Introduction

The previous chapter presented the main empirical findings, which suggest that the market values RPTs not only on the basis of the nature of the transaction but also considering the relationship with the party involved in the transaction and the potential incentives of controlling shareholders measured on the basis of their indirect ownership. This chapter adds to the analysis by providing additional tests controlling for firm heterogeneity using fixed-effect models. Next, to affirm the strength of the role of RPTs and indirect rights in the earnings-market valuation, the regression models are re-estimated only for firms which disclose RPTs and on individual RPTs. Alternative measures of firm size and some governance variables are then added in the model to check the robustness of the results based on different definitions for these variables. This chapter concludes with the summary of the additional test findings.

Fixed-effect model

To supplement pooled regression results, we run a fixed-effect model to address the panel structure of the sample data. First, a fixed-effect model is estimated to examine the effect of direct and indirect ownership rights on the MVE. Second, the results of this fixed-effect model estimation to examine the relationship between minority shareholder ownership and MVE are presented. Finally, the results for the market valuation of RPTs using fixed-effect model estimation are presented.

Family ownership and f irm value

Table 8.1 presents the results regarding the association between family ownership rights and MVE. Direct ownership (DIROWN) of controlling shareholders is positively associated with MVE (coef 1.594; t = 5.230), which is consistent with the pooled regression results reported in Chapter 7 Indirect ownership (INDOWN) is also positively associated with MVE (coef 1.387; t = 5.250); however, the coefficient for INDOWN is smaller than DIROWN. Overall, the fixed-effect model results are in agreement with the pooled regression model results.

Minority shareholder ownership and f irm value

Table 8.2 presents the results for the association between the ownership of minority shareholders and MVE. Consistent with the pooled regression model results, the first category of outside investors (MINORITY1) is negatively associated with MVE at 1 per cent (coef -3.272; t = -6.420). The association between the second category of outside investors (MINORITY2) and MVE is statistically insignificant.

This chapter presents the results of the main analysis and hypotheses testing of the study, focusing on the value relevance of ownership structure and RPTs. Multivariate analysis is presented using OLS regressions. In the first section, the effect of direct and indirect ownership of controlling families on firm value is examined. The second part of this chapter presents results on the value relevance of RPTs and the impact of indirect ownership of controlling families on RPT valuation. First, the results of transactions with group member firms are presented. Second, the RPTs involving subsidiary and holding firms are examined. This is then followed by a discussion on the distinct market valuation for these RPTs.

Ownership structure and firm value

This section provides evidence on the influence of ownership rights on firm valuation. First, the results of OLS regression estimation are presented to determine the association between direct and indirect ownership rights and the MVE. This is followed by quadratic equation analysis to examine the non-linear relationship between ownership rights and MVE. Finally, the results on the relationship between minority shareholder ownership and MVE are provided.

Family ownership and f irm value

Table 7.1 presents the results of the value relevance model for ownership rights of controlling families. This model shows a significant positive coefficient for direct and indirect ownership rights of controlling families. However, the direct ownership of controlling families variable has a higher coefficient than the indirect ownership rights variable (direct 0.925; indirect 0.761). This supports the view that cross-holding (indirect ownership) has a less positive influence than direct ownership. However, this evidence might not prove sufficient to draw any conclusions. Therefore, we examine this issue further in the next section with more analysis.

The effect of domestic institutional investors on the firm value varies across different categories of investors. Ownership of mutual funds is positively associated with firm value, whereas financial institutions and government ownership is negatively valued. Prior studies such as Douma et al. (2006) and Sarkar and Sarkar (2000) provide similar results that domestic financial institutional ownership negatively affects firm value. Ramaswamy et al. (2002) argue that financial institutions in developing economies, which are predominantly government owned, espouse social welfare objectives. Therefore, financial institutions are less likely to be vigilant in their monitoring role, which will be reflected in lower market value measured in financial term.

Introduction

This chapter develops hypotheses based on the theoretical and institutional settings presented in previous chapters. Chapter 2 outlined the institutional background in India, which is characterized by concentrated ownership, or family dominance and weak investor protection. Cross-holdings and indirect control rights of founding families provide controlling shareholders the incentive to extract private benefits. In a weak investor protection environment, it becomes easier for controlling shareholders to extract firm resources for their own personal benefits.

Chapter 3 reviewed literature on the behaviour of business groups, family firms and RPTs, and highlighted several motivations for controlling shareholders to indulge in value destroying activities. Consequently, the disclosure of RPTs might be valued negatively. Ownership rights of different groups are expected to affect firm value differently. RPTs between subsidiary and holding firms are likely to be valued on the basis of the nature of the transaction, whereas indirect rights of controlling shareholders are likely to play a key role in the valuation of RPTs with member firms. The presence of indirect ownership presents benefits for controlling shareholders to extract private benefits, and it is likely to influence the valuation of RPTs with member firms in the group.

This chapter is structured in two parts. The first section predicts the effects of ownership rights on firm value to seek evidence of expropriation of minority shareholders. In particular, we hypothesize the effect of direct and indirect rights of controlling shareholders on firm value. This is followed by hypotheses on the valuation effect of minority shareholdings. The second section predicts the value transfer potential of RPTs. The association between RPT disclosure and firm value is predicted to be influenced by the relationship with the party involved in the RPT, the nature of the transaction, and the indirect rights of controlling shareholders.

Firm value and ownership structure

The effect of ownership structure on firm value has been examined extensively in the literature. In particular, several studies have examined the role of large investors in resolving the conflict between shareholders and managers. Shleifer and Vishny (1997) argue that concentrated ownership provides both incentives and power to the controlling shareholders to mitigate agency problems. Therefore, the investors with large ownership stakes are viewed as value-adding. However, the other body of literature investigates the cost associated with the concentrated ownership.