3.2.3. Ownership Concentration, Agency Cost, and Firm Performance

The literature on ownership provides two contradicting theories with respect to ownership concentration and the agency problem. The first theory is based on efficient monitoring. The theory postulates that the majority shareholders have more stake in the firm. They are more vigilant than the minority shareholders. Their monitoring skills make them distinct from the rest of the minority shareholders. Due to efficient monitoring, they are able to reduce managerial expropriation. The second theory, known as principle–principle agency theory, postulates that the majority shareholders exert undue power on management to obtain their own benefits. The minority shareholders are hence exploited by the managers as well as the majority shareholders (Denis and McConnell 2003; Hu and Izumida 2009). In countries where the corporate governance mechanism is weak, ownership concentration works as a substitute for corporate governance (Porta et al. 1999). An increase in ownership concentration leads to shareholder activism. Therefore, agency costs can be reduced (Kroll et al. 1993; Li et al. 2008; Su et al. 2008). As the percentage of individual ownership increases in the firm, more individuals are inclined to incur monitoring costs (Porta et al. 1997).

Ma et al. (2010) studied the effect of ownership concentration and firm performance in Chinese listed companies. They found a positive impact of ownership concentration and firm performance, irrespective of who the majority shareholder was. Heugens et al. (2009) performed a meta-analysis of the relationship between ownership concentration and firm performance in Asian countries. They concluded a positive association between the two variables. They further elaborated that ownership concentration was an active corporate governance mechanism for protecting the minority shareholders from managerial appropriation.

In summary, concentrated ownership is linked with better firm performance in emerging economies (Heugens et al. 2009). The concentrated ownership structure helps in the protection of the minority shareholders from the managerial expropriation. Based on the alignment of interest argument, the concentrated ownership mitigates the agency cost in the emerging economies, resulting in improved performance (Chen 2001). The link between ownership concentration, agency cost, and firm performance is stated in the following hypothesis:
