Higher Risk in Concentrated Business Control – VGSOM Researchers

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Award-Winning Research from IIT Kharagpur’s Vinod Gupta School of Management Indicate Higher Risks with Family-controlled Firms

In an award-winning research study conducted by faculty and alumni at IIT Kharagpur’s Vinod Gupta School of Management, the researchers have found that family and family control ownership is negatively related to firms’ profitability due to lags in management. 

The study is based on decadal data from 2007 to 2017 of 421 listed firms in emerging markets which have at least 5%-20% of the equity capital is owned by a family group including concert promoters. The results show that family-owned firms dominant with concentrated ownership pay lower dividends leading to lower valuation and higher idiosyncratic risk.

“While the firms undertake significant trading in the stock market, high-risk tendencies and lower dividend payouts are the outcomes of ineffectiveness in managerial decision-making and policies. Our study points to the concentration of ownership as the primary reason rather than to the information asymmetry,” explained Prof. Arun Kumar Misra. 

The researchers used three measures of firm profitability, namely, return on assets (ROA), return on equity (ROE), and earnings per share (EPS).

“The results on the relationship of firm profitability with ownership structure (family and non-family firms) are consistent across all three measures in the context of the list of Indian firms in our sample,” said Prof. Abhijeet Chandra.

“Our findings are in line with the uncertainty and signaling theory, suggesting that (a) dividend is preferred over uncertain capital gains by investors, and (b) higher dividends signal superior health (lower risk) of a firm. The payment of low dividends negatively influences the firm-specific risk,” he further added.

The study has been named for the ‘Emerald Literati Award 2020 for Highly Commended Paper’. The paper titled  ‘Impact of ownership structure and dividend on firm performance and firm risk’, has been published in the international journal of Managerial Finance by Emerald Publishing Ltd. UK. The authors included Dr. Abhinav Kumar Rajverma, Former PhD Scholar, VGSoM (2015-2018), currently Faculty (IRMA, Anand, Guj.), Dr. Arun Kumar Misra, Associate Professor, VGSoM, Dr. Sabyasachi Mohapatra, Former PhD Scholar, VGSoM (2011-2015), currently Faculty (IIM Bodh Gaya) and Dr. Abhijeet Chandra, Assistant Professor, VGSoM. The editorial team said that it is one of the most exceptional pieces of work they saw throughout 2019. 

Citation: Rajverma, A.K., Misra, A.K., Mohapatra, S. and Chandra, A. (2019), “Impact of ownership structure and dividend on firm performance and firm risk”, Managerial Finance, Vol. 45 No. 8, pp. 1041-1061. https://doi.org/10.1108/MF-09-2018-0443

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