Impact of Ownership Structure on Company Performance: Analysis for JP Drew by PMC Inc.

You have recently been appointed as an analyst within PMC Inc. PMC is a UK consultancy company that undertakes independent research for client organisations.

Your first client is a large investment management firm (JP Drew) which provides advice and administrative services to both individuals and companies in relation to portfolio selection and specific asset purchase (stocks, bonds, etc.).

JP are interested in determining the impact which ownership structure has on company performance. In particular, the extent to which the separation of ownership and control provides opportunity for managers to undertake activities which negatively impact on performance and whether large shareholders can put pressure on managers to increase this performance.

You have been asked to undertake some quantitative analysis looking at this issue. While you are familiar with various different aspects of statistics and a number of statistical packages you have not undertaken a project of this nature before. Hence you start by conducting a literature search.

This search proves beneficial and you find that there are a number of existing studies which look at ownership structure and performance, although none specifically in a UK context.

In terms of theoretical work one of the overarching themes is that of the principal/agent problem. This suggests that the owners of a firm will want to pursue profit or value maximisation, but that on many occasions share ownership is so dispersed that the ability of shareholders to push managers in this direction is extremely limited. In contrast managers will have other objectives such as ‘empire building’ or a quest for higher salaries, with pursuit of these alternative objectives being possible (at the expense of profit) because control cannot be exerted by shareholders. This implies that in situations where share ownership is not dispersed and instead resides to a large extent in the hands of a single organisation or individual then it should be possible to force managers to pursue value maximisation. However, there is also the suggestion that some of the owners of a company may have objectives other than maximum value.  

In terms of empirical work there have been a number of studies which have attempted to look at the impact which ownership concentration (percentage shares of the largest owner) has on performance. Various measures of company performance have been used including accounting profit, market to book value and return on capital employed. In addition, some studies have looked at whether the identity of the largest owner (bank, institutional investor, etc.) has an effect on these performance measures. All such studies also contain ‘control variables’ which are likely to impact on company performance. The most frequently used of these is firm size. In addition, some studies have attempted to control for the industry in which the firms are located. 

Empirical Analysis

In structuring your analysis and your report you may wish to consider the following framework. This does not mean that you simply respond to (a) to (e) below, but rather that you formulate headings and sub-headings for your report using the framework as a starting point.

(a) A graphical representation of the data and a discussion of any issues or patterns which arise from this exercise. You need to decide upon the exact data to use and appropriate graph(s).
(b) Descriptive analysis and discussion of the variables shown in the data set.

(c) Bivariate (two variable) analysis and discussion which considers the effects of ownership structure on company performance.

(d) Multivariate (three or more variable) analysis and associated discussion which makes use of the data given in MN7024 Financial Modelling Assignment 2021-22.xlsx.

(e) Any other issues, problems or additional complications which you feel should be conveyed to the Directors of JP Drew with respect to your analysis.

Remember, the Directors of JP Drew are not experts in statistical analysis. Hence you will need to explain what you are doing and why, as well as the meaning of your results.

Important points to note:
In your report you are required to provide explanation and discussion.
Do not produce graphs if you cannot provide related discussion.
Do not produce tables if you cannot provide related discussion.
Do not cut and paste Excel, SPSS, etc. tables into your report. Produce your own summary tables in the main body of your report.
An example of ‘what you are doing, why, and the meaning of results’:
“The analysis consists of cross-tabulations and a logistic regression. The cross-tabulations, which make up the brunt of the report, allow one to see the interrelationship between two or more variables. For example, what percentage of whites and African-Americans play lottery games? Or, who spends more per month on lotteries, those younger than fifty or those older than fifty? The investigators use cross-tabulations to illustrate the relationship among demographic characteristics (e.g., age, education, income), attitudes toward lotteries, how frequently residents play lottery games, and how much they spend on them.” (Piliavin and Entner Wright, 1992: 2)
“As shown in column four, several demographic characteristics of the 1991 respondents significantly predict lottery play. These include gender, age, marital status, and education. First, men are more likely to play the lottery than women, with an estimated regression coefficient of .3242 (top of column four). Being positive, this coefficient indicates that male respondents (coded as 1) have higher probabilities of lottery play than female respondents (coded as 0).” (Piliavin and Entner Wright, 1992: 58)