This empirical study examined the simultaneous relationship between profitability and the stock ownership of affiliates. Ever since Berle and Means' (1932) seminal work, researchers argued that professional managers with little equity in the firms they run seek their own interests at the expense of shareholder value and asserted that concentrated ownership helps reduce this agency problem (Jensen and Meckling, 1976; Shleifer and Vishny, 1986).

This conventional line of research is currently being challenged on two theoretical grounds. Some have argued that strategy scholars need to consider non-Western contexts, in which key owners often not only manage their own firms but may also control other affiliated firms through cross-shareholding (La Porta et al., 1999). According to their view, the greatest source of agency problems in most countries is not professional managers but instead controlling shareholders, who expropriate value from minority shareholders. A second, distinct line of research suggests that it is wrong to accept ownership structure as exogenously given (Demsetz, 1983; Demsetz and Lehn, 1985). Others, building on this insight, have instead posited that performance may influence ownership structure but not vice versa, as previous studies argued. Kole (1996) provided related evidence for this conjecture by showing that managers prefer equity compensation only when they expect their firms to perform well, suggesting that managerial ownership represents an endogenous outcome of compensation contracting practices. Cho (1998) used the simultaneous equations estimation technique to show that corporate value affects ownership structure, while the reverse relationship does not hold.