Ownership structure, capital structure, and performance of group affiliation: Evidence from Taiwanese group‐affiliated firms

Abstract

Purpose

This study seeks to examine how agency problems and internal capital markets in group‐affiliated firms are mutually influenced by the ownership structure, capital structure, and performance. It also aims to examine the endogeneity in group affiliation.

Design/methodology/approach

Using panel data, this study employs two‐stage least squares regression with the instrumental variable technique to examine the relationship among capital structure, ownership structure, and performance of group‐affiliated firms. Simultaneous equation models are constructed to identify the effects of interdependent decisions.

Findings

The empirical results indicate a U‐shaped relationship between insider ownership and performance. Moreover, the alignment of ownership and control rights determines the relationship between ownership structure and performance for group‐affiliated firms. The capital structure decisions of group‐affiliated firms are independent of firm performance and insider ownership, supporting the view that capital structure decisions of group‐affiliated firms are determined by the overall characteristics of the business group, rather than those of the individual firms.

Practical implications

Business groups can reduce the agency problems that occur in group affiliation by increasing the insider ownership (after a certain tunneling point), debt financing, and dividend payout.

Originality/value

Previous studies have paid little attention to the effects of the agency problem and the internal capital market on group affiliation. Whether endogeneity is a consequence of the common characteristics of group affiliation or a result of the simultaneity existing among ownership structure, capital structure, and performance is also unknown. This paper fills some of these gaps.

Citation

Shyu, J. (2013), "Ownership structure, capital structure, and performance of group affiliation: Evidence from Taiwanese group‐affiliated firms", Managerial Finance, Vol. 39 No. 4, pp. 404-420. https://doi.org/10.1108/03074351311306210