THE IMPACT OF CONCENTRATED LEVERAGE AND OWNERSHIP ON FIRM PERFORMANCE: A CASE IN PAKISTAN

. Background: The objective of this study is to determine the impact of concentrated leverage and ownership (high levels of control and power) on firm performance in the case of Pakistan’s logistics sector separately in the presence and absence of growth options available to the firm. Both leverage and ownership concentration can have a significant influence on firm performance in either a positive or a negative way.

Methods:  In the data sample of this study, 141 companies in Pakistan listed on the Karachi Stock Exchange were selected with a study window from 2008 to 2018. The selection criteria for our sample study are based on firms with the highest market capitalization. Using a Panel based regression methodology, Generalized Methods of Estimating Equations are applied, which cover for 1st and 2nd order serial correlation and controls for endogeneity and autocorrelation problems.

Results: The overall results indicate that the availability and non-availability of growth options to firms are very important factors in analyzing ownership concentration and debt influence on firm performance. This paper takes growth option availability and non-availability as dummy variables and finds that in the presence of growth options, non-linear relations are found between firm performance and ownership concentration and positive significant relations of debt with firm performance. Whereas, in the absence of growth opportunities, inverse parabola relations are depicted of ownership concentration and firm performance, and negative relations between debt and firm performance.

Conclusions: Financial leverage represents a two part structure, negative in the presence of growth options and positive in the absence of growth options. The study demonstrates that high levels of power concentrated in the hands of owners leads to a convergence and entrenchment effect depicting non-linear relations with financial performance in both the availability and non-availability of growth options. Furthermore, the study also revealed that the explanatory power of results with a sales rate of growth (as a growth options measurement proxy) is higher than the Price to Earnings Ratio measurement proxy.