Does ownership structure affect the ex-ante cost of capital?


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The literature on ownership structure in Indian firms does not clearly show how various large shareholdings connected to controlling agency conflicts affect a firm’s outcome. Evidence suggests that large shareholders are in a stronger position to keep a firm’s management more responsible than its dispersed shareholders, thereby positively affecting the firm’s outcome. This research gap has sparked interest in examining the relationship between three large holdings – corporate, institutional, and foreign holdings – and expected returns measured using an ex-ante cost of capital approach in Indian listed firms between 2016 and 2021. The study used a pooled OLS technique to estimate the baseline results and a two-step system GMM technique to validate the baseline results. The results indicate that corporate holdings and expected returns have an inverted U-shaped relationship, institutional holdings and expected returns have a U-shaped relationship, and foreign holdings and expected returns have a U-shaped relationship. The results also reveal that while the threshold for each firm and industry can be different, on average, corporate holdings above 34.3%, institutional holdings below 14.15%, and foreign holdings below 49.80% negatively affect expected returns. The findings suggest that an optimal mix of large shareholders can reduce the risk of any group exerting excessive control over a company and provide benefits in terms of efficient monitoring. Expropriation of minority shareholders can occur in developing countries with weak legal protections. However, this study suggests that large shareholders can mitigate this issue by acting as a check on managerial agency problems, thereby increasing a firm’s efficiency.

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    • Table 1. Holding variables on ICC models using pooled OLS
    • Table 2. Holding variables on ICC models, including the second-order polynomials using pooled OLS
    • Table 3. Robustness check of holding variables on ICC models using a two-step system GMM
    • Table B1. Summary statistics of ICC estimates
    • Table B2. Summary statistics of other variables
    • Table B3. Partial and semipartial correlations of AVG with other variables
    • Conceptualization
      Jains P Chacko, Lakshmi Padmakumari
    • Formal Analysis
      Jains P Chacko
    • Methodology
      Jains P Chacko
    • Software
      Jains P Chacko
    • Writing – original draft
      Jains P Chacko
    • Supervision
      Lakshmi Padmakumari
    • Validation
      Lakshmi Padmakumari
    • Writing – review & editing
      Lakshmi Padmakumari