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Ownership Structure, Firm Performance, and Corporate Governance: Evidence from Selected Arab Countries Ali A. Bolbola , Ayten Fatheldinb, and Mohammed M. Omranc a

Economic Policy Institute, Arab Monetary Fund, Abu Dhabi, United Arab Emirates, P.O. Box 2818. E-mail: [email protected] b

Economic Policy Institute, Arab Monetary Fund, Abu Dhabi, United Arab Emirates, P.O. Box 281. E-mail: [email protected] c

Corresponding Author: College of Management & Technology, Arab Academy for Science & Technology, Alexandria, Egypt, P.O. Box 1029. E-mail: [email protected]

Ownership Structure, Firm Performance, and Corporate Governance: Evidence from Selected Arab Countries

Abstract The paper works with a sample of 304 firms from different sectors of the economy, and from a representative group of Arab countries (Egypt, Jordan, Oman and Tunisia) where related data could be gathered. We first present crucial descriptive statistics on the firms’ corporate ownership, identity, and their performance and market measures, and then use unstructured but credible equations to capture the relationship between these variables. Specifically, we study the determinants of ownership concentration; the effect of ownership concentration on firms’ performance and market measures, after controlling for the endogeneity of ownership concentration through the use of country and firm characteristics as instrumental variables; and, the effects of ownership identity and blockholdings. The broad conclusion that emerges is that ownership concentration is an endogenous response to poor legal protection of investors, but seems to have no significant effect on firms’ performance. This should put the urgency of corporate governance reforms at most at par with real sector and commercial reforms.

JEL Classifications : G3; F3 Key Words: ownership concentration; performance and market measures; corporate governance; Arab countries.

I – Introduction Does ownership matter? And what are its implications for corporate governance, and its effects on firm performance? The easiest to answer of these three questions is probably the first, since the bulk of the evidence shows that privately-held firms are more efficient and more profitable than publicly- held ones – although the evidence differs on the relative merit of the identity of each private owner1 . The second question is perhaps the most interesting because it has spawned a rich research agenda pioneered by La Porta et. al (1997, 1998, 1999, and 2000). The upshot of their findings is that when the legal framework does not offer sufficient protection for outside investors, entrepreneurs and original owners are forced to maintain large positions in their companies which result in a concentrated form of ownership 2 . What makes this finding interesting is its implications for the third question, since most of the evidence shows that there is no significant effect of ownership on firm performance. As a result, one is led to conclude that corporate governance or the lack of it is immaterial to firm performance 3 . How could that be so?

There are three dimensions to resolving the question posed above. First, La Porta et. al have focused on a narrow aspect of corporate governance – protection of minority investors – but this fairness aspect is only one of the four pillars that are customarily assigned to sound corporate governance, the other three being: responsibility,

1

This is particularly true for enterprises that are not monopolistic in nature. See Shirley and Walsh (2001). 2

They also find that common-law countries generally have the strongest, and French civil-law countries have the weakest, legal protection of investors, with German and Scandinavian civil-law countries located in the middle. In addition, they argue that the legal system is a more fruitful way to understand corporate governance and its reforms than the conventional distinction between bank-based and market-based financial systems. 3

See Denis and McConnell (2003) and Berglof and von Thadden (1999).

accountability, and transparency4 . In fact, there is evidence that in countries with weak legal environments, firms tend to compensate for the latter by improving firmlevel governance. This is particularly true for firms that rely heavily on external finance, and, more important, the resulting improvement in corporate governance is highly correlated with better operating performance and market valuation5 .

The second dimension relates to the definition of corporate governance, and the mechanisms for ensuring it. Corporate governance can best be interpreted as the set of mechanisms – both institutional and market-based – that induce self- interested managers (controllers of the firm) to make decisions that maximize the value of the firm to its shareholders (owners of the firm) 6 . The aim of these mechanisms, of course, is to reduce the agency costs that arise from the principle-agent problem; and they could be internal and/ or external in nature7 . Internal mechanisms deal with the composition of the board of directors, such as the proportion of independent outsiders in its membership and the distinction between the CEO and the chairperson. Another important internal mechanism is ownership structure, or the degree at which ownership by managers obviates the trade-off between alignment and entrenchment effects8 . External mechanisms, on the other hand, rely on the takeover market in

4

Fairness implies ensuring shareholders’ rights and enforceability of contracts; responsibility involves compliance with all rules and regulations that reflect society’s values; accountability means clarification of government roles and responsibilities, and the voluntary efforts to ensure convergence of managerial and shareholder’s interests; and transparency implies the provision of timely disclosure of adequate information concerning the firm’s financial performance, corporate governance and ownership. For more on these principles, see OECD (1999). 5

See Klapper and Love (2002).

6

One could also add: to promote society’s interests and economic growth in the process. See Denis and McConnell (2003). 7 8

For more on these mechanisms and the evidence relating to them, see ibid.

Equity ownership by insiders can align insiders’ interests with those of other shareholders, thereby leading to greater firm value. However, higher ownership by insiders may result in a greater degree of managerial control, potentially entrenching managers. Wan (1999) finds that management ownership does in fact exhibit an inverted u-shaped relation with Tobin’s Q-ratio.

addition to the legal/ regulatory system, whereby the takeover market acts as a threat to existing controllers in that it enables outsiders to seek control of the firm if bad corporate governance results in a significant gap between the potential and the actual value of the firm. So, given these mechanisms, we can see that the legal system is only one way to ensure good corporate governance. Not only that, but the balance of the available evidence also shows that the effective presence of the other mechanisms is positively associated with firm valuation9 .

Third, there is now an overwhelming evidence at the aggregate level that countries with reliable national and corporate governance systems have developed debt and equity markets that contribute quite favorably to economic growth. And this is more so in countries whose growth sectors are capital intensive in factor proportions and rely heavily on external finance 10 . So any skepticism regarding the impact of corporate governance on firm performance and valuation is dispelled when considering its impact at the macro level.

Notwithstanding the above arguments, though, the fact remains that the widely-held firm is not a widely-observed phenomenon in most countries. This could be attributed to several reasons. In the developed countries, it could be a rational response to a legal system that does not protect minority investors (ala La Porta et. al), but it could also be the result of entrenched financial structures and practices that determine and shape the enactment of corporate law 11 . For developing countries, in addition to the aforementioned reasons, it could also be due to the underdeveloped nature of their 9

However, the takeover mechanism seems to be confined to the US market only. See op cit.

10

See Levine and Zevros (1998) and Rajan and Zingales (1998).

financial markets – that would allow limited access to external financing – and the preponderance of family firms 12 . But perhaps what is more important as far as this phenomenon is concerned, especially in developing countries, is that sound governance should go beyond the textbook example of the widely-held firm and concentrate on redesigning corporate practices that are more peculiar to their case, such as: lack of agency between concentrated and minority owners, reduced liquidity of shares, cross ownership and pyramiding of shareholdings, dual-class shares, and the like 13 . This is of course an ambitious agenda, but it reflects better the corporate structure of these countries, and in the process acts as a better guide for future corporate reforms.

In this context, the Arab economies are no exception. Their corporate legal system largely follows the civil- law system, but one can reasonably argue that the relation between legal origin and financial arrangements in the Arab countries merely reflects the influence of a third exogenous variable, which is the role of the state or the nature of the political system and its national governance. Here, and to nobody’s surprise, the Arab world does not fare well, having a relatively closed and highly concentrated political system with a poor mode of national governance 14 . This naturally spills over to its system of corporate governance, as the majority of Arab firms are either government- or family- owned with stock markets still in a rudimentary stage. But firms are changing, prompted by increased competition from trade openness, by 11

For example, countries with a tradition of strong bank involvement in corporate control and ownership have often found ways of accommodating this tradition in legal practice (as in Japan and Sweden). 12

The evidence on family firms – especially in East Asia – is that they are robust over time, dispelling the notion that their ownership becomes dispersed over time. See Claessens et. al (2000). 13

See Berglof and von Thadden (1999). For instance, Lins (2003) finds for a sample of 1,433 firms from 18 emerging countries that when a management group’s control rights exceed its cash-flow rights then firm values are markedly lower.

privatization, and by the need for more external financing. And, to better understand their future trajectory, we need to understand their current corporate make-up and performance.

It is this what we intend to do in this paper, in the aim also of providing a preliminary step towards filling this needed research area on the relation between corporate structure and firm performance in the Arab countries. We will work with a sample of 304 firms from different sectors of the economy, and from a representative group of Arab countries where related data could be gathered. This group of countries comprises Egypt, Jordan, Oman and Tunisia. In section II we present crucial descriptive statistics on the firms’ corporate ownership, identity, and their performance and market measures, whereas in the following sections we use unstructured but credible equations to capture the relationship between these variables. Specifically, in section III we study the determinants of ownership concentration as given by firm and country characteristics; while in section IV we look at the effect of ownership concentration on firms’ performance and market measures, after controlling for the endogeneity of ownership concentration through the use of country and firm characteristics as instrumental variables. Sections V and VI follow largely the same approach as in section IV, but with sections V and VI dealing, respectively, with the effects of ownership identity and blockholdings on performance and market measures. Lastly, section VII closes the paper with a conclusion and some policy recommendations.

14

See Sadik et. al (2003).

II – Data and Descriptive Statistics

The countries under study provide a selective but representative coverage of the Arab regions – Oman (the Gulf), Egypt and Jordan (the Mashreq) and Tunisia (the Maghreb). As important, and as table (1) shows, the sample of firms from each country covers all major sectors – industry (both manufacturing and nonmanufacturing), financial institutions and services (other than financial); with manufacturing firms comprising close to half the total of 304 firms, and financial institutions slightly more than a quarter. All firms, whether majority-private or majority- government owned, are tradable on their respective stock markets (see Appendix I for data sources).

The time frame for the study stretches over the 2000-2002 period, so as to allow some longitudinal dimension to the data; and, as a result, the estimation process draws on a panel data of firms and years for all four countries. Table (2) shows some descriptive statistics for size and profitability pertaining to each country panel and the pooled panel. It is clear that Egyptian firms are the most profitable, in terms of return on assets and equity, and they have the largest market capitalizations reflecting perhaps their deeper stock market penetration. Tunisian firms, on the other hand, have the highest Q-ratio – defined as the ratio of market value plus total liabilities to book value plus total liabilities – and are largest in terms of assets, something that could be explained by the large presence (close to half) of financial institutions in the sample. Jordanian firms, however, reveal features that are noticeably more extreme. Not only are they the least profitable and have Q-ratios less than one, but their median asset size is close to 5% of their corresponding mean size, implying large size differences amongst themselves due most likely to their lopsided nature – a few large firms in

finance and the extractive industries, and a majority of small firms in other sectors. Omani firms also exhibit low returns as a result of the preponderance of low profit service-sector firms, but their size distribution is much more balanced than that of Jordan.

Before we explore the descriptive characteristics pertaining to ownership, a note on country- level characteristics is useful. Table (3) shows the pooled country data for some governance indicators: political stability, rule of law, and control of corruption; and the data for an index of economic freedom, ratio of the value of shares traded to GDP, and growth rate of GDP. Although the governance indicators are largely comparable to those of developing countries, both the economic freedom index and the value traded ratio for the latter countries, at 2.5 and 17% respectively, are markedly higher than those of our country sample – and no doubt better freedom to entrepreneurship and higher financial development help explain the higher growth performance of developing countries of 5% 15 . Among the countries in the sample, however, Oman comes as the top performer with a GDP growth rate of 5.3%, but also – and not surprisingly – with scores for governance indicators, economic freedom and value traded that are mostly above average: 1.0, 1.1, 0.73, 2.75 and 2.65%, respectively16 .

The ownership structures of the firms in the sample are portrayed in table (4). Jordan and Oman emerge as the countries with the highest private ownership, having more than 80% of firm ownership in the hands of private institutions and individuals.

15

For more on the role of governance indicators in enhancing growth, see World Bank (2003); and on the role of financial development, see Bolbol et. al (2004). 16

Jordan, Tunisia, and Egypt follow in order; for more on these scores, see the table in Appendix II.

Egypt, on the other hand, remains the country with the largest presence of government ownership at 34%, despite its diligent efforts at privatization in the second half of the 1990s17 . Tunisia comes as the country with the largest foreign participation in firm ownership at 18% – surely facilitated by the free trade agreement with the EU – and also appears to be the one with the least participation by local individuals.

As to ownership concentration, it is depicted in tables (5) and (6), with concentration defined as ownership by the top three blockholders who own a minimum of 10% of equity18 . From table (5), we see that for all countries the share of companies with at least one blockholder as local individuals increased during the period, especially for Oman whose share reached up to 45%. Egypt looks to be the only country whose corresponding share of local government in fact increased to a high of 67%; whereas Tunisia, not surprisingly, is the country who witnessed a significant rise in its corresponding share of foreign investors to 53%. It seems that both foreign and individual participation in ownership is on the rise, which bodes well for improvements in both the culture of investment and the degree of international confidence in these respective economies.

Table (6) shows ownership concentration by the top three blockholders and their identity. The mean for the pooled sample of the top three blockholders is 48%, which is between the corresponding mean of the countries whose legal origin is English of 43%, and those whose legal origin is French of 54% 19 . The highest concentration is found in Egypt at 58% and the lowest in Oman at 43%. As to the identity of 17

For more on Egypt’s privatization experience, see Omran (2002).

18

Choosing 10% as the cut-off point is necessary due to data limitations, since the sources for Oman and Jordan only list the identities of shareholders who own at least 10% of the equity. 19

See La Porta et. al (1998).

blockholders, in cases where at least one of the blockholders is a local individual, then average ownership by all local individuals is highest in Egypt at 42%; similarly for average ownership by local government and foreign investors at 43% and 42%, respectively. Egypt, then, seems to be the country with a relatively compartmentalized ownership structure, in the sense that firms are either largely owned by local individuals or local government or foreign investors. To a lesser extent, the same pattern is true for Jordan and Tunisia, but for an ownership structure dominated by either local private institutions or local government or foreign investors. Oman’s pattern, however, seems to be the one tha t is most balanced among all four types of investors.

Lastly, table (7) records the results of the mean (parametric) and median (MannWhitney, non-parametric) tests of significance for differences in ownership concentration. In the case of tests according to differences in sectoral affiliation, ownership of financial institutions come as significantly less concentrated than those of manufactured and non-manufactured industries. This is somewhat of a surprising result, given that banks have relatively lower equity ratios and, as a result, equity ownership would likely be more concentrated than otherwise. In addition, unlike firms in other industries, banks have also a sizable presence of foreign ownership at 23%, against 12% for manufacturing, 4% for nonmanufacturing, and 9% for services – although firms from all industries seem to have a significant ownership by local private institutions at 30% or more. In terms of tests based on country differences, and in agreement with the results in table (6), both Egypt and Tunisia emerge as the two countries that are significantly more concentrated in their firm ownership than either Jordan or Oman. And, as would be expected, smaller firms are more concentrated than larger ones.

III – Determinants of Ownership Concent ration

We begin our exploration of the relationship between ownership structure and firm performance by first investigating the determinants of ownership concentration. We measure ownership concentration (CONC) as the percentage of shares owned by the largest three blockholders in a firm; and, as mentioned earlier, we define a blockholder to be any entity owning more than 10% of the firm’s equity. Our empirical findings are, however, robust to using alternative measures of ownership concentration, such as: the percentage of shares owned by the largest five blockholders, the log transformation of these concentration measures, and using approximations of the Herfindahl index20 .

We incorporate both firmlevel and country- level explanatory variables in our analysis, using the following equation:

CONCit = α + βFLVit + υ CLVit + γ t + ε it

(1)

where CONCit is the ownership concentration of firm i at time t; FLVit is a vector which represents firmlevel variables for firm i at time t; CLVit is a vector which represents count ry- level variables for firms in country i at time t; γ t are fixed-year effects; and eit is the error term.

With respect to the firmlevel variables (FLVit), we control for firm size and sectoral affiliation. Firm size, proxied by the log of a firm’s total assets, and we expect an inverse relationship between SIZE and CONC due to the risk- neutral and risk-aversion

20

The Herfindahl index is measured as the sum of squared ownership shares.

effects21 . More specifically, because the market value of a given stake of ownership is greater in larger firms, this higher price should, in itself, reduce the degree of ownership concentration. At the same time, risk-aversion should discourage any attempt to preserve concentrated ownership in the face of larger capital, because this would require owners to allocate more of their wealth to a single venture. As for sectoral affiliation, the firms in our sample are divided according to whether they belong to the industrial (IND), financial (FIN) or services (SERV) sector. The industrial sector in turn is sub-divided into manufacturing (MAN) and nonmanufacturing (NONMAN) firms. As such, five sectoral dummies are used: IND, MAN, NONMAN, FIN and SERV; with 1 assigned to firms belonging to the given sector or sub-sector, and 0 otherwise.

In addition to these firmlevel explanatory variables, the three country- level variables (CLVit) that we control for are: economic freedom, legal environment and level of stock market development. In particular, an index of economic freedom (ECFR) is included in order to capture cross-country differences in the institutional environment 22 . We anticipate that ownership will be less concentrated in economies that are freer, because these economies create conditions which are more likely to encourage participation in firm ownership. Next, in order to reflect the findings of La Porta et. al (1998) that ownership concentration of firms is related to cross-country differences in legal environments, we include the rule of law index (ROL) as a proxy

21 22

See Demsetz and Lehn (1985)

The Economic Freedom Index is a score based on the average performance of an economy in the following ten areas: Trade Policy, Fiscal Burden, Government Intervention, Monetary Policy, Foreign Investment, Banking and Finance, Wages and Prices, Property Rights, Regulation, Informal Market. Scores between 1-1.99, 2-2.99, 3-3.99 and 4-5 indicate that an economy is free, mostly free, mostly unfree and repressed, respectively.

for the efficiency of the legal environment 23 . We expect to find a negative relationship between CONC and ROL because in countries with poor investor protection ownership concentration might become a substitute for legal protection, as shareholders may need to own more capital in order to exercise control. Finally, financial sector development is measured by the ratio of value of shares traded to GDP (VT/GDP ), based on the argument that firm ownership is likely to be less concentrated in countries where the degree of stock market activity and depth is higher.

Using these aforementioned variables, we utilize ordinary least squares to estimate equation (1) for three different specifications of the dummy variables, and the results, which are listed in table (8), largely confirm our expectations. In particular, we find that the impact of SIZE on CONC is negative and significant at the ten percent level in two out of the three models. These results are consistent with a number of studies that document a negative association between firm size and ownership concentration24 .

As to country- level variables, the effect of ROL on ownership concentration is always negative and significant at either the one or five percent levels, a result which suggests that ownership concentration is indeed a response to poor legal protection. Similarly, we also find the effect of VT/GDP to be negative and significant, which supports our conjecture that larger, more sophisticated markets provide a greater opportunity for ownership dilution by allowing for wider access to funds and share ownership. In addition, and as expected, the effect of ECFR is always positive and significant at the one percent level, which shows that less restrictions on economic 23

The rule of law index is provided by Kaufmann et. al (2003).

24

See, among others, Boubakri et. al (2003).

activity (smaller index) leads to lower concentration of ownership and control. Furthermore, we find that IND, MAN, NONMAN and SERV are not statistically significant determinants of ownership concentration. Instead, model (3) highlights that the only significant dummy variable is FIN, with the negative sign of its coefficient indicating that ownership concentration in financial institutions is significantly lower than that in all other sectors – a result that confirms our previous findings.

IV – Ownership Concentration and Firm Performance

The previous sections shed some light on the ownership concentration of firms in selected Arab countries, and demonstrated that the deficiencies of external governance mechanisms, i.e. the weakness of investor protection and the absence of well-developed markets for corporate control, has led investors in these countries – as elsewhere in the developing world – to rely on governance structures that are dominated by highly concentrated ownership. With this in mind, we test in this section the impact of ownership concentration on firm performance. It is not, however, a task that should produce clear results because there is no consensus in the corporate governance literature as to whether or not concentrated ownership structures enhance firm performance. On the one hand, firm performance improves when ownership and managerial interests are merged through concentration of ownership 25 . When major shareholdings are acquired, control cannot easily be disputed and the resulting concentration of ownership might lower, or even completely eliminate,

25

See, for example, Agrawal and Mandelke (1987), Castianas and Helfat (1991), and Baker and Weiner (1992).

agency costs 26 . On the other hand, blockholder ownership might provide an opportunity to extract corporate resources for private benefits in a way that would have a negative impact on firm performance27 .

To examine the relationship between ownership concentration and firm performance, we estimate a regression equation linking the two variables, after controlling for some firm-and country-level characteristics 28 .

However, in order to avoid problems of

endogeneity, we resort to a two-stage least squares regression defined by the following equations 29 :

PERF

it

= δ + θ CONC

it

+ β 1 FLV 1it + υ 1 CLV 1it + γ t + ε 1it

CONCit = α + β 2 FLV2it + υ 2 CLV2it + γ t + ε 2it

(2a) (2b)

where in equation (2a) PERF it is a measure of performance for firm i at time t: return on assets (ROA), return on equity (ROE), and the firm relative market value (Q-ratio); FLV1it is a vector which represents firmlevel variables for firm i at time t: SIZE, sectoral dummies, and a CEO dummy that takes one if the chief executive officer and the chairman of the board are the same person and zero otherwise 30 ; CLV1it is a vector that represents country- level variables for firms in country i at time t: economic

26

See Anderson et. al (1997)

27

For more details, see Denis and McConnell (2003).

28

If some of the unobserved determinants of firm performance also explain ownership concentration, then this method could be misleading and might result in a spurious relationship between ownership concentration and firm performance. 29

Himmelberg et. al (1999) and Palia (2001), among others, document the endogenous nature of ownership structure; hence, the need for using instrumental variables for ownership concentration. 30

It is a widely accepted principle of good governance that the CEO should not be the chairperson. In fact the separation allows a balance of power and authority, so that no individual person has unlimited power. However, such separation would carry costs such as agency and information costs.

freedom (ECFR), and real GDP growth rate (RGDP); ?t is fixed year effects; and e1it is the error term.

Equation (2b) is the instrumental variables equation, for which the instruments have to be carefully chosen: on the one hand, they should be highly correlated with ownership concentration; and, on the other hand, they should have no impact on the dependent variable, firm performance. For the firmlevel variables, FLV2it,, we select debt-to-equity ratio (LEV) and log of GDP (LGDP)31 . As for country- level variables, CLV2i, we include control of corruption (COC) and rule of law (ROL). And, as usual, ?t represents the fixed year effects and e2it the error term. Given this, the two-stage estimation process proceeds by first estimating equation (2b) to obtain the fitted values of CONC, and then secondly by replacing these values in equation (2a) to examine the relationship between ownership concentration and firm performance 32 .

The results obtained from equation (2a) are reported in tables (9) and (10). The regressions based on equation (2a) are estimated at two levels: the entire sample firms (table (9)) and sample firms excluding financial institutions (table (10)); while using two accounting measures (ROA and ROE) and a market measure (Q-ratio) for firm performance. We estimate different specifications for each performance measure to control for industry dummies. We can see from models 1-6 in table (9) that neither ROA nor ROE is correlated with ownership concentration. These findings tend to be

31

We control for debt ratio because of the possibility that creditors might be able to minimize managerial agency costs and in the process affect ownership concentration; see Lins (2003). Also, since firm size is a determinant of both ownership concentration and firm performance, we use log GDP instead of log of total assets as a proxy of firm size, given the fact that larger economies have larger firms and hence less ownership concentration. 32

We estimate this equation twice; once for the full sample without including LEV in the regression, and the other with LEV but excluding financial firms.

consistent with several research results that document no significant relationship between ownership concentration and firm performance 33 . However, it seems that firmlevel variables exhibit significant relationships with firm performance. We find that large-size firms are more likely to achieve better performance as indicated by the positive and significant coefficient of SIZE. This might be due to competition (or lack thereof) effects, whereby the market power of large-size firms enables them to outperform small-size firms in Arab countries. The positive and significant coefficients of IND and MAN imply that industrial firms, in particular manufacturing firms, achieve superior performance compared to other firms; whereas financial institutions underperform other firms as indicated by their negative and significant coefficient. Surprisingly, the CEO dummy coefficients are not significant at any level, suggesting that firm performance is not affected by whether there is a separation between CEO and chairperson positions.

With regard to country- level variables, we observe that ECFR has a positive and significant coefficient for all models, which suggests that more restrictive economic arrangements and market control (higher ECFR) enhance firm profitability34 . As to the RGDP coefficients, they are as expected positive in all models, but only significant for ROE at the five percent level.

When we move to the market performance measure (Q-ratio), however, a different conclusion is reached. CONC coefficients (Models 7-9) are positive and highly

33 34

See, among others, Demsetz and Lehn (1985).

These findings are inconsistent with several research results, in which economic freedom presumably creates a healthier economic environment that enables firms to achieve better performance (see, among others, Boubakri et. al (2003)). However, our results seem to imply that firms achieve better performance when they operate in a less open economic environment because of the lack of competition pressures.

significant (at the one percent level), implying that ownership concentration matters in determining the firm value. It is interesting to ask why different proxies for firm performance (accounting and market measures) produce different relationships with ownership concentration. One explanation is that while ROA and ROE measure the past and current performance of the firm, Q-ratio, in addition to that, captures the expected future performance of the firm. Consequently, rapidly growing firms might have larger Q-ratios with relatively smaller accounting performance measures, resulting in substantial differences between the impact of ownership concentration on ROA or ROE, and Q-ratio. A second explanation or implication is that the relevance of accounting earnings in determining firm value is very miniscule in Arab stock markets, in the sense that there is no contemporaneous association between accounting values and the market value of firms 35 .

Another important finding is the favorable effect that the market bestows on firms where the CEO and the chairperson are the same person, as indicated by the positive and significant CEO coefficients for all models. Regarding other firmlevel variables, we still find that FIN underperform other firms significantly, whereas NONMAN outperform the rest. Nevertheless, we fail to find any impact of the country-level variables, ECFR and RGDP, on firm value. Table (10) repeats the same regressions for all firms excluding financial institutions, and its results mirror to a large extent those obtained in table (9). Qualitatively the results reported in both tables are identical, and the differences are only quantitative. 35

It is not really surprising to find a separation between accounting and market performance measures, given the fact that stock markets in the Arab world are indeed in need of more transparency, through the promotion of timely disclosure and dissemination of information to the public, so that investors could rely on this information in determining firm value. For example, the inadequacy of financial disclosure in Egypt is a severe problem; only 10% of listed companies comply with the financial disclosure requirements, in which companies should publish quarterly financial statements and the fullyear results. See Bolbol et. al (2004).

So what can we conclude from the analysis of tables (9) and (10)? Collectively, the ir results reveal that ownership concentration does not really matter in determining firms’ accounting performance measures, whereas its impact on firm value is unanimously positive and highly significant. If we would like to rank firms according to their accounting performance measures, the conclusion to draw here is that larger firms, ind ustrial firms, in particular manufacturing ones and those that operate in a less open economic environment appear to achieve superior performance. In addition, a higher GDP growth rate and what it implies in terms of more business activity to firms could be conducive to better performance. As to the market measure, we find that firms with higher ownership concentration, nonmanufacturing firms, and those with no separation between CEO and chairperson positions have a higher market value.

V – Ownership Ide ntity and Firm Performance

Since the types of ownership concentration might vary across firms according to the identity of larger shareholders, we postulate that the relationship between large shareholders and firm performance depends on who the large sha reholders are 36 . To delve deeper into this issue and provide further evidence to the existing literature, we split the concentrated ownership structure into four separate groups of owners, as was argued previously: individual investors, domestic institutional investors, government, and foreign investors. As a result, we estimate the following system of equations to determine the relationship between ownership identity and firm performance, after we control for some firm- and country-level variables:

36

See, among others, Boycko et. al (1996), Claessens et. al (1998), and Denis and McConnell (2003).

PERFit = δ + ∑ θ jOWNERijt + β1 FLV1it + υ1CLV1it + γ t + ε 1it

(3a)

OWNERijt = α + β 2 FLV2it + υ 2 CLV2it + γ t + ε 2it

(3b)

j

where OWNERijt is the percentage of shares held by the owner of type j of firm i at time t. We employ the same technique applied to equations (2a, 2b), with the notable difference that we instrument for each type of the four large shareholders in equation (3b) using the same variables as in equation (2b). The fitted values of each type of owners are then placed in equation (3a).

The results of equation (3a) are reported in tables (11) and (12), in which the former table includes the entire sample, while the latter one excludes financial institutions. Models 1-6 of table (11) relate to accounting performance measures, and we see from them that after controlling for firm size, industry and CEO dummies, economic freedom, and real GDP growth rate, individual ownership concentration has a negative and significant impact on ROA and ROE at the ten percent level. At the same time, concentrated government ownership has positive impact on firm performance, although only significant with ROE at the ten percent level. Surprisingly, we fail to find any significant impact of either local institution or foreign investors on firm performance. The results, however, still support our previous findings, in that size, industrial firms, in particular manufacturing firms, and real GDP growth rate, all have a positive and significant relationship with firm performance, whereas economic freedom’s impact is negative and significant. In addition, the performance of service firms and financial institution is significantly less compared with industrial firms.

In models 7-10, which reflect the outcomes of the market measure, we obtain the following results: INDVCONC is no longer significant, whereas all other types of ownership concentration are positive and highly significant. We can also detect that foreign ownership concentration results in better firm value relative to other types of owners, as indicated by the higher coefficients and significance levels. These findings are consistent with theoretical arguments claiming that foreign investors bring better governance and monitoring practices, in addition to more valuable technology transfer and know-how, and in the process increase the value of the firm37 .

Lastly, table (12) repeats the same regression of equation (3a) but excluding financial institutions, and the results obtained tend to reproduce those given in table (11) – with some minor differences. INDVCONC turns insignificant (models 1-4) and positive and significant (models 5 and 6). And, recalling that we exclude financial institutions from our sample, it seems then that the negative impact of INDVCONC on firm performance obtained in table (11) is solely due to the dominant influence of financial institutions. As a result, we can argue that concentrating ownership in the hands of individual investors does not auger well for the performance of financial institutions. The results also corroborate with our previous argume nt that concentrated foreign ownership improves firm value.

VI –Ownership Concentration and Firm Performance: A Further Investigation

While testing for the impact of ownership concentration and identity on firm performance in the previous two sections, we only included in our regressions those firms in which the ownership structure was characterized by the presence of at least 37

See, for example, Boycko et. al (1996), and Dyck (2001).

one blockholder. As such, 14% of our sample firms were excluded since there was no concentration of ownership in these firms. In this way, we were testing for the impact of different levels of concentration on firm performance, as opposed to testing whether firm performance is sensitive to the actual presence of blockholders. In light of this, we now extend our analysis to incorporate the latter proposition, i.e. our aim is now to determine whether firms in which ownership is concentrated perform significantly different than firms in which ownership is not concentrated.

We investigate the above proposition by first carrying out statistical tests (parametric t-test and non-parametric Mann-Whitney test) to compare the performance of the 260 firms with concentrated ownership to that of the 44 firms with no concentrated ownership (see Appendix III for more details). The results are reported in table (13), and they preliminarily indicate that there are no significant differences in any of the performance measures between the two sets of data.

In an effort to investigate further, we also estimate the regression below, which captures whether the presence of blockholders significantly affects performance, after controlling for country-and firmlevel variables:

PERF it = δ + CONCDUM

it

+ β 1 FLV it + υ 1CLV it + γ t + ε it

(4)

where CONCDUMit is a dummy variable which takes one if firm i is characterized by the presenc e of at least one blockholder at time t, and where the country-and firmlevel variables are the same as those used in equation (2a).

The results, which are shown in table (14), duplicate qualitatively those found in table (9). Most important are the coefficients pertaining to CONCDUM, which indicate that although the presence of a blockholder does not affect the accounting performance measures, it does significantly raise the Q-ratio. This complements our previous finding with respect to the impact of ownership concentration on the market valuation of firms. It also allows us to refine our conclusion as follows: although ownership concentration has no impact on accounting performance measures, not only does the presence of blockholders improve the market va luation of firms, but also the higher the level of such ownership concentration the higher the market valuation.

VII – Conclusion

Using a sample of more than 300 representative Arab firms, the paper studied the determinants of ownership concentration, and the effect of this and other aspects of corporate governance on firm performance and profitability. The following conclusions and policy recommendations could be summed up from the analysis:

1) Ownership concentration in Arab corporations seem to be negatively associated with legal protection, thus vindicating the view of La Porta et. al. In addition, more active stock markets and fewer restrictions on economic activity are correlated with dilution and less concentration of corporate ownership. Hence, if the latter is desired in its own right, then naturally better laws protecting investors and their implementation and more developed stock markets are surely welcome.

2) Contrary to economic intuition, the reality is that Arab financial institutions have less ownership concentration than corporations in other sectors. This is partly

explained by a sizeable foreign participation, but perhaps more importantly it implies that further privatizations of Arab state banks should not be discouraged by the lack of foreign participation and the fear of more concentrated ownership.

3) Notwithstanding the desirability of less concentrated ownership, it does not seem to have a significant effect on Arab firms’ profitability and performance measures. Nor does the separation between CEO and chairperson positions. This means that – at least in the short term and especially given the fact that firms typically raise equity not so much in public markets but through family ties or personal relationships – legal protection of creditors is more important than improving other aspects of corporate governance since any substantial growth in external finance is likely to take the form of debt.

4) Q-ratios tend to be positively related to concentrated ownership, presence of blockho lders, and conflation of CEO and chairperson positions. However, this result seems to depend more on reputational effects and lower agency costs than on market fundamentals pertaining to firms’ actual performance, as previous research had indicated 38 . Hence, future improvements in corporate governance practices are better gauged through their effect on performance measures rather than market measures.

5) Large-size firms and firms operating in a less open economic environment have higher profitability and performance measures than other firms. This could be the result of favorable advantages seized by monopoly power, not advantages gained through more efficiency. As a result, efforts that aim at better corporate practices

38

See Bolbol and Omran (2003).

should be coupled with reforms of product markets, competition policy, and the overall operating environment for firms.

6) The identity of owners matters more than the concentration of ownership. Particularly important in this regard is the negative association of individual investors with performance measures in financial institutions, a result that could be explained by the tendency of individual owners to manage banks’ assets recklessly in the absence of checks and oversight by other major owners. Also interesting is the lack of a significant relation between foreign investors and performance measures but the presence of a positive one with market measures. This, however, should not mean taking a neutral or indifferent stand regarding foreign investors, because of the better governance practices that they could bring to domestic markets (as reflected by the higher Q-ratios), and consequently should not act as a deterrent for attracting more of them.

Table (1) : Number of Sample Firms in Each Country, Classified According to Industry Affiliation

Manufacturing

NonManufacturing

Financial Institutions*

Services

Total

Egypt

45

6

21

9

81

Jordan

56

2

29

29

116

Oman

37

3

12

18

70

Tunisia

8

0

18

11

37

146

11

80

67

304

Pool

* Includes banks, insurance and investment firms.

Table (2) : Descriptive Statistics of Firm - Level Data Panel A: Egypt ( 239 Observations )

MV ASSETS ROA ROE Q

Mean

Median

Minimum

Maximum

Std. Dev.

88,469 379,623 7.0 % 18.9 % 1.01

35,294 101,148 6.1 % 17.3 % 0.98

623 8,692 -10.0 % -46.1 % 0.34

2,170,795 4,375,919 24.7 % 72.3 % 2.35

190,088 667,572 0.06 0.14 0.31

339 816 -32.5 % -66.8 % 0.38

2,482,370 20,753,389 27.5 % 59.7 % 3.08

214,085 1,914,313 0.09 0.14 0.39

390 1,891 -29.0 % -66.8 % 0.41

364,785 1,920,593 27.4 % 59.8 % 2.80

47,708 234,129 0.07 0.18 0.40

31,749 90,463 2.0 % 11.5 % 1.01

4,052 7,934 -5.9 % -48.1 % 0.71

288,668 2,974,467 34.0 % 51.8 % 3.38

55,254 728,121 0.06 0.12 0.50

15,321 33,748 2.9 % 9.6 % 0.98

339 816 -32.5 % -66.8 % 0.34

2,482,370 20,753,389 34.0 % 72.3 % 3.38

169,183 1,270,781 0.08 0.16 0.39

Panel B: Jordan ( 341 Observations ) MV ASSETS ROA ROE Q

46,944 301,616 2.1 % 3.0 % 0.98

9,309 15,418 1.4 % 3.7 % 0.93

Panel C: O m a n ( 203 Observations ) MV ASSETS ROA ROE Q

26,530 75,580 2.9 % 5.2 % 1.08

11,313 24,278 3.1 % 8.6 % 0.99

Panel D: Tunisia ( 106 Observations ) MV ASSETS ROA ROE Q

53,871 483,209 4.4 % 12.5 % 1.19

Panel E: Pool ( 889 Observations ) MV ASSETS ROA ROE Q

54,272 292,625 3.9 % 8.9 % 1.04

MV

:

Market Value in thousands of US$

ASSETS

: Total Assets in thousands of US$

ROA

:

Return on Assets

ROE

:

Return on Equity

Q

:

Q - Ratio

Table (3) : Descriptive Statistics for Pooled Country - Level Data Mean

Median

Minimum

Maximum

Std. Dev.

PS

0.40

0.25

-0.44

1.01

0.52

ROL

0.57

0.53

0.09

1.25

0.37

COC

0.31

0.24

-0.29

1.03

0.44

ECFR

3.03

2.94

2.60

3.58

0.33

^ Y

4.4 %

4.5 %

1.7 %

9.3 %

0.02

VT / GDP

6.0 %

4.2 %

1.1 %

14.4 %

0.05

PS

: Political Stability Index (ranges from a low of – 2.5 to a high of 2.5)

ROL

: Rule of Law Index (ranges from a low of –2.5 to a high of 2.5)

COC

: Control of Corruption Index (ranges from a low of – 2.5 to a high of 2.5)

ECFR

: Economic Freedom Index (ranges from a low of 5 to a high of 1)

^ Y

: Rate of Growth of Real GDP

VT / GDP : Value Traded / GDP PCI

: Per Capita Income in US$.

Source

: AMF, Economic Indicators of Arab Countries (various issues) and

Database of Arab Stock Markets (various issues); Kaufmann et. al (2003); and Heritage Foundation, Index of Economic Freedom (www.heritage.org).

Table (4) : Ownership Structure Panel A : Egypt (239 Observations) Mean

Median

Minimum

Maximum

Std. Dev.

Local Individuals

18 %

9%

0%

99 %

0.23

Local Private Institutions

35 %

30 %

0%

100 %

0.28

Local Government

34 %

33 %

0%

95 %

0.28

Local Other

1%

0%

0%

45 %

0.05

Foreign

12 %

0%

0%

96 %

0.23

Panel B: Jordan (341 Observations) Local Individuals

45 %

44 %

1%

97 %

0.23


28 %

22 %

0%

86 %

0.22

Local Government

9%

2%

0%

85 %

0.16

Local Other

4%

1%

0%

46 %

0.07

Foreign

15 %

7%

0%

97 %

0.20

Panel C: Oman (203 Observations) Local Individuals

38 %

36 %

0%

100 %

0.21


44 %

44 %

0%

88 %

0.21

Local Government

6%

2%

0%

71 %

0.12

Local Other

3%

0%

0%

53 %

0.06

Foreign

10 %

3%

0%

66 %

0.14

Panel D: Tunisia (106 Observations) Local Individuals

10 %

0%

0%

92 %

0.17


23 %

20 %

0%

74 %

0.21

Local Government

20 %

0%

0%

78 %

0.25

Local Other *

30 %

30 %

0%

71 %

0.20

Foreign

18 %

11 %

0%

78 %

0.22

Panel E : Pool (889 Observations) Local Individuals

32 %

29 %

0%

100 %

0.26


33 %

30 %

0%

100 %

0.24

Local Government

16 %

4%

0%

95 %

0.23

Local Other

6%

0%

0%

71 %

0.13

Foreign

14 %

4%

0%

97 %

0.20

* Due to data limitations, this entry was calculated as the residual.

Table (5) : Number of Firms whose Ownership Structure is Characterized by the Presence of At Least One Blockholder *

Panel A : Egypt 2000

2001

2002

Number of firms

% of Total

Number of firms

% of Total

Number of firms

% of Total

Local Individuals Local Private Institutions

7 41

9% 53%

8 40

10% 50%

12 42

15% 52%

Local Government Foreign

50 14

64% 18%

52 17

65% 21%

54 17

67% 21%

Local Individuals

36

31%

42

36%

42

38%

Local Private Institutions Local Government

56 22

49% 19%

58 21

50% 18%

59 24

54% 22%

Foreign

28

24%

28

24%

23

21%


23 29

34% 43%

27 38

40% 57%

31 38

45% 55%

Local Government

5

7%

7

10%

7

10%

Foreign

8

12%

8

12%

8

12%

Local Individuals

4

12%

5

14%

4

11%


14

42%

16

43%

17

47%


14 12

42% 36%

15 19

41% 51%

16 19

44% 53%

Local Individuals

70

24%

82

27%

89

30%

Local Private Institutions Local Government

140 91

48% 31%

152 95

51% 32%

156 101

53% 34%

Foreign

62

21%

72

24%

67

23%

Panel B : Jordan

Panel C : Oman

Panel D : Tunisia

Panel E : Pool

* A blockholder is defined as an entity owning a minimum of 10% of equity.

Table (6) : Ownership Concentration by Top Three Blockholders, and by Identity of Blockholders

Panel A : Egypt Mean

Median

Minimum

Maximum

Std. Dev.

Top Three Blockholders

58%

58%

10%

97%

0.21


42% 24%

36% 13%

10% 10%

90% 95%

0.25 0.22


43% 42%

39% 33%

10% 10%

92% 96%

0.22 0.28


40%

38%

10%

87%

0.21


24% 30%

19% 23%

10% 10%

79% 80%

0.15 0.17


30% 30%

23% 20%

10% 10%

83% 97%

0.21 0.24


43%

46%

10%

90%

0.19

Local Individuals Local Private Institutions Local Government

30% 36% 31%

25% 35% 25%

10% 10% 15%

90% 70% 64%

0.18 0.17 0.16

Foreign

29%

30%

11%

49%

0.14


52%

50%

13%

88%

0.18


25% 31% 41%

20% 28% 39%

10% 10% 10%

51% 70% 78%

0.16 0.15 0.20

Foreign

33%

22%

10%

78%

0.22


48%

49%

10%

97%

0.22


28% 30% 39%

23% 25% 36%

10% 10% 10%

90% 95% 92%

0.18 0.19 0.22

Foreign

33%

24%

10%

97%

0.24

Panel B : Jordan

Panel C : Oman

Panel D : Tunisia

Panel E : Pool

Table (7) : Tests for Significant Differences in Ownership Concentration Panel A : Comparison of Differences in Ownership According to Industry Affiliation Z - Statistic for Differences in Medians Average Rank

Means

T- Statistic for Differences in Means

Medians

Manf. - Non Manf.

48% - 57%

-2.09 **

49% - 60%

205 - 246 ***

Manf. - Services

48% - 48%

0.19

49% - 49%

286 - 281

Manf. - Fin. Inst.

48% - 45%

1.97 **

49% - 46%

302 - 270 **

Non Manf. - Services

57% - 48%

2.26 **

60% - 49%

125 - 104 ***

Non Manf. - Fin. Inst.

57% - 45%

2.94 *

60% - 46%

141 - 109 **

Services - Fin. Inst.

48% - 45%

1.62

49% - 46%

202 - 181 ***

Panel B : Comparison of Differences in Ownership According to Country Egypt - Jordan

58% - 41%

9.07 *

58% - 40%

326 - 214 *

Egypt - Oman

58% - 43%

7.21 *

58% - 46%

229 - 155 *

Egypt - Tunisia

58% - 52%

2.46 **

58% - 50%

170 - 143 **

Jordan - Oman

41% - 43%

-1.16

40% - 46%

229 - 250

Jordan - Tunisia

41% - 52%

-4.66 *

40% - 50%

186 - 248 *

Oman - Tunisia

43% - 52%

-3.73 *

46% - 50%

125 - 157 *

Panel C : Comparison of Differences in Ownership According to Firm Size Large - Small

41% - 45%

-2.29 **

42% - 48%

*, **, *** refer to 1%, 5% and 10% levels of significance, respectively.

425 - 465 **

Table (8) : Regression Results for Ownership Concentration Dependent Variable: CONC Independent Variables SIZE IND

Model 1

Model 2

-0.01 (-1.63) ***

-0.01 (-1.78) ***

Model 3 0.00 (-0.62)

0.01 (0.31) 0.00 (-0.05)

MAN

0.01 (0.19)

NONMAN

-0.06 (-2.50) **

FIN

0.03 (1.59)

SERV ECFR

0.18 (4.39) *

0.18 (4.37) *

0.16 (4.06) *

ROL

-0.11 (-2.43) **

-0.11 (-2.41) **

-0.12 (-2.64) *

VTGDP

-0.73 (-3.04) *

-0.73 (-3.00) *

-0.73 (-3.09) *

N

889 9.04 23.82 *

889 8.93 19.02 5.11 *

889 10.20 21.76 *

Adj . R2 ( % ) F - Ratio

*, **, *** refer to 1%, 5% and 10% levels of significance, respectively. Figures in parenthesis are t – statistics.

Table (9) : Regression Results for Performance and Ownership Concentration (Full Sample) Independent Variables

Dependent Variable : ROA

Dependent Variable : ROE

Dependent Variable :Q

Model 1

Model 2

Model 3

Model 4

Model 5

Model 6

Model 7

Model 8

Model 9

CONC

0.00 (0.58)

0.00 (0.64)

0.00 (0.13)

0.01 (0.59)

0.01 (0.63)

0.00 (0.25)

0.09 (3.34) *

0.09 (3.38) *

0.08 (2.99) *

SIZE

0.00 (0.70)

0.00 (0.54)

0.00 (2.30) **

0.02 (4.53) *

0.01 (4.46) *

0.02 (5.43) *

0.01 (0.69)

0.00 (0.41)

0.02 (1.93) ***

IND

0.03 (5.37) *

0.03 (2.85) *

0.02 (0.77)

MAN

0.03 (5.12) *

0.03 (2.70) *

0.01 (0.18)

NONMAN

0.01 (0.48)

0.01 (0.43)

0.11 (1.83) ***

FIN

-0.05 (-6.73) *

-0.06 (-4.19) *

-0.10 (2.66) *

SERV

-0.02 (-2.47) *

-0.01 (-0.80)

0.03 (1.02)

CEO

-0.01 (-1.35)

-0.01 (-1.44)

-0.01 (-1.39)

ECFR

0.05 (4.51) *

0.05 (4.50) *

0.04 (4.26) *

0.16 (7.14) *

0.16 (6.97) *

RGDP

0.18 (1.00)

0.19 (1.03)

0.15 (0.79)

0.94 (2.45) **

N

795 8.97 19.10 *

795 8.71 15.63 5.11 *

795 10.51 18.88 *

795 15.67 34.59 *

2

Adj. R ( % ) F - Ratio

-0.02 (-1.37)

5.11


-0.02 (-1.41)

-0.02 (-1.39)

0.06 (1.91) ***

0.06 (1.97) **

0.06 (1.90) ***

0.15 (6.94) *

-0.02 (-0.38)

-0.04 (-0.60)

-0.03 (-0.61)

0.94 (2.42) **

0.88 (2.30) **

0.09 (0.08)

-0.14 (-0.14)

-0.08 (-0.08)

795 15.51 28.66 5.11 *

795 16.48 30.71 *

5.11

795 1.06 3.50 *

795 1.27 3.40 5.11 *

795 2.08 4.64 *

Table (10) : Regression Results for Performance and Ownership Concentration (Excluding Financial Institutions) Dependent Variable: ROA

Dependent Variable: ROE

Model 1

Model 2

Model 3

Model 4

Model 5

Model 6

CONC

0.00 (0.04)

0.00 (0.06)

0.00 (-0.01)

0.00 (0.01)

0.09 (2.50) **

0.09 (2.44) **

SIZE

0.01 (3.39) *

0.01 (3.40) *

0.02 (3.89) *

0.02 (3.90) *

0.02 (1.18)

0.02 (1.16)

IND

0.01 (1.93) ***

Independent Variables

Dependent Variable: Q

0.01 (0.95)

-0.04 (-1.01)

MAN

0.01 (2.03) **

0.01 (0.99)

NONMAN

0.00 (0.10)

0.00 (0.09)

-0.01 (-0.95)

-0.02 (-1.27)

-0.05 (-1.31) 0.14 (1.64) ***

CEO

-0.01 (-0.90)

ECFR

0.05 (3.46) *

0.05 (3.51) *

0.17 (6.05) *

0.17 (6.06) *

0.00 (-0.03)

-0.01 (-0.15)

RGDP

0.21 (0.95)

0.22 (0.99)

1.15 (2.48) **

1.16 (2.49) **

-0.04 (-0.03)

-0.17 (-0.13)

N 2 Adj. R ( % ) F - Ratio

552 9.62 15.32 *

552 9.59 12.90 5.11 *

552 17.76 29.46 *

552 17.65 24.54 5.11 *

##

-0.02 (-1.29)

0.10 (2.20) **

##


552 1.29 3.28 *

0.10 (2.35) **

552 2.01 3.70 5.11 *

Table (11) : Regression Results for Performance and Ownership Identity (Full Sample) Independent Variables

Dependent Variable : ROA Model 1

Model 2

INDVCONC

-0.02 (-1.83) ***

-0.02 (-1.70) ***

INSTCONC

0.02 (1.04)

GOVCONC

Model 3

Dependent Variable : ROE Model 6

Dependent Variable : Q

Model 4

Model 5

-0.01 (-1.37)

-0.04 (-1.84) ***

-0.03 (-1.80) ***

-0.03 (-1.51)

-0.05 (-0.99)

-0.05 (-1.09)

-0.03 (-0.53)

0.02 (1.06)

0.01 (0.53)

0.04 (1.00)

0.04 (1.03)

0.03 (0.66)

0.28 (2.76) *

0.27 (2.67) *

0.23 (2.27) **

0.01 (1.27)

0.01 (1.46)

0.01 (0.59)

0.04 (1.77) ***

0.04 (1.87) ***

0.03 (1.25)

0.16 (2.89) *

0.16 (2.88) *

0.12 (2.14) **

FORCONC

0.01 (0.51)

0.01 (0.53)

0.00 (0.47)

0.01 (0.56)

0.01 (0.57)

0.01 (0.52)

0.28 (5.04) *

0.28 (5.04) *

0.28 (5.03) *

SIZE

0.00 (0.47)

0.00 (0.33)

0.00 (1.90) ***

0.01 (4.03) *

0.01 (3.97) *

0.02 (4.70) *

0.00 (-0.31)

-0.01 (-0.66)

0.01 (1.17)

IND

0.03 (5.43) *

0.03 (2.89) *

Model 7

Model 8

Model 9

0.03 (0.95)

MAN

0.03 (5.22) *

0.03 (2.82) *

0.01 (0.32)

NONMAN

0.01 (0.69)

0.01 (0.64)

0.12 (2.02)

FIN

-0.05 (-6.50) *

-0.06 (-3.82) *

-0.12 (-3.06) *

SERV

-0.02 (-2.63) *

-0.01 (-1.09)

0.04 (1.14)

CEO

-0.01 (-1.37)

-0.01 (-1.42)

-0.01 (-1.48)

-0.02 (-1.31)

-0.02 (-1.34)

-0.02 (-1.38)

0.05 (1.46)

0.05 (1.51)

0.04 (1.28)

ECFR

0.04 (4.00) *

0.04 (3.91) *

0.04 (3.96) *

0.15 (6.45) *

0.14 (6.21) *

0.14 (6.42) *

-0.04 (-0.61)

-0.05 (-0.84)

-0.04 (-0.68)

RGDP

0.17 (0.94)

0.17 (0.92)

0.15 (0.81)

0.91 (2.36) **

0.89 (2.27) **

0.87 (2.27) **

0.29 (0.29)

0.05 (0.05)

0.16 (0.16)


795 9.24 12.67 *

795 9.00 11.09 *

795 10.46 12.87 *

795 16.19 22.82 *

795 14.94 20.22 *

795 16.68 21.09 *


795 2.57 4.30 *

795 2.82 4.19 *

795 3.87 5.30 *

Table (12) : Regression Results for Performance and Ownership Identity (Excluding Financial Institutions) : ROA Independent Dependent Variable Variables Model1 Model2

Dependent Variable : ROE

Dependent Variable :Q

Model3

Model4

Model5

Model6

INDVCONC

0.00 (-0.16)

0.00 (-0.12)

-0.01 (-0.34)

-0.01 (-0.31)

0.15 (1.75) ***

0.14 (1.61) ***

INSTCONC

0.00 (-0.02)

0.00 (-0.01)

-0.01 (-0.24)

-0.01 (-0.23)

0.13 (1.63) ***

0.13 (1.61) ***

GOVCONC

0.00 (0.14)

0.00 (0.18)

0.03 (0.85)

0.02 (0.88)

0.16 (2.06) **

0.15 (1.93) ***

FORCONC

0.02 (1.00)

0.01 (0.99)

0.02 (0.51)

0.02 (0.51)

0.44 (5.14) *

0.45 (5.19) *

SIZE

0.01 (2.90) *

0.01 (2.92) *

0.02 (3.16) *

0.02 (3.16) *

0.00 (0.22)

0.00 (0.18)

IND

0.01 (1.83) ***

0.01 (1.02)

-0.06 (-1.45)

MAN

0.01 (1.91) ***

0.02 (1.06)

-0.07 (-1.78) ***

NONMAN

0.00 (0.15)

0.00 (0.11)

0.15 (1.74) ***

CEO

-0.01 (-1.12)

-0.01 (-1.15)

ECFR

0.05 (3.35) *

0.05 (3.39) *

0.17 (5.82) *

RGDP

0.23 (1.03)

0.24 (1.06)


552 9.51 9.85 *

552 9.46 8.82 5.11 *

-0.02 (-1.12)

###

-0.02 (-1.13)

0.06 (1.39)

0.07 (1.49)

0.17 (5.83) *

-0.01 (-0.18)

-0.03 (-0.32)

1.19 (2.55) **

1.19 (2.56) **

0.28 (0.22)

0.15 (0.11)

552 17.84 18.89 *

552 17.74 16.79 5.11 *

###


552 4.87 5.51 *

552 5.85 5.78 5.11 *

Table (13) : Tests for Significant Differences in Firm Performance Panel A : Comparison of Differences in ROA

Concentrated vs. Non-Concentrated

Means


Medians

3.9% - 3.7%

0.31

2.9% - 2.9%

Z - Statistic for Differences in Medians Average Rank 446 - 432

Panel B : Comparison of Differences in ROE


Means


Medians

8.9% - 8.8%

0.07

9.6% - 8.3%


Panel C : Comparison of Differences in -QRatio


Means


Medians

1.04 - 0.99

1.37

0.98 - 0.97


Table (14) : Regression Results for Performance and Ownership Concentration Dummies (Full Sample) Independent Variables

Dependent Variable: ROA Model1

Model2

0.00 (-0.29)

0.00 (-0.30)

SIZE

0.00 (0.65)

0.00 (0.66)

IND

0.03 (5.36) *

CONCDUM

Dependent Variable: ROE

Model3

Model4

0.00 (-0.53)

-0.01 (-0.55)

0.00 (2.27) **

0.01 (4.47) *

Model5 -0.01 (-0.55) 0.01 (4.47) *

Dependent Variable: Q

Model6

Model7

Model8

Model9

-0.01 (-0.74)

0.07 (1.66) ***

0.07 (1.72) ***

0.06 (1.46)

0.02 (5.40) *

0.01 (0.59)

0.00 (0.57)

0.02 (1.95) ***

0.03 (2.83) *

0.02 (0.82)

MAN

0.03 (5.39) *

0.03 (2.82) *

0.01 (0.34)

NONMAN

0.02 (1.49)

0.03 (0.94)

0.21 (2.91) *

FIN

-0.05 (-6.76) *

-0.06 (-4.22) *

-0.01 (-2.85) *

SERV

-0.02 (-2.43) **

-0.01 (-0.74)

0.04 (1.11)

-0.01 (-1.38)

CEO

-0.01 (-1.41)

-0.01 (-1.42)

-0.02 (-1.41)

-0.02 (-1.42)

-0.02 (-1.44)

0.06 (1.98) **

0.07 (2.15) **

0.06 (1.97) **

ECFR

0.05 (4.63) *

0.05 (4.66) *

0.05 (4.32) *

0.15 (7.30) *

0.16 (7.30) *

0.15 (7.05) *

0.00 (-0.02)

-0.01 (-0.18)

-0.02 (-0.30)

RGDP

0.19 (1.02)

0.19 (1.05)

0.15 (0.81)

0.95 (2.49) **

0.96 (2.49) **

0.89 (2.32) **

0.16 (0.16)

0.06 (0.06)

-0.03 (-0.03)

889

889

889

889

889

889

889

889

889

8.94

8.89

10.54

15.66

16.42

16.53

0.12

0.89

1.32

19.04 *

15.93 5.11 *

18.93 *

34.59 *

28.79 5.11 *

30.80 *

1.81 ***

2.83 5.11 *

3.48 *

N 2

Adj. R ( % ) F - Ratio

5.11


5.11

Appendix I

The accounting and ownership data for the four countries were obtained from the

following

sources:

Jordan,

Amman

Stock

Exchange:

Jordanian

Shareholding Companies Guide; Egypt, Kompass Egypt Financial Yearbook; Oman, Muscat Securities Market (MSM): Shareholding Guide of MSM Listed Companies; and Tunisia, Bourse de Tunis: www.bvmt.com.tn.

Appendix II

Country–Level Variables

Panel A : Egypt

PS ROL COC ECFR ^

Y VT/GDP

2000

2001

2002

0.05 0.23 -0.19 3.58 5.10%

0.21 0.21 -0.16 3.53 3.50%

-0.35 0.09 -0.29 3.53 2.00%

12.04%

7.01%

8.95%

0.25 0.57 0.13 2.95 4.20%

0.13 0.66 0.09 2.85 4.20%

-0.44 0.33 0 2.73 4.90%

4.79%

10.58%

14.36%

1.01 1.25 0.72 2.93 5.50%

1 1.06 0.44 2.6 9.30%

0.98 0.83 1.03 2.78 2.30%

2.78%

2.11%

2.87%

0.86 0.48 0.7 2.94 4.70%

0.82 0.81 0.86 3.04 4.90%

0.24 0.27 0.35 2.89 1.70%

3.53%

1.71%

1.06%

Panel B: Jordan PS ROL COC ECFR ^

Y VT/GDP

Panel C : Oman PS ROL COC ECFR ^

Y VT/GDP

Panel D : Tunisia PS ROL COC ECFR ^

Y VT/GDP

Source: Same as Table ( 3 )

Appendix III

Number of Firms in Each Country That Are Characterized by the Presence/ Absence of Concentrated Ownership, Classified According to Industry Affiliation Panel A : Firms With Ownership Concentration Manufacturing

NonManufacturing


Services

Total Number

%

Egypt

41

5

18

9

73

90%

Jordan

48

2

24

26

100

86%

Oman

27

2

10

13

52

74%

Tunisia

8

0

16

11

35

95%

124 85%

9 82%

68 85%

59 88%

260 86%

86% --

NonManufacturing


Services

Pool

Number %

Panel B : Firms Without Ownership Concentration Manufacturing

Total Number

%

Egypt

4

1

3

0

8

10%

Jordan

8

0

5

3

16

14%

Oman

10

1

2

5

18

26%

Tunisia

0

0

2

0

2

5%

22 15%

2 18%

12 15%

8 12%

44 14%

14% --

Pool

Number %

* Includes banks, insurance and investment firms.

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