institutional investors, Cho (1998) employed the percentage of shares held
by company directors, Demsetz and Villalonga (2001) took the shares hold by the top
management, the CEO and company directors. Regarding the research the concentration
ratio depends on the sample and the information that can be provided.
Furthermore, dummy variables are introduced in the statistical model. According to
Gujarati (2003, p. 298) these variables usually indicate the presence or absence of a
27

28. “quality” or an attribute and are essentially nominal scale variables. They are used to
classify data into mutually exclusive categories. For the purpose of this research the
dummies were used in order to introduce a distinction between data for the financial and
non-financial sector. In the past year, the financial sector in Macedonia particularly the
banking sector has attracted many investors. The financial sector also hosts some of the
most profitable companies in the country. Given the particular interest in the performance
of the financial sector, dummies were introduced for each variable such as for ROSF,
First shareholder, Sales growth and Debt to Equity.
For presentational convenience, Table 1 offers a short description of the symbols,
variables employed and the expected sign of the relationship with the dependent variable.
Table 1 – Description of variables
Symbol Description Expected sign
First shareholder owning shares more than
first 5% plus
sales Sales growth plus
de Debt to Equity ratio plus
Dummy for first shareholder owning shares
d2first more than 5% in the banking sector plus
Dummy for sales growth in the banking
d2sales sector plus
d2de Dummy for debt to equity ratio plus
In Table 2 a descriptive statistics is given for the sample in the period of 2006-2009. The
results indicate average high concentration ratio of 0.35 but as well a high standard
deviation arising from the fact that the maximum concentration ratio is 0.92. The ROSF
ratio on average shows negative results but as well the standard deviation is higher. An
interesting fact is that the minimum for the debt to equity ratio is 0.00 meaning that there
are companies that do not employ debt at all. The standard deviation is high for the debt
to equity ratio. The sales growth has a very high standard deviation as the minimum
shows negative sign and the maximum indicates high results. It can be concluded that the
28

29. sample is heterogenic, meaning it is consisted of companies achieving highly different
performance results. One more reason is that they are from different industries which are
differently developed in Macedonia. Another possible explanation is that the sectors were
differently impacted by the financial crisis and that influenced the financial results in
2008 and 2009.
Table 2 – Descriptive statistics
First
DEBT to
shareholder > ROSF SALES Growth
EQUITY
5%
Average 0.35 -0.03 0.22 0.10
Standard deviation 0.22 0.38 0.30 0.64
Maximum 0.92 0.34 1.92 6.10
Minimum 0.06 -3.98 0.00 -0.96
29

30. 3.2.5. Estimation results
The tests were conducted by using the software package STATA 11.0. The results from
the diagnostic test are presented in Table 3.
Table 3 – Test results
Dependent variable: Return on shareholders funds
Parsimonious
Explanatory variables OLS regression System GMM
Random-effects System GMM
First lag of the dependent variable 0.177 *** 0.146 ** 0.169 ***
(3.19) (2.40) (4.51)
First shareholder owning more than 5% -0.183 -0.754 0.058
(endogenous in the GMM specification) (-1.19) (-1.10) (0.46)
Financial sector dummy * First shareholder owning more than 5% -0.012 0.659
(endogenous in the GMM specification) (-0.07) (0.96)
Debt-to-equity ratio 0.038 0.031 0.017
(0.58) (0.21) (0.24)
Financial sector dummy * Debt-to-equity ratio -0.238 -0.307
(-1.58) (-0.84)
Contemporaneous sales growth 0.146 *** 0.119 * 0.065 **
(3.08) (1.72) (2.64)
Financial sector dummy * Contemporaneous sales growth -0.141 *** -0.106
(-2.85) (-1.47)
Intercept 0.022 0.230 -0.050
(1.08) (1.14) (-0.50)
Financial sector intercept dummy 0.155 *** -0.078
(3.23) (-0.35)
R-squared 0.068
Number of observations 108 108 108
The first column presents the results from the ordinary least square regression. As
mentioned previously the OLS does not treat the problem of endogeneity of the
ownership structure which is considered as a limitation of using this technique. For this
reason, the results are informative only.
The results indicate that the first lag is statistically significant at 1% level of significance
(t=3.19, p<0.01) and suggest that past values influence the current values of ROSF. The
estimator revealed a positive coefficient for the contemporaneous sales growth which is
also statistically significant at 1% level of significance (t=3.08, p>0.01). Other things
30

31. being equal, the estimates suggest that an increase of the sales growth by 1 % would be
associated with an improvement of the ROSF by 0.15%. The OLS estimator also reveals
a positive relationship between ROSF and sales growth in the financial sector, but the
impact is of a smaller magnitude. This coefficient is statistically significant at 1% level of
significance. The most important finding is that the estimator does not show a statistically
significant coefficient for the first shareholder owning more than 5% of the shares. This
fact confronts the theoretical assumption that the greater ownership concentration leads to
higher performance presented by the return on ordinary shareholders funds.
The second column of Table 3 reports the results produced by the GMM estimator. As
previously mentioned the GMM estimator addresses the problem of endogeneity. This
technique indicates that two coefficients are statistically significant. The first one is the
first lag of the dependant variable. This is consistent with the OLS estimator. Again, the
past values influence the current values of ROSF. The coefficient is statistically
significant at the 5% level of significance. The other statistically significant coefficient at
10% level of significance is the contemporaneous sales growth. This indicates a positive
relationship between the sales growth and ROSF in this sample (t=1.72, p>0.1). The
GMM estimator does not reveal a statistically significant coefficient of the first
shareholder owning more than 5% of the shares. Consistent with the results of the OLS,
again using the GMM estimator the results are not in compliance with the theoretical
assumptions. The dummies did not show any statistically significant coefficient so they
were excluded from the test using the parsimonious system GMM. The results in the third
column revealed consistency with the system GMM and produced statistically significant
coefficient with the first lag of the return on ordinary shareholders funds and the
contemporaneous sales growth. Again, there was no statistically significant coefficient
for the first shareholder owning more than 5%.
The tests in the previous empirical studies, using the OLS and other estimators that treat
the problem of endogeneity, present mixed evidence. Demsetz and Lehn (1985, p. 1175)
in their article used the OLS estimator which revealed no significant relationship between
ownership concentration and accounting profit rate and especially no significant positive
31

32. relationship. Using a piecewise linear regression Morck, Schleifer and Vishny (1988)
revealed significant non-monotonic relation (increasing between 0% and 5%, decreasing
between 5 and 25%, and increasing beyond 25%), McConnell and Servaes (1990) found
a positive relation for insider ownership with the Tobin’s Q, Hermalin and Weisbach
(1991) revealed significant non-monotonic relation between managerial ownership and
performance, Loderer and Martin (1997) by using simultaneous equations and addressing
the problem of endogeneity revealed that ownership fails to predict performance but
performance is a negative predictor of ownership. Cho (1998) using the system of three
equations estimates that Tobin’s Q affects ownership structure but not vice versa. In 2003
Demsetz and Villalonga (2001) did tests with the two equation method and revealed no
significant relationship. The recent empirical findings of Kapopoulos and Lazaretou
(2007) suggests that more concentrated ownership structure positively relates to higher
firm profitability and also found that higher firm profitability requires less diffused
ownership. The research of Perrini, Rosssi and Rovetta (2008) provides empirical support
for the agency theory in finding that ownership concentration of the five largest
shareholders is beneficial to firm valuation.
This research has investigated the validity of the agency theory by using data for the
Macedonian companies listed on the official market on the stock exchange. The
hypothesis was that more concentrated ownership is associated with better performance
indicators. Unlike the previous studies, it addresses the problem of potential endogeneity.
Both estimators, OLS and system GMM, did not reveal any significant coefficients
regarding the relation between ownership structure and performance. Hence, the evidence
from the listed companies in the Republic of Macedonia does not support the Berle and
Means (1932) hypothesis.
32

33. 4. Conclusions and Recommendations
The more concentrated ownership structure tends to lead to better monitoring of the
professional managers which produces better company performance. This is the
hypothesis in this research that was tested on the evidence from the Macedonian
companies listed on the Macedonian Stock Exchange. The test results using the ordinary
least square regression and generalized method of moments produced results that were
not supporting the hypothesis.
More advanced statistical estimators are used in this research than the previous studies
that have been conducted in the finance theory. The results depend on the data available
for the research. Regarding the data for the Macedonian companies there are issues that
should be considered for any future research. Namely, the sample for this research is
relatively small having 36 companies that are listed on the Macedonian Stock Exchange.
However, the covered period can be extended if there is an opportunity to get the data.
For this research the period used in extracting data for the ownership structure and
performance was 2006 to 2009. Higher number of observations can give more precise
results in a future research. Furthermore, the group of companies (36) is heterogenic
having companies classified in a number of sectors. The variability of performance ratios
is high not just between the sectors but within the sectors as well. In this research
dummies were used for the financial sector as the most profitable and influential one in
the economy. In future research other sectors can be controlled as well. The following
authors that will be interested in this field can use other variables in their studies if they
have available data. Namely, the percent of stock held by CEO’s can as well be
implemented in the research.
The root of the tested hypothesis is the agency theory explaining the conflict of interest
between the managers and shareholders. Despite the results produced, the awareness of
the agency problem should rise in better improvement of the corporate governance
practices in the Macedonian companies. Even thought, corporate governance discipline is
33

34. relatively young in this country there are many institutions and tools which have been
used for its promotion. A company should put in place practices that will in the same
time preserve and provide return on the investment of the shareholders but will also
enable the professional managers to achieve the company strategy. Furthermore, this
should motivate managers’ accountability towards the shareholders and the society as
whole.
34

35. 5. Reflection on Learning
The greatest challenge in writing the thesis was the fact that this was originally the first
research in Republic of Macedonia addressing the agency problem in this manner. Every
aspect of the whole process was very demanding. The literature had to be reviewed
regarding the theory and the number of studies done in this field. The interesting part was
the historical development of the ownership – performance issue that has been researched
for decades by many authors. This indicates the significance of this field of study in the
finance theory. Collecting the data was a time consuming process which gave a dose of
unpredictability to the whole study regarding the willingness of the institutions that
provided the data. The knowledge gained related to the statistics part is very valuable. A
lot of reading was done regarding the complex estimators used in conducting the tests. It
gave the author a new perspective in further researches in other fields regarding the data,
variables employed and new statistical methods used.
The period of six months was testing the knowledge and skills gained in the previous
period of studying as well as developing new. It is a great feeling that this piece of study
is a contribution to an ongoing debate for decades as well it is a basis for this field of
research in Republic of Macedonia. However, the experience and knowledge gained
during the whole process of this research will open new perspectives for other studies in
the future.
35

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