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Ownership Structure, Firm Performance, and Corporate Governance: Evidence from Selected Arab Countries

Ali A. Bolbola, Ayten Fatheldinb, and Mohammed M. Omranc

a Economic Policy Institute, Arab Monetary Fund, Abu Dhabi, United Arab Emirates, P.O. Box 2818. E-mail: [email protected]

b Economic Policy Institute, Arab Monetary Fund, Abu Dhabi, United Arab Emirates, P.O. Box 281. E-mail: [email protected] c Corresponding Author: College of Management & Technology, Arab Academy for Science & Technology, Alexandria, Egypt, P.O. Box 1029. E-mail: [email protected]

Ownership Structure, Firm Performance, and Corporate

Governance: Evidence from Selected Arab Countries

Abstract

The paper works with a sample of 304 firms from different sectors of the economy,

and from a representative group of Arab countries (Egypt, Jordan, Oman and

Tunisia) where related data could be gathered. We first present crucial descriptive

statistics on the firms’ corporate ownership, identity, and their performance and

market measures, and then use unstructured but credible equations to capture the

relationship between these variables. Specifically, we study the determinants of

ownership concentration; the effect of ownership concentration on firms’

performance and market measures, after controlling for the endogeneity of ownership

concentration through the use of country and firm characteristics as instrumental

variables; and, the effects of ownership identity and blockholdings. The broad

conclusion that emerges is that ownership concentration is an endogenous response

to poor legal protection of investors, but seems to have no significant effect on firms’

performance. This should put the urgency of corporate governance reforms at most at

par with real sector and commercial reforms.

JEL Classifications : G3; F3

Key Words: ownership concentration; performance and market measures; corporate governance; Arab countries.

I – Introduction

Does ownership matter? And what are its implications for corporate governance, and

its effects on firm performance? The easiest to answer of these three questions is

probably the first, since the bulk of the evidence shows that privately-held firms are

more efficient and more profitable than publicly-held ones – although the evidence

differs on the relative merit of the identity of each private owner1. The second

question is perhaps the most interesting because it has spawned a rich research agenda

pioneered by La Porta et. al (1997, 1998, 1999, and 2000). The upshot of their

findings is that when the legal framework does not offer sufficient protection for

outside investors, entrepreneurs and original owners are forced to maintain large

positions in their companies which result in a concentrated form of ownership 2. What

makes this finding interesting is its implications for the third question, since most of

the evidence shows that there is no significant effect of ownership on firm

performance. As a result, one is led to conclude that corporate governance or the lack

of it is immaterial to firm performance3. How could that be so?

There are three dimensions to resolving the question posed above. First, La Porta et.

al have focused on a narrow aspect of corporate governance – protection of minority

investors – but this fairness aspect is only one of the four pillars that are customarily

assigned to sound corporate governance, the other three being: responsibility,

1 This is particularly true for enterprises that are not monopolistic in nature. See Shirley and Walsh (2001). 2 They also find that common-law countries generally have the strongest, and French civil-law countries have the weakest, legal protection of investors, with German and Scandinavian civil-law countries located in the middle. In addition, they argue that the legal system is a more fruitful way to understand corporate governance and its reforms than the conventional distinction between bank-based and market-based financial systems. 3 See Denis and McConnell (2003) and Berglof and von Thadden (1999).

accountability, and transparency4. In fact, there is evidence that in countries with

weak legal environments, firms tend to compensate for the latter by improving firm-

level governance. This is particularly true for firms that rely heavily on external

finance, and, more important, the resulting improvement in corporate governance is

highly correlated with better operating performance and market valuation5.

The second dimension relates to the definition of corporate governance, and the

mechanisms for ensuring it. Corporate governance can best be interpreted as the set of

mechanisms – both institutional and market-based – that induce self- interested

managers (controllers of the firm) to make decisions that maximize the value of the

firm to its shareholders (owners of the firm)6. The aim of these mechanisms, of

course, is to reduce the agency costs that arise from the principle-agent problem; and

they could be internal and/ or external in nature7. Internal mechanisms deal with the

composition of the board of directors, such as the proportion of independent outsiders

in its membership and the distinction between the CEO and the chairperson. Another

important internal mechanism is ownership structure, or the degree at which

ownership by managers obviates the trade-off between alignment and entrenchment

effects8. External mechanisms, on the other hand, rely on the takeover market in

4 Fairness implies ensuring shareholders’ rights and enforceability of contracts; responsibility involves compliance with all rules and regulations that reflect society’s values; accountability means clarification of government roles and responsibilities, and the voluntary efforts to ensure convergence of managerial and shareholder’s interests; and transparency implies the provision of timely disclosure of adequate information concerning the firm’s financial performance, corporate governance and ownership. For more on these principles, see OECD (1999). 5 See Klapper and Love (2002). 6 One could also add: to promote society’s interests and economic growth in the process. See Denis and McConnell (2003). 7 For more on these mechanisms and the evidence relating to them, see ibid. 8 Equity ownership by insiders can align insiders’ interests with those of other shareholders, thereby leading to greater firm value. However, higher ownership by insiders may result in a greater degree of managerial control, potentially entrenching managers. Wan (1999) finds that management ownership does in fact exhibit an inverted u-shaped relation with Tobin’s Q-ratio.

addition to the legal/ regulatory system, whereby the takeover market acts as a threat

to existing controllers in that it enables outsiders to seek control of the firm if bad

corporate governance results in a significant gap between the potential and the actual

value of the firm. So, given these mechanisms, we can see that the legal system is

only one way to ensure good corporate governance. Not only that, but the balance of

the available evidence also shows that the effective presence of the other mechanisms

is positively associated with firm valuation9.

Third, there is now an overwhelming evidence at the aggregate level that countries

with reliable national and corporate governance systems have developed debt and

equity markets that contribute quite favorably to economic growth. And this is more

so in countries whose growth sectors are capital intensive in factor proportions and

rely heavily on external finance10. So any skepticism regarding the impact of

corporate governance on firm performance and valuation is dispelled when

considering its impact at the macro level.

Notwithstanding the above arguments, though, the fact remains that the widely-held

firm is not a widely-observed phenomenon in most countries. This could be attributed

to several reasons. In the developed countries, it could be a rational response to a legal

system that does not protect minority investors (ala La Porta et. al), but it could also

be the result of entrenched financial structures and practices that determine and shape

the enactment of corporate law11. For developing countries, in addition to the

aforementioned reasons, it could also be due to the underdeveloped nature of their

9 However, the takeover mechanism seems to be confined to the US market only. See op cit. 10 See Levine and Zevros (1998) and Rajan and Zingales (1998).

financial markets – that would allow limited access to external financing – and the

preponderance of family firms12. But perhaps what is more important as far as this

phenomenon is concerned, especially in developing countries, is that sound

governance should go beyond the textbook example of the widely-held firm and

concentrate on redesigning corporate practices that are more peculiar to their case,

such as: lack of agency between concentrated and minority owners, reduced liquidity

of shares, cross ownership and pyramiding of shareholdings, dual-class shares, and

the like13. This is of course an ambitious agenda, but it reflects better the corporate

structure of these countries, and in the process acts as a better guide for future

corporate reforms.

In this context, the Arab economies are no exception. Their corporate legal system

largely follows the civil- law system, but one can reasonably argue that the relation

between legal origin and financial arrangements in the Arab countries merely reflects

the influence of a third exogenous variable, which is the role of the state or the nature

of the political system and its national governance. Here, and to nobody’s surprise, the

Arab world does not fare well, having a relatively closed and highly concentrated

political system with a poor mode of national governance14. This naturally spills over

to its system of corporate governance, as the majority of Arab firms are either

government- or family- owned with stock markets still in a rudimentary stage. But

firms are changing, prompted by increased competition from trade openness, by

11 For example, countries with a tradition of strong bank involvement in corporate control and ownership have often found ways of accommodating this tradition in legal practice (as in Japan and Sweden). 12 The evidence on family firms – especially in East Asia – is that they are robust over time, dispelling the notion that their ownership becomes dispersed over time. See Claessens et. al (2000). 13 See Berglof and von Thadden (1999). For instance, Lins (2003) finds for a sample of 1,433 firms from 18 emerging countries that when a management group’s control rights exceed its cash-flow rights then firm values are markedly lower.

privatization, and by the need for more external financing. And, to better understand

their future trajectory, we need to understand their current corporate make-up and

performance.

It is this what we intend to do in this paper, in the aim also of providing a preliminary

step towards filling this needed research area on the relation between corporate

structure and firm performance in the Arab countries. We will work with a sample of

304 firms from different sectors of the economy, and from a representative group of

Arab countries where related data could be gathered. This group of countries

comprises Egypt, Jordan, Oman and Tunisia. In section II we present crucial

descriptive statistics on the firms’ corporate ownership, identity, and their

performance and market measures, whereas in the following sections we use

unstructured but credible equations to capture the relationship between these

variables. Specifically, in section III we study the determinants of ownership

concentration as given by firm and country characteristics; while in section IV we

look at the effect of ownership concentration on firms’ performance and market

measures, after controlling for the endogeneity of ownership concentration through

the use of country and firm characteristics as instrumental variables. Sections V and

VI follow largely the same approach as in section IV, but with sections V and VI

dealing, respectively, with the effects of ownership identity and blockholdings on

performance and market measures. Lastly, section VII closes the paper with a

conclusion and some policy recommendations.

14 See Sadik et. al (2003).

II – Data and Descriptive Statistics

The countries under study provide a selective but representative coverage of the Arab

regions – Oman (the Gulf), Egypt and Jordan (the Mashreq) and Tunisia (the

Maghreb). As important, and as table (1) shows, the sample of firms from each

country covers all major sectors – industry (both manufacturing and non-

manufacturing), financial institutions and services (other than financial); with

manufacturing firms comprising close to half the total of 304 firms, and financial

institutions slightly more than a quarter. All firms, whether majority-private or

majority-government owned, are tradable on their respective stock markets (see

Appendix I for data sources).

The time frame for the study stretches over the 2000-2002 period, so as to allow some

longitudinal dimension to the data; and, as a result, the estimation process draws on a

panel data of firms and years for all four countries. Table (2) shows some descriptive

statistics for size and profitability pertaining to each country panel and the pooled

panel. It is clear that Egyptian firms are the most profitable, in terms of return on

assets and equity, and they have the largest market capitalizations reflecting perhaps

their deeper stock market penetration. Tunisian firms, on the other hand, have the

highest Q-ratio – defined as the ratio of market value plus total liabilities to book

value plus total liabilities – and are largest in terms of assets, something that could be

explained by the large presence (close to half) of financial institutions in the sample.

Jordanian firms, however, reveal features that are noticeably more extreme. Not only

are they the least profitable and have Q-ratios less than one, but their median asset

size is close to 5% of their corresponding mean size, implying large size differences

amongst themselves due most likely to their lopsided nature – a few large firms in

finance and the extractive industries, and a majority of small firms in other sectors.

Omani firms also exhibit low returns as a result of the preponderance of low profit

service-sector firms, but their size distribution is much more balanced than that of

Jordan.

Before we explore the descriptive characteristics pertaining to ownership, a note on

country- level characteristics is useful. Table (3) shows the pooled country data for

some governance indicators: political stability, rule of law, and control of corruption;

and the data for an index of economic freedom, ratio of the value of shares traded to

GDP, and growth rate of GDP. Although the governance indicators are largely

comparable to those of developing countries, both the economic freedom index and

the value traded ratio for the latter countries, at 2.5 and 17% respectively, are

markedly higher than those of our country sample – and no doubt better freedom to

entrepreneurship and higher financial development help explain the higher growth

performance of developing countries of 5%15. Among the countries in the sample,

however, Oman comes as the top performer with a GDP growth rate of 5.3%, but also

– and not surprisingly – with scores for governance indicators, economic freedom and

value traded that are mostly above average: 1.0, 1.1, 0.73, 2.75 and 2.65%,

respectively16.

The ownership structures of the firms in the sample are portrayed in table (4). Jordan

and Oman emerge as the countries with the highest private ownership, having more

than 80% of firm ownership in the hands of private institutions and individuals.

15 For more on the role of governance indicators in enhancing growth, see World Bank (2003); and on the role of financial development, see Bolbol et. al (2004). 16 Jordan, Tunisia, and Egypt follow in order; for more on these scores, see the table in Appendix II.

Egypt, on the other hand, remains the country with the largest presence of government

ownership at 34%, despite its diligent efforts at privatization in the second half of the

1990s17. Tunisia comes as the country with the largest foreign participation in firm

ownership at 18% – surely facilitated by the free trade agreement with the EU – and

also appears to be the one with the least participation by local individuals.

As to ownership concentration, it is depicted in tables (5) and (6), with concentration

defined as ownership by the top three blockholders who own a minimum of 10% of

equity18. From table (5), we see that for all countries the share of companies with at

least one blockholder as local individuals increased during the period, especially for

Oman whose share reached up to 45%. Egypt looks to be the only country whose

corresponding share of local government in fact increased to a high of 67%; whereas

Tunisia, not surprisingly, is the country who witnessed a significant rise in its

corresponding share of foreign investors to 53%. It seems that both foreign and

individual participation in ownership is on the rise, which bodes well for

improvements in both the culture of investment and the degree of international

confidence in these respective economies.

Table (6) shows ownership concentration by the top three blockholders and their

identity. The mean for the pooled sample of the top three blockholders is 48%, which

is between the corresponding mean of the countries whose legal origin is English of

43%, and those whose legal origin is French of 54%19. The highest concentration is

found in Egypt at 58% and the lowest in Oman at 43%. As to the identity of

17 For more on Egypt’s privatization experience, see Omran (2002). 18 Choosing 10% as the cut-off point is necessary due to data limitations, since the sources for Oman and Jordan only list the identities of shareholders who own at least 10% of the equity. 19 See La Porta et. al (1998).

blockholders, in cases where at least one of the blockholders is a local individual, then

average ownership by all local individuals is highest in Egypt at 42%; similarly for

average ownership by local government and foreign investors at 43% and 42%,

respectively. Egypt, then, seems to be the country with a relatively compartmentalized

ownership structure, in the sense that firms are either largely owned by local

individuals or local government or foreign investors. To a lesser extent, the same

pattern is true for Jordan and Tunisia, but for an ownership structure dominated by

either local private institutions or local government or foreign investors. Oman’s

pattern, however, seems to be the one tha t is most balanced among all four types of

investors.

Lastly, table (7) records the results of the mean (parametric) and median (Mann-

Whitney, non-parametric) tests of significance for differences in ownership

concentration. In the case of tests according to differences in sectoral affiliation,

ownership of financial institutions come as significantly less concentrated than those

of manufactured and non-manufactured industries. This is somewhat of a surprising

result, given that banks have relatively lower equity ratios and, as a result, equity

ownership would likely be more concentrated than otherwise. In addition, unlike

firms in other industries, banks have also a sizable presence of foreign ownership at

23%, against 12% for manufacturing, 4% for non-manufacturing, and 9% for services

– although firms from all industries seem to have a significant ownership by local

private institutions at 30% or more. In terms of tests based on country differences, and

in agreement with the results in table (6), both Egypt and Tunisia emerge as the two

countries that are significantly more concentrated in their firm ownership than either

Jordan or Oman. And, as would be expected, smaller firms are more concentrated

than larger ones.

III – Determinants of Ownership Concentration

We begin our exploration of the relationship between ownership structure and firm

performance by first investigating the determinants of ownership concentration. We

measure ownership concentration (CONC) as the percentage of shares owned by the

largest three blockholders in a firm; and, as mentioned earlier, we define a

blockholder to be any entity owning more than 10% of the firm’s equity. Our

empirical findings are, however, robust to using alternative measures of ownership

concentration, such as: the percentage of shares owned by the largest five

blockholders, the log transformation of these concentration measures, and using

approximations of the Herfindahl index20.

We incorporate both firm-level and country- level explanatory variables in our

analysis, using the following equation:

ittititit CLVFLVCONC εγυβα ++++= (1)

where CONCit is the ownership concentration of firm i at time t; FLVit is a vector

which represents firm-level variables for firm i at time t; CLVit is a vector which

represents count ry- level variables for firms in country i at time t; γ t are fixed-year

effects; and eit is the error term.

With respect to the firm-level variables (FLVit), we control for firm size and sectoral

affiliation. Firm size, proxied by the log of a firm’s total assets, and we expect an

inverse relationship between SIZE and CONC due to the risk-neutral and risk-aversion

20 The Herfindahl index is measured as the sum of squared ownership shares.

effects21. More specifically, because the market value of a given stake of ownership is

greater in larger firms, this higher price should, in itself, reduce the degree of

ownership concentration. At the same time, risk-aversion should discourage any

attempt to preserve concentrated ownership in the face of larger capital, because this

would require owners to allocate more of their wealth to a single venture. As for

sectoral affiliation, the firms in our sample are divided according to whether they

belong to the industrial (IND), financial (FIN) or services (SERV) sector. The

industrial sector in turn is sub-divided into manufacturing (MAN) and non-

manufacturing (NONMAN) firms. As such, five sectoral dummies are used: IND,

MAN, NONMAN, FIN and SERV; with 1 assigned to firms belonging to the given

sector or sub-sector, and 0 otherwise.

In addition to these firm-level explanatory variables, the three country- level variables

(CLVit) that we control for are: economic freedom, legal environment and level of

stock market development. In particular, an index of economic freedom (ECFR) is

included in order to capture cross-country differences in the institutional

environment22. We anticipate that ownership will be less concentrated in economies

that are freer, because these economies create conditions which are more likely to

encourage participation in firm ownership. Next, in order to reflect the findings of La

Porta et. al (1998) that ownership concentration of firms is related to cross-country

differences in legal environments, we include the rule of law index (ROL) as a proxy

21 See Demsetz and Lehn (1985) 22 The Economic Freedom Index is a score based on the average performance of an economy in the following ten areas: Trade Policy, Fiscal Burden, Government Intervention, Monetary Policy, Foreign Investment, Banking and Finance, Wages and Prices, Property Rights, Regulation, Informal Market. Scores between 1-1.99, 2-2.99, 3-3.99 and 4-5 indicate that an economy is free, mostly free, mostly unfree and repressed, respectively.

for the efficiency of the legal environment23. We expect to find a negative relationship

between CONC and ROL because in countries with poor investor protection

ownership concentration might become a substitute for legal protection, as

shareholders may need to own more capital in order to exercise control. Finally,

financial sector development is measured by the ratio of value of shares traded to

GDP (VT/GDP ), based on the argument that firm ownership is likely to be less

concentrated in countries where the degree of stock market activity and depth is

higher.

Using these aforementioned variables, we utilize ordinary least squares to estimate

equation (1) for three different specifications of the dummy variables, and the results,

which are listed in table (8), largely confirm our expectations. In particular, we find

that the impact of SIZE on CONC is negative and significant at the ten percent level in

two out of the three models. These results are consistent with a number of studies that

document a negative association between firm size and ownership concentration24.

As to country- level variables, the effect of ROL on ownership concentration is always

negative and significant at either the one or five percent levels, a result which

suggests that ownership concentration is indeed a response to poor legal protection.

Similarly, we also find the effect of VT/GDP to be negative and significant, which

supports our conjecture that larger, more sophisticated markets provide a greater

opportunity for ownership dilution by allowing for wider access to funds and share

ownership. In addition, and as expected, the effect of ECFR is always positive and

significant at the one percent level, which shows that less restrictions on economic

23 The rule of law index is provided by Kaufmann et. al (2003). 24 See, among others, Boubakri et. al (2003).

activity (smaller index) leads to lower concentration of ownership and control.

Furthermore, we find that IND, MAN, NONMAN and SERV are not statistically

significant determinants of ownership concentration. Instead, model (3) highlights

that the only significant dummy variable is FIN, with the negative sign of its

coefficient indicating that ownership concentration in financial institutions is

significantly lower than that in all other sectors – a result that confirms our previous

findings.

IV – Ownership Concentration and Firm Performance

The previous sections shed some light on the ownership concentration of firms in

selected Arab countries, and demonstrated that the deficiencies of external

governance mechanisms, i.e. the weakness of investor protection and the absence of

well-developed markets for corporate control, has led investors in these countries – as

elsewhere in the developing world – to rely on governance structures that are

dominated by highly concentrated ownership. With this in mind, we test in this

section the impact of ownership concentration on firm performance. It is not,

however, a task that should produce clear results because there is no consensus in the

corporate governance literature as to whether or not concentrated ownership structures

enhance firm performance. On the one hand, firm performance improves when

ownership and managerial interests are merged through concentration of ownership 25.

When major shareholdings are acquired, control cannot easily be disputed and the

resulting concentration of ownership might lower, or even completely eliminate,

25 See, for example, Agrawal and Mandelke (1987), Castianas and Helfat (1991), and Baker and Weiner (1992).

agency costs26. On the other hand, blockholder ownership might provide an

opportunity to extract corporate resources for private benefits in a way that would

have a negative impact on firm performance27.

To examine the relationship between ownership concentration and firm performance,

we estimate a regression equation linking the two variables, after controlling for some

firm-and country-level characteristics28. However, in order to avoid problems of

endogeneity, we resort to a two-stage least squares regression defined by the

following equations29:

it1tit11it11itit CLVFLVCONCPERF εγυβθδ +++++= (2a)

it2tit22it22it CLVFLVCONC εγυβα ++++= (2b)

where in equation (2a) PERFit is a measure of performance for firm i at time t: return

on assets (ROA), return on equity (ROE), and the firm relative market value (Q-ratio);

FLV1it is a vector which represents firm-level variables for firm i at time t: SIZE,

sectoral dummies, and a CEO dummy that takes one if the chief executive officer and

the chairman of the board are the same person and zero otherwise30; CLV1it is a vector

that represents country- level variables for firms in country i at time t: economic

26 See Anderson et. al (1997) 27 For more details, see Denis and McConnell (2003). 28 If some of the unobserved determinants of firm performance also explain ownership concentration, then this method could be misleading and might result in a spurious relationship between ownership concentration and firm performance. 29 Himmelberg et. al (1999) and Palia (2001), among others, document the endogenous nature of ownership structure; hence, the need for using instrumental variables for ownership concentration. 30 It is a widely accepted principle of good governance that the CEO should not be the chairperson. In fact the separation allows a balance of power and authority, so that no individual person has unlimited power. However, such separation would carry costs such as agency and information costs.

freedom (ECFR), and real GDP growth rate (RGDP); ?t is fixed year effects; and e1it is

the error term.

Equation (2b) is the instrumental variables equation, for which the instruments have

to be carefully chosen: on the one hand, they should be highly correlated with

ownership concentration; and, on the other hand, they should have no impact on the

dependent variable, firm performance. For the firm-level variables, FLV2it,, we select

debt-to-equity ratio (LEV) and log of GDP (LGDP)31. As for country- level variables,

CLV2i, we include control of corruption (COC) and rule of law (ROL). And, as usual,

?t represents the fixed year effects and e2it the error term. Given this, the two-stage

estimation process proceeds by first estimating equation (2b) to obtain the fitted

values of CONC, and then secondly by replacing these values in equation (2a) to

examine the relationship between ownership concentration and firm performance32.

The results obtained from equation (2a) are reported in tables (9) and (10). The

regressions based on equation (2a) are estimated at two levels: the entire sample

firms (table (9)) and sample firms excluding financial institutions (table (10)); while

using two accounting measures (ROA and ROE) and a market measure (Q-ratio) for

firm performance. We estimate different specifications for each performance measure

to control for industry dummies. We can see from models 1-6 in table (9) that neither

ROA nor ROE is correlated with ownership concentration. These findings tend to be

31 We control for debt ratio because of the possibility that creditors might be able to minimize managerial agency costs and in the process affect ownership concentration; see Lins (2003). Also, since firm size is a determinant of both ownership concentration and firm performance, we use log GDP instead of log of total assets as a proxy of firm size, given the fact that larger economies have larger firms and hence less ownership concentration. 32 We estimate this equation twice; once for the full sample without including LEV in the regression, and the other with LEV but excluding financial firms.

consistent with several research results that document no significant relationship

between ownership concentration and firm performance33. However, it seems that

firm-level variables exhibit significant relationships with firm performance. We find

that large-size firms are more likely to achieve better performance as indicated by the

positive and significant coefficient of SIZE. This might be due to competition (or lack

thereof) effects, whereby the market power of large-size firms enables them to

outperform small-size firms in Arab countries. The positive and significant

coefficients of IND and MAN imply that industrial firms, in particular manufacturing

firms, achieve superior performance compared to other firms; whereas financial

institutions underperform other firms as indicated by their negative and significant

coefficient. Surprisingly, the CEO dummy coefficients are not significant at any

level, suggesting that firm performance is not affected by whether there is a separation

between CEO and chairperson positions.

With regard to country- level variables, we observe that ECFR has a positive and

significant coefficient for all models, which suggests that more restrictive economic

arrangements and market control (higher ECFR) enhance firm profitability34. As to

the RGDP coefficients, they are as expected positive in all models, but only

significant for ROE at the five percent level.

When we move to the market performance measure (Q-ratio), however, a different

conclusion is reached. CONC coefficients (Models 7-9) are positive and highly

33 See, among others, Demsetz and Lehn (1985). 34 These findings are inconsistent with several research results, in which economic freedom presumably creates a healthier economic environment that enables firms to achieve better performance (see, among others, Boubakri et. al (2003)). However, our results seem to imply that firms achieve better performance when they operate in a less open economic environment because of the lack of competition pressures.

significant (at the one percent level), implying that ownership concentration matters in

determining the firm value. It is interesting to ask why different proxies for firm

performance (accounting and market measures) produce different relationships with

ownership concentration. One explanation is that while ROA and ROE measure the

past and current performance of the firm, Q-ratio, in addition to that, captures the

expected future performance of the firm. Consequently, rapidly growing firms might

have larger Q-ratios with relatively smaller accounting performance measures,

resulting in substantial differences between the impact of ownership concentration on

ROA or ROE, and Q-ratio. A second explanation or implication is that the relevance

of accounting earnings in determining firm value is very miniscule in Arab stock

markets, in the sense that there is no contemporaneous association between

accounting values and the market value of firms35.

Another important finding is the favorable effect that the market bestows on firms

where the CEO and the chairperson are the same person, as indicated by the positive

and significant CEO coefficients for all models. Regarding other firm-level variables,

we still find that FIN underperform other firms significantly, whereas NONMAN

outperform the rest. Nevertheless, we fail to find any impact of the country-level

variables, ECFR and RGDP, on firm value. Table (10) repeats the same regressions

for all firms excluding financial institutions, and its results mirror to a large extent

those obtained in table (9). Qualitatively the results reported in both tables are

identical, and the differences are only quantitative.

35 It is not really surprising to find a separation between accounting and market performance measures, given the fact that stock markets in the Arab world are indeed in need of more transparency, through the promotion of timely disclosure and dissemination of information to the public, so that investors could rely on this information in determining firm value. For example, the inadequacy of financial disclosure in Egypt is a severe problem; only 10% of listed companies comply with the financial disclosure requirements, in which companies should publish quarterly financial statements and the full-year results. See Bolbol et. al (2004).

So what can we conclude from the analysis of tables (9) and (10)? Collectively, the ir

results reveal that ownership concentration does not really matter in determining

firms’ accounting performance measures, whereas its impact on firm value is

unanimously positive and highly significant. If we would like to rank firms according

to their accounting performance measures, the conclusion to draw here is that larger

firms, industrial firms, in particular manufacturing ones and those that operate in a

less open economic environment appear to achieve superior performance. In addition,

a higher GDP growth rate and what it implies in terms of more business activity to

firms could be conducive to better performance. As to the market measure, we find

that firms with higher ownership concentration, non-manufacturing firms, and those

with no separation between CEO and chairperson positions have a higher market

value.

V – Ownership Identity and Firm Performance

Since the types of ownership concentration might vary across firms according to the

identity of larger shareholders, we postulate that the relationship between large

shareholders and firm performance depends on who the large sha reholders are36. To

delve deeper into this issue and provide further evidence to the existing literature, we

split the concentrated ownership structure into four separate groups of owners, as was

argued previously: individual investors, domestic institutional investors, government,

and foreign investors. As a result, we estimate the following system of equations to

determine the relationship between ownership identity and firm performance, after we

control for some firm- and country-level variables:

36 See, among others, Boycko et. al (1996), Claessens et. al (1998), and Denis and McConnell (2003).

ittititj

ijtjit CLVFLVOWNERPERF 11111 εγυβθδ +++++= ∑ (3a)

ittititijt CLVFLVOWNER 22222 εγυβα ++++= (3b)

where OWNERijt is the percentage of shares held by the owner of type j of firm i at

time t. We employ the same technique applied to equations (2a, 2b), with the notable

difference that we instrument for each type of the four large shareholders in equation

(3b) using the same variables as in equation (2b). The fitted values of each type of

owners are then placed in equation (3a).

The results of equation (3a) are reported in tables (11) and (12), in which the former

table includes the entire sample, while the latter one excludes financial institutions.

Models 1-6 of table (11) relate to accounting performance measures, and we see from

them that after controlling for firm size, industry and CEO dummies, economic

freedom, and real GDP growth rate, individual ownership concentration has a

negative and significant impact on ROA and ROE at the ten percent level. At the same

time, concentrated government ownership has positive impact on firm performance,

although only significant with ROE at the ten percent level. Surprisingly, we fail to

find any significant impact of either local institution or foreign investors on firm

performance. The results, however, still support our previous findings, in that size,

industrial firms, in particular manufacturing firms, and real GDP growth rate, all have

a positive and significant relationship with firm performance, whereas economic

freedom’s impact is negative and significant. In addition, the performance of service

firms and financial institution is significantly less compared with industrial firms.

In models 7-10, which reflect the outcomes of the market measure, we obtain the

following results: INDVCONC is no longer significant, whereas all other types of

ownership concentration are positive and highly significant. We can also detect that

foreign ownership concentration results in better firm value relative to other types of

owners, as indicated by the higher coefficients and significance levels. These findings

are consistent with theoretical arguments claiming that foreign investors bring better

governance and monitoring practices, in addition to more valuable technology transfer

and know-how, and in the process increase the value of the firm37.

Lastly, table (12) repeats the same regression of equation (3a) but excluding financial

institutions, and the results obtained tend to reproduce those given in table (11) – with

some minor differences. INDVCONC turns insignificant (models 1-4) and positive

and significant (models 5 and 6). And, recalling that we exclude financial institutions

from our sample, it seems then that the negative impact of INDVCONC on firm

performance obtained in table (11) is solely due to the dominant influence of financial

institutions. As a result, we can argue that concentrating ownership in the hands of

individual investors does not auger well for the performance of financial institutions.

The results also corroborate with our previous argument that concentrated foreign

ownership improves firm value.

VI –Ownership Concentration and Firm Performance: A Further Investigation

While testing for the impact of ownership concentration and identity on firm

performance in the previous two sections, we only included in our regressions those

firms in which the ownership structure was characterized by the presence of at least

37 See, for example, Boycko et. al (1996), and Dyck (2001).

one blockholder. As such, 14% of our sample firms were excluded since there was no

concentration of ownership in these firms. In this way, we were testing for the impact

of different levels of concentration on firm performance, as opposed to testing

whether firm performance is sensitive to the actual presence of blockholders. In light

of this, we now extend our analysis to incorporate the latter proposition, i.e. our aim is

now to determine whether firms in which ownership is concentrated perform

significantly different than firms in which ownership is not concentrated.

We investigate the above proposition by first carrying out statistical tests (parametric

t-test and non-parametric Mann-Whitney test) to compare the performance of the 260

firms with concentrated ownership to that of the 44 firms with no concentrated

ownership (see Appendix III for more details). The results are reported in table (13),

and they preliminarily indicate that there are no significant differences in any of the

performance measures between the two sets of data.

In an effort to investigate further, we also estimate the regression below, which

captures whether the presence of blockholders significantly affects performance, after

controlling for country-and firm-level variables:

ittitititit CLVFLVCONCDUMPERF εγυβδ +++++= 11 (4)

where CONCDUMit is a dummy variable which takes one if firm i is characterized by

the presence of at least one blockholder at time t, and where the country-and firm-

level variables are the same as those used in equation (2a).

The results, which are shown in table (14), duplicate qualitatively those found in table

(9). Most important are the coefficients pertaining to CONCDUM, which indicate that

although the presence of a blockholder does not affect the accounting performance

measures, it does significantly raise the Q-ratio. This complements our previous

finding with respect to the impact of ownership concentration on the market valuation

of firms. It also allows us to refine our conclusion as follows: although ownership

concentration has no impact on accounting performance measures, not only does the

presence of blockholders improve the market va luation of firms, but also the higher

the level of such ownership concentration the higher the market valuation.

VII – Conclusion

Using a sample of more than 300 representative Arab firms, the paper studied the

determinants of ownership concentration, and the effect of this and other aspects of

corporate governance on firm performance and profitability. The following

conclusions and policy recommendations could be summed up from the analysis:

1) Ownership concentration in Arab corporations seem to be negatively associated

with legal protection, thus vindicating the view of La Porta et. al. In addition, more

active stock markets and fewer restrictions on economic activity are correlated with

dilution and less concentration of corporate ownership. Hence, if the latter is desired

in its own right, then naturally better laws protecting investors and their

implementation and more developed stock markets are surely welcome.

2) Contrary to economic intuition, the reality is that Arab financial institutions have

less ownership concentration than corporations in other sectors. This is partly

explained by a sizeable foreign participation, but perhaps more importantly it implies

that further privatizations of Arab state banks should not be discouraged by the lack of

foreign participation and the fear of more concentrated ownership.

3) Notwithstanding the desirability of less concentrated ownership, it does not seem to

have a significant effect on Arab firms’ profitability and performance measures. Nor

does the separation between CEO and chairperson positions. This means that – at least

in the short term and especially given the fact that firms typically raise equity not so

much in public markets but through family ties or personal relationships – legal

protection of creditors is more important than improving other aspects of corporate

governance since any substantial growth in external finance is likely to take the form

of debt.

4) Q-ratios tend to be positively related to concentrated ownership, presence of

blockholders, and conflation of CEO and chairperson positions. However, this result

seems to depend more on reputational effects and lower agency costs than on market

fundamentals pertaining to firms’ actual performance, as previous research had

indicated38. Hence, future improvements in corporate governance practices are better

gauged through their effect on performance measures rather than market measures.

5) Large-size firms and firms operating in a less open economic environment have

higher profitability and performance measures than other firms. This could be the

result of favorable advantages seized by monopoly power, not advantages gained

through more efficiency. As a result, efforts that aim at better corporate practices

38 See Bolbol and Omran (2003).

should be coupled with reforms of product markets, competition policy, and the

overall operating environment for firms.

6) The identity of owners matters more than the concentration of ownership.

Particularly important in this regard is the negative association of individual investors

with performance measures in financial institutions, a result that could be explained

by the tendency of individual owners to manage banks’ assets recklessly in the

absence of checks and oversight by other major owners. Also interesting is the lack of

a significant relation between foreign investors and performance measures but the

presence of a positive one with market measures. This, however, should not mean

taking a neutral or indifferent stand regarding foreign investors, because of the better

governance practices that they could bring to domestic markets (as reflected by the

higher Q-ratios), and consequently should not act as a deterrent for attracting more of

them.

Table (1) : Number of Sample Firms in Each

Country, Classified According to Industry Affiliation

ManufacturingNon-

ManufacturingFinancial

Institutions* Services Total

Egypt 45 6 21 9 81

Jordan 56 2 29 29 116

Oman 37 3 12 18 70

Tunisia 8 0 18 11 37

Pool 146 11 80 67 304

* Includes banks, insurance and investment firms.

Table (2) : Descriptive Statistics of Firm - Level Data

Panel A : Egypt ( 239 Observations)

Mean Median Minimum Maximum Std. Dev.

MV 88,469 35,294 623 2,170,795 190,088 ASSETS 379,623 101,148 8,692 4,375,919 667,572 ROA 7.0 % 6.1 % -10.0 % 24.7 % 0.06 ROE 18.9 % 17.3 % -46.1 % 72.3 % 0.14 Q 1.01 0.98 0.34 2.35 0.31

Panel B : Jordan ( 341 Observations)

MV 46,944 9,309 339 2,482,370 214,085 ASSETS 301,616 15,418 816 20,753,389 1,914,313 ROA 2.1 % 1.4 % -32.5 % 27.5 % 0.09 ROE 3.0 % 3.7 % -66.8 % 59.7 % 0.14 Q 0.98 0.93 0.38 3.08 0.39

Panel C : Oman ( 203 Observations)

MV 26,530 11,313 390 364,785 47,708 ASSETS 75,580 24,278 1,891 1,920,593 234,129 ROA 2.9 % 3.1 % -29.0 % 27.4 % 0.07 ROE 5.2 % 8.6 % -66.8 % 59.8 % 0.18 Q 1.08 0.99 0.41 2.80 0.40

Panel D : Tunisia ( 106 Observations)

MV 53,871 31,749 4,052 288,668 55,254 ASSETS 483,209 90,463 7,934 2,974,467 728,121 ROA 4.4 % 2.0 % -5.9 % 34.0 % 0.06 ROE 12.5 % 11.5 % -48.1 % 51.8 % 0.12 Q 1.19 1.01 0.71 3.38 0.50

Panel E : Pool ( 889 Observations)

MV 54,272 15,321 339 2,482,370 169,183 ASSETS 292,625 33,748 816 20,753,389 1,270,781 ROA 3.9 % 2.9 % -32.5 % 34.0 % 0.08 ROE 8.9 % 9.6 % -66.8 % 72.3 % 0.16 Q 1.04 0.98 0.34 3.38 0.39

MV : Market Value in thousands of US$

ASSETS : Total Assets in thousands of US$

ROA : Return on Assets

ROE : Return on Equity

Q : Q - Ratio

Table (3) : Descriptive Statistics for Pooled Country - Level Data


PS 0.40 0.25 -0.44 1.01 0.52

ROL 0.57 0.53 0.09 1.25 0.37

COC 0.31 0.24 -0.29 1.03 0.44

ECFR 3.03 2.94 2.60 3.58 0.33

^ Y

VT / GDP 6.0 % 4.2 % 1.1 % 14.4 % 0.05

0.024.4 % 4.5 % 1.7 % 9.3 %

PS : Political Stability Index (ranges from a low of –2.5 to a high of 2.5)

ROL : Rule of Law Index (ranges from a low of –2.5 to a high of 2.5)

COC : Control of Corruption Index (ranges from a low of –2.5 to a high of 2.5)

ECFR : Economic Freedom Index (ranges from a low of 5 to a high of 1)

^ Y : Rate of Growth of Real GDP

VT / GDP : Value Traded / GDP

PCI : Per Capita Income in US$.

Source : AMF, Economic Indicators of Arab Countries (various issues) and

Database of Arab Stock Markets (various issues); Kaufmann et. al (2003); and

Heritage Foundation, Index of Economic Freedom (www.heritage.org).

Table (4) : Ownership Structure

Panel A : Egypt (239 Observations )


Local Individuals 18 % 9 % 0 % 99 % 0.23

Local Private Institutions 35 % 30 % 0 % 100 % 0.28

Local Government 34 % 33 % 0 % 95 % 0.28

Local Other 1 % 0 % 0 % 45 % 0.05

Foreign 12 % 0 % 0 % 96 % 0.23

Panel B : Jordan (341 Observations )




Local Other 4 % 1 % 0 % 46 % 0.07

Foreign 15 % 7 % 0 % 97 % 0.20

Panel C : Oman (203 Observations )




Local Other 3 % 0 % 0 % 53 % 0.06

Foreign 10 % 3 % 0 % 66 % 0.14

Panel D : Tunisia (106 Observations )




Local Other * 30 % 30 % 0 % 71 % 0.20

Foreign 18 % 11 % 0 % 78 % 0.22

Panel E : Pool (889 Observations )




Local Other 6 % 0 % 0 % 71 % 0.13

Foreign 14 % 4 % 0 % 97 % 0.20

* Due to data limitations, this entry was calculated as the residual.

Table (5) : Number of Firms whose Ownership Structure

is Characterized by the Presence of At Least One Blockholder *

Panel A : Egypt

Number of firms

% of Total

Number of firms

% of Total

Number of firms

% of Total

Local Individuals 7 9% 8 10% 12 15%Local Private Institutions 41 53% 40 50% 42 52%

Local Government 50 64% 52 65% 54 67%Foreign 14 18% 17 21% 17 21%

Panel B : Jordan

Local Individuals 36 31% 42 36% 42 38%

Local Private Institutions 56 49% 58 50% 59 54%Local Government 22 19% 21 18% 24 22%

Foreign 28 24% 28 24% 23 21%

Panel C : Oman

Local Individuals 23 34% 27 40% 31 45%Local Private Institutions 29 43% 38 57% 38 55%

Local Government 5 7% 7 10% 7 10%

Foreign 8 12% 8 12% 8 12%

Panel D : Tunisia


Local Private Institutions 14 42% 16 43% 17 47%

Local Government 14 42% 15 41% 16 44%Foreign 12 36% 19 51% 19 53%

Panel E : Pool


Local Private Institutions 140 48% 152 51% 156 53%Local Government 91 31% 95 32% 101 34%

Foreign 62 21% 72 24% 67 23%

2000 2001 2002

* A blockholder is defined as an entity owning a minimum of 10% of equity.

Table (6) : Ownership Concentration by Top

Three Blockholders, and by Identity of Blockholders

Panel A : Egypt


Top Three Blockholders 58% 58% 10% 97% 0.21

Local Individuals 42% 36% 10% 90% 0.25 Local Private Institutions 24% 13% 10% 95% 0.22

Local Government 43% 39% 10% 92% 0.22 Foreign 42% 33% 10% 96% 0.28

Panel B : Jordan


Local Individuals 24% 19% 10% 79% 0.15 Local Private Institutions 30% 23% 10% 80% 0.17

Local Government 30% 23% 10% 83% 0.21 Foreign 30% 20% 10% 97% 0.24

Panel C : Oman


Local Individuals 30% 25% 10% 90% 0.18 Local Private Institutions 36% 35% 10% 70% 0.17 Local Government 31% 25% 15% 64% 0.16

Foreign 29% 30% 11% 49% 0.14

Panel D : Tunisia



Foreign 33% 22% 10% 78% 0.22

Panel E : Pool



Foreign 33% 24% 10% 97% 0.24

Table (7) : Tests for Significant Differences in Ownership Concentration

Panel A : Comparison of Differences in Ownership According to Industry Affiliation

Manf. - Non Manf. 48% - 57% -2.09 ** 49% - 60% 205 - 246 ***

Manf. - Services 48% - 48% 0.19 49% - 49% 286 - 281

Manf. - Fin. Inst. 48% - 45% 1.97 ** 49% - 46% 302 - 270 **

Non Manf. - Services 57% - 48% 2.26 ** 60% - 49% 125 - 104 ***

Non Manf. - Fin. Inst. 57% - 45% 2.94 * 60% - 46% 141 - 109 **

Services - Fin. Inst. 48% - 45% 1.62 49% - 46% 202 - 181 ***

Panel B : Comparison of Differences in Ownership According to Country

Egypt - Jordan 58% - 41% 9.07 * 58% - 40% 326 - 214 *

Egypt - Oman 58% - 43% 7.21 * 58% - 46% 229 - 155 *

Egypt - Tunisia 58% - 52% 2.46 ** 58% - 50% 170 - 143 **

Jordan - Oman 41% - 43% -1.16 40% - 46% 229 - 250

Jordan - Tunisia 41% - 52% -4.66 * 40% - 50% 186 - 248 *

Oman - Tunisia 43% - 52% -3.73 * 46% - 50% 125 - 157 *

Panel C : Comparison of Differences in Ownership According to Firm Size

Large - Small 41% - 45% -2.29 ** 42% - 48% 425 - 465 **

Means MediansZ - Statistic for

Differences in MediansAverage Rank

T- Statistic forDifferences in Means

*, **, *** refer to 1%, 5% and 10% levels of significance, respectively.

Table (8) : Regression Results for Ownership Concentration

Independent Variables

-0.01 -0.01 0.00 (-1.63) *** (-1.78) *** (-0.62)

0.01 (0.31)

0.00 (-0.05)

0.01 (0.19)

-0.06 (-2.50) **

0.03 (1.59)

0.18 0.18 0.16 (4.39) * (4.37) * (4.06) *

-0.11 -0.11 -0.12 (-2.43) ** (-2.41) ** (-2.64) *

-0.73 -0.73 -0.73 (-3.04) * (-3.00) * (-3.09) *

N 889 889 889

Adj . R2 ( % ) 9.04 8.93 10.20 F - Ratio 23.82 * 19.02 * 21.76 *5.11

SIZE

IND

ECFR

ROL

VTGDP

MAN

NONMAN

SERV

FIN

Model 1 Model 2 Model 3

Dependent Variable : CONC


Figures in parenthesis are t – statistics.

Table (9) : Regression Results for Performance and Ownership Concentration (Full Sample)

0.00 0.00 0.00 0.01 0.01 0.00 0.09 0.09 0.08 (0.58) (0.64) (0.13) (0.59) (0.63) (0.25) (3.34) * (3.38) * (2.99) *

0.00 0.00 0.00 0.02 0.01 0.02 0.01 0.00 0.02 (0.70) (0.54) (2.30) ** (4.53) * (4.46) * (5.43) * (0.69) (0.41) (1.93) ***

0.03 0.03 0.02 (5.37) * (2.85) * (0.77)

0.03 0.03 0.01 (5.12) * (2.70) * (0.18)

0.01 0.01 0.11 (0.48) (0.43) (1.83) ***

-0.05 -0.06 -0.10 (-6.73) * (-4.19) * (2.66) *

-0.02 -0.01 0.03 (-2.47) * (-0.80) (1.02)

-0.01 -0.01 -0.01 -0.02 -0.02 -0.02 0.06 0.06 0.06 (-1.35) (-1.44) (-1.39) (-1.37) (-1.41) (-1.39) (1.91) *** (1.97) ** (1.90) ***

0.05 0.05 0.04 0.16 0.16 0.15 -0.02 -0.04 -0.03 (4.51) * (4.50) * (4.26) * (7.14) * (6.97) * (6.94) * (-0.38) (-0.60) (-0.61)

0.18 0.19 0.15 0.94 0.94 0.88 0.09 -0.14 -0.08 (1.00) (1.03) (0.79) (2.45) ** (2.42) ** (2.30) ** (0.08) (-0.14) (-0.08)

N 795 795 795 795 795 795 795 795 795

Adj. R2

( % ) 8.97 8.71 10.51 15.67 15.51 16.48 1.06 1.27 2.08 F - Ratio 19.10 * 15.63 * 18.88 * 34.59 * 28.66 * 30.71 * 3.50 * 3.40 * 4.64 *5.11 5.11 5.11 5.11 5.11

RGDP

CONC

FIN

SERV

CEO

ECFR

SIZE

IND

MAN

NONMAN

Model 1

Independent Variables Model 2 Model 3

Dependent Variable : ROA Dependent Variable : ROE


Dependent Variable : Q


*, **, *** refer to 1%, 5% and 10% levels of significance, respectively. Figures in parenthesis are t – statistics.

Table (10) : Regression Results for Performance and

Ownership Concentration (Excluding Financial Institutions)

0.00 0.00 0.00 0.00 0.09 0.09 (0.04) (0.06) (-0.01) (0.01) (2.50) ** (2.44) **

0.01 0.01 0.02 0.02 0.02 0.02 (3.39) * (3.40) * (3.89) * (3.90) * (1.18) (1.16)

0.01 0.01 -0.04 (1.93) *** (0.95) (-1.01)

0.01 0.01 -0.05 (2.03) ** (0.99) (-1.31)

0.00 0.00 0.14 (0.10) (0.09) (1.64) ***

-0.01 -0.01 -0.02 -0.02 0.10 0.10 (-0.90) (-0.95) (-1.27) (-1.29) (2.20) ** (2.35) **

0.05 0.05 0.17 0.17 0.00 -0.01 (3.46) * (3.51) * (6.05) * (6.06) * (-0.03) (-0.15)

0.21 0.22 1.15 1.16 -0.04 -0.17 (0.95) (0.99) (2.48) ** (2.49) ** (-0.03) (-0.13)

N 552 552 552 552 552 552 Adj. R

2 ( % ) 9.62 9.59 17.76 17.65 1.29 2.01

F - Ratio 15.32 * 12.90 * 29.46 * 24.54 * 3.28 * 3.70 *5.11 ## 5.11 ## 5.11

Model 5 Model 6

CONC

Independent Variables Model 1 Model 2 Model 3 Model 4

RGDP

Dependent Variable: ROA Dependent Variable: ROE Dependent Variable: Q

CEO

ECFR

SIZE

IND

MAN

NONMAN



Table (11) : Regression Results for Performance and Ownership Identity (Full Sample)

-0.02 -0.02 -0.01 -0.04 -0.03 -0.03 -0.05 -0.05 -0.03 (-1.83) *** (-1.70) *** (-1.37) (-1.84) *** (-1.80) *** (-1.51) (-0.99) (-1.09) (-0.53)

0.02 0.02 0.01 0.04 0.04 0.03 0.28 0.27 0.23 (1.04) (1.06) (0.53) (1.00) (1.03) (0.66) (2.76) * (2.67) * (2.27) **

0.01 0.01 0.01 0.04 0.04 0.03 0.16 0.16 0.12 (1.27) (1.46) (0.59) (1.77) *** (1.87) *** (1.25) (2.89) * (2.88) * (2.14) **

0.01 0.01 0.00 0.01 0.01 0.01 0.28 0.28 0.28 (0.51) (0.53) (0.47) (0.56) (0.57) (0.52) (5.04) * (5.04) * (5.03) *

0.00 0.00 0.00 0.01 0.01 0.02 0.00 -0.01 0.01 (0.47) (0.33) (1.90) *** (4.03) * (3.97) * (4.70) * (-0.31) (-0.66) (1.17)

0.03 0.03 0.03 (5.43) * (2.89) * (0.95)

0.03 0.03 0.01 (5.22) * (2.82) * (0.32)

0.01 0.01 0.12 (0.69) (0.64) (2.02)

-0.05 -0.06 -0.12 (-6.50) * (-3.82) * (-3.06) *

-0.02 -0.01 0.04 (-2.63) * (-1.09) (1.14)

-0.01 -0.01 -0.01 -0.02 -0.02 -0.02 0.05 0.05 0.04 (-1.37) (-1.42) (-1.48) (-1.31) (-1.34) (-1.38) (1.46) (1.51) (1.28)

0.04 0.04 0.04 0.15 0.14 0.14 -0.04 -0.05 -0.04 (4.00) * (3.91) * (3.96) * (6.45) * (6.21) * (6.42) * (-0.61) (-0.84) (-0.68)

0.17 0.17 0.15 0.91 0.89 0.87 0.29 0.05 0.16 (0.94) (0.92) (0.81) (2.36) ** (2.27) ** (2.27) ** (0.29) (0.05) (0.16)

N 795 795 795 795 795 795 795 795 795 Adj. R2 ( % ) 9.24 9.00 10.46 16.19 14.94 16.68 2.57 2.82 3.87 F - Ratio 12.67 * 11.09 * 12.87 * 22.82 * 20.22 * 21.09 * 4.30 * 4.19 * 5.30 *

RGDP

INSTCONC

GOVCONC

FORCONC

FIN

SERV

CEO

ECFR

SIZE

IND

MAN

NONMAN

Model 7 Model 8 Model 5 Model 6 Model 9

INDVCONC


Dependent Variable : ROA Dependent Variable : ROE Dependent Variable : Q

Model 1 Model 2 Model 3 Model 4


Table (12) : Regression Results for Performance and

Ownership Identity (Excluding Financial Institutions)

0.00 0.00 -0.01 -0.01 0.15 0.14 (-0.16) (-0.12) (-0.34) (-0.31) (1.75) *** (1.61) ***

0.00 0.00 -0.01 -0.01 0.13 0.13 (-0.02) (-0.01) (-0.24) (-0.23) (1.63) *** (1.61) ***

0.00 0.00 0.03 0.02 0.16 0.15 (0.14) (0.18) (0.85) (0.88) (2.06) ** (1.93) ***

0.02 0.01 0.02 0.02 0.44 0.45 (1.00) (0.99) (0.51) (0.51) (5.14) * (5.19) *

0.01 0.01 0.02 0.02 0.00 0.00 (2.90) * (2.92) * (3.16) * (3.16) * (0.22) (0.18)

0.01 0.01 -0.06 (1.83) *** (1.02) (-1.45)

0.01 0.02 -0.07 (1.91) *** (1.06) (-1.78) ***

0.00 0.00 0.15 (0.15) (0.11) (1.74) ***

-0.01 -0.01 -0.02 -0.02 0.06 0.07 (-1.12) (-1.15) (-1.12) (-1.13) (1.39) (1.49)

0.05 0.05 0.17 0.17 -0.01 -0.03 (3.35) * (3.39) * (5.82) * (5.83) * (-0.18) (-0.32)

0.23 0.24 1.19 1.19 0.28 0.15 (1.03) (1.06) (2.55) ** (2.56) ** (0.22) (0.11)

N 552 552 552 552 552 552 Adj. R

2 ( % ) 9.51 9.46 17.84 17.74 4.87 5.85

F - Ratio 9.85 * 8.82 * 18.89 * 16.79 * 5.51 * 5.78 *5.11 ### 5.11 ### 5.11



Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

INDVCONC

SIZE

IND

MAN

INSTCONC

GOVCONC

FORCONC

NONMAN

CEO

ECFR

RGDP



Table (13) : Tests for Significant Differences in Firm Performance

Panel A : Comparison of Differences in ROA

Concentrated vs. Non-Concentrated

3.9% - 3.7% 2.9% - 2.9%

Panel B : Comparison of Differences in ROE


8.9% - 8.8% 9.6% - 8.3%

Panel C : Comparison of Differences in Q - Ratio


1.04 - 0.99 0.98 - 0.97

MeansT- Statistic for

MediansZ - Statistic for

Differences in MediansDifferences in Means

Average Rank

0.31 446 - 432




Average Rank




Average Rank

1.37 448 - 418

0.07 446 - 436

Table (14) : Regression Results for Performance and Ownership Concentration Dummies (Full Sample)

0.00 0.00 0.00 -0.01 -0.01 -0.01 0.07 0.07 0.06 (-0.29) (-0.30) (-0.53) (-0.55) (-0.55) (-0.74) (1.66) *** (1.72) *** (1.46)

0.00 0.00 0.00 0.01 0.01 0.02 0.01 0.00 0.02 (0.65) (0.66) (2.27) ** (4.47) * (4.47) * (5.40) * (0.59) (0.57) (1.95) ***

0.03 0.03 0.02 (5.36) * (2.83) * (0.82)

0.03 0.03 0.01 (5.39) * (2.82) * (0.34)

0.02 0.03 0.21 (1.49) (0.94) (2.91) *

-0.05 -0.06 -0.01 (-6.76) * (-4.22) * (-2.85) *

-0.02 -0.01 0.04 (-2.43) ** (-0.74) (1.11)

-0.01 -0.01 -0.01 -0.02 -0.02 -0.02 0.06 0.07 0.06 (-1.38) (-1.41) (-1.42) (-1.41) (-1.42) (-1.44) (1.98) ** (2.15) ** (1.97) **

0.05 0.05 0.05 0.15 0.16 0.15 0.00 -0.01 -0.02 (4.63) * (4.66) * (4.32) * (7.30) * (7.30) * (7.05) * (-0.02) (-0.18) (-0.30)

0.19 0.19 0.15 0.95 0.96 0.89 0.16 0.06 -0.03 (1.02) (1.05) (0.81) (2.49) ** (2.49) ** (2.32) ** (0.16) (0.06) (-0.03)

N 889 889 889 889 889 889 889 889 889

Adj. R2 ( % ) 8.94 8.89 10.54 15.66 16.42 16.53 0.12 0.89 1.32

F - Ratio 19.04 * 15.93 * 18.93 * 34.59 * 28.79 * 30.80 * 1.81 *** 2.83 * 3.48 *5.11 5.11 5.11 5.11 5.11

Model 8 Model 9

CONCDUM




IND

MAN

NONMAN

Model 7 Model 4 Model 5 Model 6

SIZE

RGDP

FIN

SERV

CEO

ECFR


Appendix I

The accounting and ownership data for the four countries were obtained from

the following sources: Jordan, Amman Stock Exchange: Jordanian

Shareholding Companies Guide; Egypt, Kompass Egypt Financial Yearbook;

Oman, Muscat Securities Market (MSM): Shareholding Guide of MSM Listed

Companies; and Tunisia, Bourse de Tunis: www.bvmt.com.tn.

Appendix II

Country–Level Variables

Panel A : Egypt

2000 2001 2002

PS 0.05 0.21 -0.35 ROL 0.23 0.21 0.09 COC -0.19 -0.16 -0.29 ECFR 3.58 3.53 3.53 ^ Y VT/GDP 12.04% 7.01% 8.95%

Panel B : Jordan

PS 0.25 0.13 -0.44 ROL 0.57 0.66 0.33 COC 0.13 0.09 0 ECFR 2.95 2.85 2.73 ^ Y VT/GDP 4.79% 10.58% 14.36%

Panel C : Oman

PS 1.01 1 0.98 ROL 1.25 1.06 0.83 COC 0.72 0.44 1.03 ECFR 2.93 2.6 2.78 ^ Y VT/GDP 2.78% 2.11% 2.87%

Panel D : Tunisia

PS 0.86 0.82 0.24 ROL 0.48 0.81 0.27 COC 0.7 0.86 0.35 ECFR 2.94 3.04 2.89 ^ Y VT/GDP 3.53% 1.71% 1.06%

4.70% 4.90% 1.70%

5.50% 9.30% 2.30%

4.20% 4.90%

5.10% 3.50% 2.00%

4.20%

Source: Same as Table ( 3 )

Appendix III

Number of Firms in Each Country That Are

Characterized by the Presence/ Absence of Concentrated

Ownership, Classified According to Industry Affiliation

Number %

Egypt 41 5 18 9 73 90%

Jordan 48 2 24 26 100 86%

Oman 27 2 10 13 52 74%

Tunisia 8 0 16 11 35 95%

Number 124 9 68 59 260 86%% 85% 82% 85% 88% 86% --

Number %

Egypt 4 1 3 0 8 10%

Jordan 8 0 5 3 16 14%

Oman 10 1 2 5 18 26%

Tunisia 0 0 2 0 2 5%

Number 22 2 12 8 44 14%% 15% 18% 15% 12% 14% --

Pool

Pool

Panel B : Firms Without Ownership Concentration

ManufacturingNon-


Institutions*Services

Total

Panel A : Firms With Ownership Concentration

ManufacturingNon-


Institutions*Services

Total

* Includes banks, insurance and investment firms.

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