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Does Ownership Structure Affect Performance?

Evidence from the Italian Market

Article in Corporate Governance An International Review October 2008

DOI: 10.1111/j.1467-8683.2008.00695.x

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312 CORPORATE GOVERNANCE

Does Ownership Structure Affect Performance?

Evidence from the Italian Market
Francesco Perrini*, Ginevra Rossi and Barbara Rovetta

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This paper aims at exploring the relationship between ownership structure and rm performance
in the context of a small European capital market. Further developing existing literature, we acknowledge the multi-
dimensionality of ownership by including both the fraction of shares owned by the ve largest shareholders and the
fraction of shares owned by management.
Research Findings/Results: Using panel data for the period 20002003 with respect to the Italian market, we nd that the
ownership concentration of the ve largest shareholders is benecial to rm valuation. On the contrary, managerial
ownership is benecial only in non-concentrated rms, suggesting that the controlling owner may use his/her position in
the rm to extract private benets at the expense of the other shareholders by appointing managers that represent its own
interest.
Theoretical Implications: This study provides empirical support for the agency theory and the managerial entrenchment
argument. As such, it suggests new avenues of research for the ownership structure literature willing to reect the diverging
interests of different types of shareholders and to explore both endogeneity and non-linearity issues.
Practical Implications: This study contributes to the recent debate on the effects of government regulations inspired by the
Anglo-Saxon model of corporate governance in the small European countries. In questioning the alleged competitive
superiority of the widely held company, our paper also suggests that the existence of good corporate law is not a sufcient
condition for the development of a corporate economy resembling the US model.

Keywords: Corporate Social Responsibility, Corporate Governance Code, Stakeholders

INTRODUCTION between unmonitored managers and widely dispersed

shareholders. The vast majority of contributions on the topic

T he effect of ownership structure on rm performance

has been the subject of an important and ongoing
debate in the corporate nance literature. The debate goes
back to the contributions of Berle and Means (1932) and
Chandler (1962), which observe a correlation between own-
ership concentration and rm performance and discuss
the role of the visible hand of management. Subsequent
empirical studies have failed to reach a consensus regarding
the effect of ownership structure on company performance.
In addition, the majority of relevant studies are based on the
US market, where rms are widely held and agency conict
between unmonitored managers and widely dispersed
shareholders emerges. The traditional agency theory
approach emphasizes the potential conict of interest
*Address for correspondence: Bocconi University, Department of Management, Viale
Filippetti 9, 20136, Milan, Italy. Phone: +39-02-5836-3624; Fax: +39-02-5836-3691;
E-mail: francesco.perrini@unibocconi.it
mainly focus on this conict, typical of the outsider or
market-based system. Most of the literature on the issues of
ownership structure is from an Anglo-American perspective
and assumes a widely dispersed ownership. The conict
between majority and minority shareholders, typical of
most economic contexts outside the US and UK, has long
been ignored.
Recently, some authors have investigated the relationship
between ownership and performance for the markets
outside the US, but the few studies addressing the issue
mostly focus on the effect of family control on rm value and
performance, failing to reect the fact that company owners
are a collection of stakeholders with potentially diverging
interests. Contrary to what has been documented in previ-
ous research, Gedajlovic and Shapiro (1998) nd that in the
USA and Germany the entrenchment effect is dominant
for low shareholdings while an incentive effect emerges
for high levels of ownership. Maury (2005) explores this

2008 The Authors

Volume 16 Number 4 July 2008 Journal compilation 2008 Blackwell Publishing Ltd
doi:10.1111/j.1467-8683.2008.00695.x
DOES OWNERSHIP STRUCTURE AFFECT PERFORMANCE?
relationship on a sample of European companies, and shows
that family ownership generates better economic and nan-
cial performance. Kapopoulos and Lazaretou (2007) are
among the few authors testing the relationship between
ownership structure and rm performance in the context of
a small European capital market such as the Athens Stock
Exchange, and they nd evidence that a more concentrated
ownership structure positively relates to higher rm prot-
ability. However, rms listed on the Greek stock market only
have the legal obligation to announce changes in voting
rights for those owners with a share above 5 percent. There-
fore, the lack of data for equity owners with a share below
this threshold imposes a constraint on their empirical analy-
sis. In addition, their study only covers listed rms for the
year 2000, not allowing panel data analysis.
Further developing their study, we examine the relation-
ship between ownership structure and rm performance
using panel data for the period 20002003 with respect to
the Italian market, where data for equity owners with a
share above 2 percent are available. From this perspective,
the Italian case provides unique information, useful to
shed new light on the extremely limited empirical evidence
regarding the relationship between ownership and perfor-
mance in the context of a small and young European stock
market. The peculiarity of the Italian economic system has
long been known (Mengoli, Pazzaglia and Sapienza, 2007;
Bianchi and Bianco, 2006). Barca (1994) argues that Italian
capitalism, where pyramidal groups and family control are
predominant, represents a strong obstacle to capital market
development. Similarly, Crisci and Tarizzo (1995) identify
the lack of separation between ownership and control and
the near absence of real public companies as typical char-
acteristics of the Italian market. The presence of weak man-
agers, strong block shareholders and unprotected minority
shareholders (Mengoli et al., 2007: 7) is a possible conse-
quence of this practice (Roe, 1994). Zattoni (1999) shows
that the majority of Italian companies have one single
shareholder owning more than 51 percent and that in most
cases such shareholder is represented by a family. In the
United States, on average one third of the companies can
be classied as family-controlled (Anderson and Reeb,
2003; Villalonga and Amit, 2006), compared with around 77
per cent of the companies in Italy, 63 per cent in France and
48 per cent in Germany, according to Barontini and Caprio
(2005). The authors also show that half of the European
companies have a shareholder with more than 37 per cent
of ownership, and that half of the Italian companies have a
shareholder with more than 52 per cent of ownership.
Despite the regulatory changes introduced by the Draghi
Law (1998) and the Preda Code (1999), the current Italian
system still maintains many of these characteristics. The
Draghi Law, also known as the Corporate Governance
Reform, represented the rst step towards the reform of the
Italian corporate law, attributing increasing rights to voice
minority shareholders and improving the standards of
nancial communication for listed companies1. The Preda
Code, also known as the Code of Conduct, has been intro-
duced in 1999. It rules the composition, appointment and
role of Board of Directors. As a code of conduct, the code is
an organizational and operational reference model and does
not give rise to legal obligations, but, in line with common
2008 The Authors
Journal compilation 2008 Blackwell Publishing Ltd
313
practices from other developed nancial markets, it repre-
sents a guide to best practice for listed companies and it is a
crucial reference for rms aiming at maintaining a strong
and constant relationship with the nancial market. Despite
the voluntary nature of this regulation, the vast majority of
Italian companies comply with the Code (Mengoli et al.,
2007). Bianchi and Bianco (2006) show that the Italian own-
ership and control structure is today still characterized by a
high ownership concentration, and that no radical change
occurred after the introduction of the new corporate gover-
nance regulations, as they nd limited changes in the own-
ership and control structures of both unlisted and listed
companies.
Starting from the premises of agency theory (Jensen and
Meckling, 1976) concerning the relationship between own-
ership structure and rm performance, our paper sheds
light on the positive effect of concentrated ownership on
performance in the context of a small European capital
market. In this study, we examine this relationship for all the
publicly traded Italian companies, acknowledging the multi-
dimensionality of ownership and controlling for endogene-
ity. We investigate if, in a market largely based on family
control, the classic owner-manager conict described by
Berle and Means (1932) and Jensen and Meckling (1976) is
mitigated due to the large shareholders greater incentive to
monitor the manager or if on the contrary the large share-
holder may use its controlling position to extract private
benets at the expense of the small shareholders. In line with
Villalonga and Amit (2006), we expect ownership concentra-
tion to reduce the agency conict between owner and
manager, and therefore we anticipate ownership concentra-
tion to positively affect rm valuation. In addition, we expect
managerial ownership to negatively affect rm valuation in
concentrated companies, as the managerial ownership is not
a mechanism for reducing agency conicts when managers
are expression of the interests of the main shareholder. To
our knowledge, with respect to the context of European
capital markets with concentrated ownership and a brief
history in corporate governance, no research has examined
the relationship between ownership structure and rm per-
formance on such comprehensive data set. In this paper, we
make an attempt at lling this gap.
Following Demsetz and Villalonga (2001), we include
both the fraction of shares owned by the ve largest share-
holders and the fraction of shares owned by management, to
reect the fact that the interests of different types of stake-
holders might diverge, and we model ownership structure
as an endogenous variable. Further, following Maury (2005)
we also focus on the nature of the main shareholder, to
verify if, in the Italian market, where ownership concentra-
tion has been historically high and the vast majority of the
companies are controlled by families, family rms outper-
form non-family rms. We provide descriptive statistics both
for the total sample and the sample broken down in sub-
categories (concentrated and non-concentrated companies,
family and non-family companies). Then we explore the
relationship between ownership and performance through
robust regressions with clusters and we model different
ownership structure variables as endogenous, using both
OLS, 2SLS and panel data analysis. To our knowledge, no
published paper has explored this issue with respect to the
Volume 16 Number 4 July 2008
314
Italian market after the regulatory changes introduced by
the Draghi Law (1998) and the Preda Code (1999).
Our evidence supports the results of Kapopoulos and
Lazaretou (2007) for the Greek market. We nd that the
ownership concentration of the ve largest shareholders is
benecial to rm valuation, as the benets of ownership
concentration make minority shareholders better off than
they would be in a rm with low ownership concentration
levels. However, managerial ownership is benecial only
in non-concentrated rms, suggesting that the shareholder
controlling more than 50 percent of the shares may use its
controlling position in the rm to extract private benets at
the expense of the other shareholders by appointing man-
agers that represent its own interest. Finally, in line with
Villalonga and Amit (2006), we cast doubt on the fact that
family ownership per se creates or destroy value.
We believe our study makes a number of contributions to
the corporate governance literature. First, we contribute to
the debate on the effects of the monitoring provided by
concentrated ownership to rm performance. Second, we
provide evidence in support of the managerial entrench-
ment argument. Third, we further develop the understand-
ing of the Italian market by conrming that this market is far
from perfect, as a systematic relationship between owner-
ship structure and rm valuation can be found. And nally,
we support the results of Kapopoulos and Lazaretou (2007)
by removing the main constraints in their empirical analysis.
The remainder of the paper is organized as follows. In
the following section we present a review of the relevant
literature. We then describe the sample and provide the
descriptive statistics. We nally illustrate our results on the
relationship between ownership and rm valuation, and
present some robustness tests for the main results. The last
section concludes.
OWNERSHIP AND PERFORMANCE
IN PRIOR LITERATURE
Among the corporate governance mechanisms affecting
company performance, ownership structure has received
signicant attention from nance scholars and the invest-
ment community. The agency theory suggests that concen-
trated ownership will result in more effective monitoring.
Thus, ownership should be a relevant component of corpo-
rate governance systems. Although the effects of ownership
on company performance have been extensively explored,
the results have largely been mixed. Morck, Shleifer and
Vishny (1988), in a widely cited paper, address the relation-
ship between insider ownership and rm value (proxied by
Tobins Q) in the US market. They nd a non-monotonic
roof-shaped relationship between rm value and manage-
rial stock ownership. They explain this evidence through the
incentive and entrenchment integrated theory. This evi-
dence nds additional support in McConnell and Servaes
(1990), who identify an optimal ownership threshold
around 40 percent for US companies. Short and Keasey
(1999) nd similar results on the UK market and identify an
inection point at 12 percent ownership. Theoretically, an
increase in ownership concentration should lead to a reduc-
Volume 16 Number 4 July 2008
CORPORATE GOVERNANCE
tion in the costs deriving from the separation between own-
ership and control, with benecial effects in terms of
performance. However, the large shareholder may use its
controlling position in the rm to extract private benets at
the expense of the small shareholder. An increase in mana-
gerial share ownership when management already owns a
moderate level of a rms capital also results in managers
being more entrenched. This increases the risk that they
pursue interests other than those of the small shareholder.
Fama and Jensen (1983) note that the combination of owner-
ship and control allows concentrated shareholders to
exchange prots for private rents.
In addition to ownership concentration, which determines
the percentage of cash ow rights, researchers have widely
explored the identity of the main owner and its effects
on rm performance. Morck, Stangeland and Yeung (2000),
in a study on Canadian rms, argue that family business
groups can have serious corporate governance problems
leading to negative economic results. According to the
authors, families are used to reserving the executive posi-
tions for family members and investing in low risk (and low
return) projects, with detrimental effects in terms of share-
holder value. On a different line, a number of studies report
a positive correlation between family control and rm per-
formance and suggest that familys presence and control of
management lead to a reduction of the free-riding risk and
to a mitigation of the incentives for myopic investment deci-
sions by managers (Anderson and Reeb, 2003). With respect
to the US market, Mehran (1995) nds no signicant rela-
tionship between performance and ownership for different
types of shareholders (families, institutional investors and
companies). Following Himmelberg, Hubbard and Palia
(1999), Holderness (2003) analyzes the effect of insider and
block ownership on rm performance and concludes that
ownership appears to have little impact on rm value.
Recently, some studies on the relationship between
corporate ownership and rm performance have started to
acknowledge the multi-dimensionality of ownership, to
reect potentially diverging interests of different types of
owners. Demsetz and Villalonga (2001), in analyzing the
relationship between ownership and performance with
respect to the widely explored US market, are the rst to
consider two ownership level variables: the level of institu-
tional shareholding and the level of insider shareholding.
Their evidence does not support the belief that ownership
structure affects rm performance, and they explain this
result through the hypothesis that ownership structures,
whether diffuse or concentrated, that maximize sharehold-
ers expected returns are those that emerge from the inter-
play of market forces (Demsetz and Villalonga, 2001: 212).
They conclude that the market in which ownership struc-
tures are formed is not so imperfect as to create a systematic
relation that is left undisturbed by investors who seek to
maximize the returns they earn. Following Demsetz and
Villalonga (2001), Welch (2003) investigates the issue on
the US market when ownership is multi-dimensional and
institutional shareholding, insider shareholding and per-
formance measures are part of a joint endogenous system.
Results suggest that higher proportions of institutional
shareholding are associated with stronger rm perfor-
mance, measured by Tobins Q.
2008 The Authors
Journal compilation 2008 Blackwell Publishing Ltd
DOES OWNERSHIP STRUCTURE AFFECT PERFORMANCE?
With respect to Western European corporations, Maury
(2005) provides evidence that the benets from family
control occur in non-majority held rms, suggesting that
family control lowers the agency problem between owners
and managers but generates conicts between the family
and the minority shareholders. With respect to the same
geographical area, Barontini and Caprio (2005) show that
family control is positive for rm value in Continental Euro-
pean rms. In a recently published paper, Kapopoulos and
Lazaretou (2007) test the relationship between ownership
structure and rm performance using data for 175 Greek
listed rms. By modeling ownership structure as an endo-
genous variable and by considering different measures of
ownership to reect different groups of shareholders with
conicting interests, they nd evidence that a more concen-
trated ownership structure positively relates to higher rm
protability.
In line with these contributions, we expect ownership
concentration to mitigate the agency conict between owner
and manager in the Italian market, thus positively affecting
rm valuation, and we anticipate managerial ownership not
to represent a mechanism for reducing agency conicts in
concentrated rms.
SAMPLE SELECTION AND
DESCRIPTIVE STATISTICS
In Italy, rms are required to provide Consob (the Italian
Securities Exchange Commission) with a list of all share-
holders with stakes larger than 2 percent. Using this infor-
mation, included in the Consob database we had access to,
we get to know the identity of each relevant shareholder and
we are able to identify the ultimate owners. Our sample
includes all publicly traded Italian companies over the
period 20002003: it consists of 297 companies for 921 rm-
year observations. All the measures for the ownership struc-
ture and corporate governance variables come from the
Consob Database; all the nancial data are from Datastream.
The variables Ownership (rst, second, third, fourth and fth)
Shareholder measure the fraction of shares owned by each of
the ve largest shareholders in the company. The variable
Ownership 5sh measures the control rights held by the ve
largest shareholders. In line with previous literature on the
topic (Morck et al., 1988; Cho, 1998; Demsetz and Villalonga,
2001; Kapopoulos and Lazaretou, 2007) the dependent
variable is rm performance as measured by Tobins Q.
We estimate Tobins Q as the ratio between market value of
total assets and book value of total assets.
Managerial ownership includes shares owned by members
of the corporate board, the CEO and the top management.
Demsetz and Villalonga (2001) note the importance of dif-
ferentiating between ownership by top shareholders and
insiders, as these two measurements provide an indication
of the relative power held by two parties with arguable the
most diverging interests of all shareholders. Following
them, we rely on both the fraction of shares owned by the
ve largest shareholders and the fraction of shares owned
by management, to give a more accurate picture of the
ownership-performance relation. In line with the two
authors, we nd that the fraction of shares owned by the ve
2008 The Authors
Journal compilation 2008 Blackwell Publishing Ltd
315
largest shareholders and the fraction of shares owned by the
management are positively correlated, but not so much so as
to allow a claim that one is redundant.. # relevant shareholders
is the number of shareholders reporting 2 percent stakes to
Consob. The Concentrated ownership dummy is used to control
for rms that do have one single shareholder owing more
than 50 percent of the shares. The Multiple blockholders
dummy is set equal to one if there is another owner with at
least 10 percent of the shares in the rm, and zero otherwise.
Following Maury (2005), the Family ownership dummy is a
dummy variable that equals to one if the largest controlling
ultimate shareholder is a family2. Finally, the Financial own-
ership dummy is set equal to one if the largest controlling
ultimate shareholder is a nancial institution.
Several variables are used to control for rm specic and
industry characteristics. Return on Equity is used to measure
companys protability. Growth in net sales from the previ-
ous year is used to proxy the value of growth opportunities.
Debt to Asset and Liquidity ratio are used to capture the
effect of companys nancial policy. Firm size is measured
by the logarithm of total assets. We partition the companies
in the sample in three industries: nancial, industrial and
other. Financial dummy is a variable that equals one for
nancial companies. Industrial dummy is a variable that
equals one for industrial companies. To control for poten-
tially relevant corporate governance variables, we include in
our analysis the number of directors sitting on the board,
Board size, and the number of other board appointments
held by the directors sitting on the board, Directorships per
director3. A number of studies (Fich and Shivdasani, 2006;
Coles, Daniel and Naveen, 2005) report a relationship
between board characteristics and rm performance. Large
boards are less effective at monitoring managers (Jensen,
1993; Lipton and Lorsch, 1992). Agrawal and Knoeber
(1996), Barnhart and Rosenstein (1998) and Yermack (1996)
report a negative correlation between board size and
various measures of rm performance. Similarly, multiple
director appointments per director may reduce director
effectiveness in monitoring (Fich and Shivdasani, 2006),
thus negatively affecting corporate performance. We
include market risk, Market risk, and rm-specic risk, Firm
risk, to take into account different risk proles associated
with different companies. Market risk is the Beta coefcient
obtained from a regression of 5 years of monthly stock
returns on monthly market returns. Firm risk is the average
standard deviation in the companys stock prices of the
year. Table 1 describes the main variables of our study.
Table 2 provides descriptive statistics. On the full sample,
the average ownership of the rst shareholder (47.62
percent) and of the ve largest shareholders (62.38 percent)
show high average ownership concentration. The average
ownership of the other relevant shareholders is much lower
than that of the rst shareholder, and is equal to 7.46 percent,
3.81 percent, 2.19 percent and 1.31 percent, respectively. On
average, the management owns about 15.07 percent of the
company and the average number of relevant shareholders
per company is around 4. A typical board has approximately
14 directors and the average number of other directorships
per director is about 0.83. In untabulated results, we nd that
the correlation between the ownership of ve largest share-
holders and the level of managerial ownership is quite low
Volume 16 Number 4 July 2008
316 CORPORATE GOVERNANCE

TABLE 1
Variable Denitions

Variable Description

Ownership rst shareholder (%)
Ownership second shareholder (%)
Ownership third shareholder (%)
Ownership fourth shareholder (%)
Ownership fth shareholder (%)
Ownership 5sh (%)
Managerial ownership (%)
# relevant shareholders
Concentrated ownership dummy
Multiple blockholders dummy
Family ownership dummy
Financial ownership dummy
Return on Equity (%)
Growth (%)
Debt to Asset ratio (%)
Liquidity ratio (%)
Firm size
Board size
Directorships per director
Market risk
Firm risk
Tobins Q
Industrial dummy
Financial dummy
Year 2000 dummy
Year 2001 dummy
Year 2002 dummy
Fraction of shares owned by the rst largest shareholder.
Fraction of shares owned by the second largest shareholder.
Fraction of shares owned by the third largest shareholder.
Fraction of shares owned by the fourth largest shareholder.
Fraction of shares owned by the fth largest shareholder.
Fraction of shares owned by the ve largest shareholders together.
Average shareholding of the corporate board members, the CEO and the top
management.
Number of shareholders reporting 2% stakes to Consob.
Dummy variable that equals one if the controlling shareholder has more than 50% of
the shares.
Dummy variable that equals one if there is another owner with at least 10% of the
shares, and zero otherwise.
Dummy variable that equals one if the largest controlling ultimate shareholder is a
family.
Dummy variable that equals one if the largest controlling ultimate shareholder is a
nancial institution;
Ratio of Net Income to Net Worth.
Percentage increase in sales from previous year.
Total debt divided by total assets.
Weight of cash and cash equivalents on total assets.
Logarithm of the companys total assets.
Size of the board of directors.
Number of other board appointments divided by the board size
Beta coefcient obtained from a regression of 5 years of monthly stock returns on
monthly market returns.
Average standard deviation in the companys stock prices of the year.
Market value of total assets divided by the book value of total assets.
Dummy variable that equals one for industrial companies
Dummy variable that equals one for nancial companies
Dummy variable that equals one for observations from year 2000
Dummy variable that equals one for observations from year 2001
Dummy variable that equals one for observations from year 2002

(r = 0.19). This evidence suggests that, in the vast majority of
cases, managers are not the main company shareholders.
In Table 3 we partition the sample in concentrated and
non-concentrated companies. We dene Concentrated the
companies where the controlling shareholder has more than
50 percent of the shares. The results document substantial
differences in the ownership structure, performance and
governance variables depending on the level of concentra-
tion. The rst shareholder owns about 63 and 26 percent of
the concentrated and non-concentrated sub-samples, respec-
tively. On average, the ve largest shareholders own 71.42
percent of the concentrated companies and 49.31 percent in
the non concentrated ones. It is interesting to notice that the
average ownership of the other relevant shareholders tend
to be smaller in the concentrated sub-sample. In addition,
the average managerial ownership is larger (17 percent vs 12
percent, p-value = .004). We also nd that family companies
represent around 49 percent both of the concentrated and
the non-concentrated sub-sample. This allows us to con-
clude that high ownership concentration is a typical charac-
teristic of both family and non-family companies in the
Italian economy.
Concentrated rms have smaller boards (13 vs 15
members, p-value = .000) and a lower average number of
directorships per director (0.77 vs 0.94, p-value = .002). With
respect to performance and protability, we do not nd
signicant differences in Tobins Q and growth between the
two sub-samples but we nd signicant differences in ROE.
Concentrated companies show higher return on equity (3.25
vs -2.04, p-value = .025). In addition, the concentrated com-
panies have lower leverage ratio (26.68 percent vs 31.51
percent, p-value = .000) and higher average levels of cash

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DOES OWNERSHIP STRUCTURE AFFECT PERFORMANCE? 317

TABLE 2 by the ve largest shareholding interests (Demsetz and

Descriptive Statistics Villalonga, 2001: 221). Furthermore, concentrated rms are
This table provides descriptive statistics on the overall smaller in size than non concentrated rms.
sample over the period between 2000 and 2003. The sample Table 4 provides descriptive statistics for our sample,
consists of 920 rm-year observations for 297 companies. broken down by family and non-family rms. We dene
Medians are reported in square brackets. Family companies as rms where the largest ultimate owner
is an identied family or individual. Family ownership is a
Variable Full sample common feature of most industries in Western Europe
(Maury, 2005) and this evidence is conrmed in the Italian
Ownership rst shareholder (%) 47.62 market. Faccio and Lang (2002) identify Italy as the European
country with the highest number of companies controlled by
[52.09]
a single family. Family rms represent almost half of our
Ownership second shareholder (%) 7.46 sample (457 rm-years observations out of 920). On average,
[5.14] the rst shareholder owns 47.51 and 47.73 percent in the
Ownership third shareholder (%) 3.81 family and non-family sub-sample, respectively. In contrast
[2.58] with what has been documented by Maury (2005) with
Ownership fourth shareholder (%) 2.19 respect to Western European corporations, we nd no differ-
[0.00] ence in ownership concentration between family and non-
Ownership fth shareholder (%) 1.31 family rms (p-value = 0.878), although the ownership of the
[0.00] ve largest shareholders is higher for family than for non-
Ownership 5sh (%) 62.38 family companies (63.83 vs 60.96, p-value = 0.017). As
[64.86] expected, managerial ownership is higher in family than
in non-family companies (29.26 percent vs 1.07 percent,
Managerial ownership (%) 15.07
p-value = 0.000). This evidence suggests that family members
[0.00] tend to be actively involved in the management of the
# Relevant shareholders 3.98 company. In support of this argument, we nd that the cor-
[3.00] relation coefcient between managerial ownership and the
Return on Equity (%) 1.09 ownership of the rst shareholder is equal to 0.17 and to -0.02
[6.03] for family and non-family companies, respectively. Therefore,
Growth (%) 17.51 with respect to the Italian market, managerial ownership
[6.71] cannot be seen as a mechanism for reducing agency conict
Debt to Asset ratio (%) 28.65 (Jensen and Meckling, 1976). If managers are family
[28.68] members, they will act on behalf of the majority shareholder.
Liquidity ratio (%) 10.36 With respect to the corporate governance variables,
we document that family companies have smaller boards
[5.52]
(13 vs 15 members, p-value = 0.000) but with an average
Firm size 5.93 higher number of directorships per director (0.91 vs 0.76,
[5.70] p-value = 0.003). A possible explanation of this result is that
Board size 13.68 large Italian companies tend to be structured as pyramidal
[12.00] groups made up of many levels of rms . . . (Zattoni, 1999:
Directorships per director 0.83 45). In similar cases, it is very common that each family
[0.63] member serve as a director on the boards of the other com-
Market risk 0.92 panies in the group. Family and non-family companies do
[0.85] not show any systematic difference in performance with
Firm risk 0.89 respect to Tobins Q, whereas family rms exhibit lower
[0.39] returns on equity (-1.11 vs 3.23, p-value = 0.045). We believe
that this result can be explained, on the one hand, by the
Tobins Q 2.32
higher weight of operating costs for family companies
[1.48] (where the controlling shareholders and managers seek to
Number of observations 920 extract private benets from the rm) and, on the other, by
the limited relevance for these rms of agency costs and the
subsequent managerial expropriation risk, normally con-
strained by debt (Jensen and Meckling, 1976; Faccio, Lang
holdings (11.13 percent vs 9.24 percent, p-value = 0.020) and Young, 2005). Finally, family companies tend to hold
suggesting that non-concentrated rms tend to use larger more cash and use less debt: their debt to asset and liquidity
amounts of debt and hold less cash. This is consistent with ratios are equal to 27.17 and 13.46 respectively, compared
Demsetz and Villalonga (2001), which show that leverage with an average 30.11 and 7.30 for non-family rms.
serves to reect the possibility that creditors provide some Overall, these results show that family ownership is a
of the monitoring of management that otherwise would common feature of the Italian economic system, where
have come from equity holders. Hence larger values of lever- family rms represent almost 50 percent of publicly traded
age should be associated to lower fractions of shares owned companies. However, concentrated ownership is not a

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318 CORPORATE GOVERNANCE

TABLE 3
Difference in means across concentrated and non-concentrated companies
This table provides descriptive statistics on the sample partitioned in concentrated and non-concentrated companies.
Concentrated companies are dened as the rms where the rst shareholder owns more than 50 percent of the shares. The
p-values from the t-test for the difference in means across the two sub-samples are reported in the last column.
Variable Concentrated companies Non-concentrated companies P-value diff.
(Ownership rst sh > 50%) (Ownership rst sh 50%)

Ownership rst shareholder (%) 62.57 25.98 .00

Ownership second shareholder (%) 5.54 10.24 .00
Ownership third shareholder (%) 2.10 6.28 .00
Ownership fourth shareholder (%) 0.85 4.13 .00
Ownership fth shareholder (%) 0.36 2.68 .00
Ownership 5sh (%) 71.42 49.31 .00
Managerial ownership (%) 16.90 12.44 .00
# Relevant shareholders 2.77 5.73 .00
Return on Equity (%) 3.25 -2.04 .02
Growth (%) 16.41 19.17 .55
Debt to Asset ratio (%) 26.68 31.51 .00
Liquidity ratio (%) 11.13 9.24 .02
Firm size 5.84 6.07 .00
Board size 12.74 15.21 .00
Directorships per director 0.77 0.94 .00
Market risk 0.85 1.01 .00
Firm risk 0.81 1.00 .06
Tobins Q 2.38 2.25 .59
Number of Observations 544 376
of which observation for family companies: 271 186

typical characteristic of family companies. In the Italian
market, family and non-family companies tend to be
similarly concentrated: ownership concentration does not
depend on the nature of the main shareholder. Furthermore,
in contrast to what has been previously documented with
respect to US and UK rms, substantial managerial owner-
ship is a typical characteristic of concentrated and family
companies only. Our results must be interpreted in light of
country-specic differences in the governance and owner-
ship environment.
THE RELATIONSHIP BETWEEN
OWNERSHIP AND PERFORMANCE
In this section, we explore the relationship between owner-
ship and performance. Our primary tests are robust regres-
sions with clusters, in which observations are clustered by
rm and the covariance matrix is estimated using the White
(1980) estimator. As Boone, Casares, Karpoff and Raheja
(2007) pointed out in a similar analysis, this method allows
us to exploit information in both the cross-sectional and
time-series nature of the data, controlling for the serial cor-
relation in each rms time series of observations. In Table 5
we provide a pairwise correlation matrix of our main
explanatory variables. Table 6 reports the results of the
robust regressions of the Tobins Q on the control rights held
by the ve largest shareholders (Ownership 5sh) and the
Managerial ownership, plus some control variables. In line
with Maury (2005), we also add the interaction between the
Managerial ownership and the Concentrated ownership dummy,
as we expect managerial ownership not to positively affect
rm valuation when managers represent the interest of the
controlling shareholder. To make sure that multicollinearity
is not a problem in the regression models, we calculate vari-
ance ination factors (VIF) for all the variables in the models.
The VIF values are insignicant and thus do not indicate
concerns with multicollinearity among the independent
variables in the model.
The results show that rm valuation (Tobins Q) increases
with ownership concentration of the ve largest sharehold-
ers. Ownership 5sh coefcient is positive and statistically sig-
nicant (t = 2.28, p < .05), whereas Managerial ownership in
concentrated companies is negatively related to rm perfor-
mance (t = -1.76, p < .10). Results are consistent with the
theoretical assumption that greater ownership concentration
by outside investors does lead to superior rm performance
and greater shareholding by insiders does lead to a more
entrenched management. We argue that, in concentrated
companies, where the average managerial ownership is
around 17 percent, an increase in Managerial ownership nega-
tively affects rm valuation, whereas this effect cannot be

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DOES OWNERSHIP STRUCTURE AFFECT PERFORMANCE? 319

TABLE 4
Difference in means across family and non-family companies
This table provides descriptive statistics on the sample partitioned in family and non-family companies. The p-values from
the t-test for the difference in means across the two sub-samples are reported in the last column.
Variable Family companies Non-family companies P-value diff.

Ownership rst shareholder (%) 47.51 47.73 .88

Ownership second shareholder (%) 8.03 6.90 .02
Ownership third shareholder (%) 4.22 3.40 .00
Ownership fourth shareholder (%) 2.53 1.85 .00
Ownership fth shareholder (%) 1.54 1.08 .00
Ownership 5sh (%) 63.83 60.96 .02
Managerial ownership (%) 29.26 1.07 .00
# Relevant shareholders 4.31 3.65 .00
Return on Equity (%) -1.11 3.23 .05
Growth (%) 18.45 16.60 .68
Debt to Asset ratio (%) 27.17 30.11 .02
Liquidity ratio (%) 13.46 7.30 .00
Firm size 5.61 6.26 .00
Board size 12.56 14.72 .00
Directorships per director 0.91 0.76 .00
Market risk 0.94 0.90 .25
Firm risk 0.98 0.79 .04
Tobins Q 2.43 2.22 .37
Number of Observations 457 463
of which observation for concentrated companies: 271 273

found in non-concentrated rms, where the average Mana-
gerial ownership is only equal to 12.5 percent. This evidence
supports the idea of Morck et al. (1988) that an increase in
managerial ownership when the management already owns
a moderate level of a corporations capital also results in the
management being more entrenched. The fact that perfor-
mance is not negatively affected by the level of inside share
ownership in non-concentrated companies is consistent with
share ownership reducing the disparity between the actions
of management and the objectives of shareholders, therefore
increasing rm performance. This doesnt happen in con-
centrated rms, where an increase in Managerial Ownership
negatively affects rm valuation. For this nding to be rea-
sonable, larger shareholding by insiders has to generate a
more entrenched management. This is what happens in the
Italian concentrated companies, where the average manage-
rial ownership is high because the management of the
company tends to represent the main shareholders interest.
It is also interesting to note that the Family Ownership
dummy coefcient is positive but insignicant. In line with
Villalonga and Amit (2006), this result casts doubt on the fact
that family ownership per se can generate or destroy value.
Anderson and Reeb (2003) argue that family ownership in
listed rms operating in a well-regulated and transparent
market reduces agency costs. On a different line, Faccio, Lang
and Young (2001) claim that in markets where transparency is
low politically powerful families in control of public rms
have been able to expropriate minority shareholders. Maury
(2005) suggests that family ownership may be less benecial
to rm in legal environments, as Italy, where antidirector
rights are below the median score and thus minority share-
holders are not able to protect themselves against family
opportunism. Our evidence does not refute this view.
Table 6 also reveals that the dummy variable for the pres-
ence of multiple controlling blocks is negatively, although
insignicantly, related to rm performance. A possible
explanation for the overall insignicance of the presence of
multiple blockholders is provided by Maury and Pajuste
(2005). They suggest that the incentives to monitor or
collude with the leading shareholders depend on the type
and relative size of the other blockholders. Although we are
aware that the issue of who monitors the controlling share-
holder deserves a closer analysis, the relationship between
largest shareholders control and different types of monitors
is beyond the scope of this paper.
As previously detected by Kapopoulos and Lazaretou
(2007), the variable Debt to Asset relates negatively to rm
valuation (t = -1.96, p < .05). This result is consistent with the
idea that, as debt rises, so do the costs associated with debt
serving. Both sales Growth and Firm size are insignicant. In
addition, the variables Board size and Directorships per director
are negatively but insignicantly related to rm valuation.
We suspect that the improvement in corporate governance
mechanisms following the introduction of the Preda code in

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 320

Volume 16
TABLE 5
Correlation Matrix

Number 4
This table provides pairwise correlations between the main variables considered in the analysis. p-values are given in parentheses.
Ownership Managerial Concentrated Multiple Family Financial Return Growth Debt to Liquidity Firm Board Directorships Market Firm Industrial
5sh ownership ownership blockholders ownership ownership on Asset ratio size size per director risk risk dummy
dummy dummy dummy dummy Equity ratio

July 2008
Managerial 0.19
ownership (.00)
Concentrated 0.59 0.09
ownership (.00) (.01)
dummy
Multiple 0.16 0.09 -0.38
blockholders (.00) (.01) (.00)
dummy
Family 0.08 0.57 0.00 0.08
ownership (.02) (.00) (.92) (.02)
dummy
Financial -0.04 -0.19 -0.06 0.00 -0.33
ownership (.20) (.00) (.06) (.92) (.00)
dummy
Return on 0.08 0.05 0.08 -0.02 -0.07 0.06
Equity (.01) (.14) (.01) (.46) (.04) (.08)
Growth -0.01 -0.04 -0.02 0.01 0.01 0.01 -0.04
(.70) (.20) (.55) (.79) (.68) (.81) (.26)
Debt to -0.10 0.04 -0.12 0.02 -0.08 0.16 -0.04 0.07
Asset ratio (.00) (.24) (.00) (.53) (.02) (.00) (.18) (.04)
Liquidity 0.07 0.05 0.07 0.03 0.25 -0.20 0.01 -0.02 -0.28
ratio (.03) (.17) (.02) (.30) (.00) (.00) (.78) (.56) (.00)
Firm size -0.31 -0.24 -0.12 -0.17 -0.35 0.41 0.16 0.01 0.27 -0.25
(.00) (.00) (.00) (.00) (.00) (.00) (.00) (.76) (.00) (.00)
Board size -0.39 -0.24 -0.26 -0.03 -0.23 0.33 0.10 0.00 0.10 -0.15 0.65
(.00) (.00) (.00) (.32) (.00) (.00) (.00) (.92) (.00) (.00) (.00)
Directorships -0.17 -0.09 -0.12 -0.05 0.11 -0.06 0.03 0.03 -0.02 0.13 0.35 0.17
per director (.00) (.02) (.00) (.14) (.00) (.13) (.47) (.48) (.53) (.00) (.00) (.00)
Market risk -0.16 -0.10 -0.15 0.08 0.04 -0.03 -0.23 0.03 0.00 0.10 0.06 0.14 0.28
(.00) (.00) (.00) (.02) (.25) (.37) (.00) (.33) (.90) (.00) (.06) (.00) (.00)
Firm risk -0.04 -0.08 -0.07 0.09 0.07 0.00 -0.02 -0.01 -0.17 0.12 0.02 0.17 0.10 0.22
(.24) (.01) (.05) (.01) (.04) (.98) (.46) (.72) (.00) (.00) (.49) (.00) (.00) (.00)
Industrial 0.05 0.21 0.03 0.03 0.29 -0.34 -0.09 -0.09 -0.12 0.13 -0.40 -0.36 -0.03 -0.10 0.02
dummy (.11) (.00) (.36) (.39) (.00) (.00) (.00) (.01) (.00) (.00) (.00) (.00) (.46) (.00) (.52)
Financial -0.16 -0.17 -0.19 0.03 -0.26 0.54 0.13 0.10 0.21 -0.17 0.48 0.42 0.09 0.03 -0.03 -0.62
dummy (.00) (.00) (.00) (.44) (.00) (.00) (.00) (.00) (.00) (.00) (.00) (.00) (.02) (.44) (.30) (.00)
CORPORATE GOVERNANCE

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DOES OWNERSHIP STRUCTURE AFFECT PERFORMANCE? 321

TABLE 6 Robustness of the Results

Regression analysis (OLS pooled)
Although some authors suggest that endogeneity is less of a
This table reports results of ordinary least square regres- concern in the Continental European setting (Claessens,
sions. The dependent variable is Tobins Q. Standard errors Djankov, Fan and Lang, 2002; Barontini and Caprio, 2005),
are computed using robust methods in which observations potential endogeneity of the ownership variables may gener-
are clustered by rm. ate estimation problems. In general, there is reason to believe
that ownership concentration is affected by rm performance
Variable Coefcients t-values VIF to some extent, because the controlling shareholders may
retain control only of rms with favorable prospects. Follow-
Intercept -.69 -.28 ing Kapopoulos and Lazaretou (2007), we analyze the sensi-
Ownership 5sh 2.69* 2.28 1.51 tivity of our main results to the use of a simultaneous system
Managerial ownership 1.43 .88 5.52 of two equations, in which rm performance is the dependent
Managerial -2.16 -1.76 4.35 variable in the rst equation and ownership structure is the
ownership * Concentrated dependent variable in the second equation. To detect whether
ownership dummy different methods of estimation may affect the results, we
estimate both ordinary least squares and two-stages least
Multiple blockholders -.22 -.63 1.22
squares. The estimated equations are as follows:
dummy
Family ownership dummy .28 .51 2.13 Firm performancei = constant1 + i1 SHi
Financial ownership dummy .36 .52 1.70 + i1 X i + u i1 (1)
Return on Equity -.01 -.89 1.07
Growth .00 .78 1.05 SHi = constant 2 + i 2 Firm performancei
Debt to Asset ratio -.02* -1.96 1.23 + i 2 Zi + u i 2 (2)
Liquidity ratio -.02 -1.36 1.25
Firm size .31 .92 2.96 where SH is a measure of corporate ownership structure for
Board size -.00 -.07 2.26 the ith rm, Xi and Zi are control variables and ui1 and ui2 are
Directorships per director -.08 -.28 1.45 error terms. We estimate rm performance using Tobins Q.
Market risk .41 .99 1.20 The set of explanatory variables includes both ownership
Firm risk .44* 2.22 1.15 variables, Ownership 5sh and the interaction between Mana-
Industrial dummy -1.12* -2.29 1.96 gerial ownership and the Concentrated ownership dummy.
Financial dummy -.67 -1.22 2.49 With the objective to replicate the study of Kapopoulos and
Year 2000 dummy 1.04** 3.27 1.69 Lazaretou (2007) on our more comprehensive sample, we
Year 2001 dummy .24 .89 1.66 follow the authors and model separately Ownership 5 sh and
Managerial Ownership as endogenous variables in the simul-
Year 2002 dummy -.27 -1.18 1.65
taneous equation system. In line with their evidence, we nd
Adjusted R2 .15 that rm performance as measured by Tobins Q has a stron-
F-value 3.16** ger effect on the fraction of shares owned by external share-
holders than it does on managerial ownership. In Table 7, we
p < .10, *p < .05, **p < .01. present the results on the relationship between ownership
structure and rm performance using Ownership 5sh as
dependent variable in equation (2). Due to space constraints,
1999 may have turned into the lack of a statistically signi- results from the analysis developed with Managerial Owner-
cant relation between board size and multiple directorships ship as dependent variable in equation (2) are not reported in
and rm market valuation. This evidence supports ndings the paper. In the 2SLS model in Table 7, we consider Owner-
from previous studies (Corbetta and Salvato, 2004), showing ship 5sh and the interaction between Managerial ownership and
that in Italy, where ownership is concentrated in the hands of Concentrated ownership as endogenous variables.
families, it seems unclear whether performance is affected Columns I and II IV of Table 7 report the results for OLS
by measures of corporate governance as it is when owner- and columns III and IV report the results for 2SLS models.
ship is widely dispersed. Focusing on OLS estimates for the performance equation, we
Altogether, the results show that ownership concentration note that Tobins Q is statistically dependent on the control
of the ve largest shareholders is positively related to rm rights held by the ve largest shareholders (t = 4.47, p < .01)
valuation. In addition, an increase in managerial ownership and managerial ownership negatively affect Tobins Q in
in concentrated companies appears to be detrimental to rm concentrated companies (t = -2.53, p < .05). These results are
valuation. In companies with one single shareholder owing consistent with the evidence documented in Table 6. This
more than 50 percent of the shares, where the average evidence is also conrmed by the 2SLS analysis: the coef-
managerial ownership is higher, an additional increase in cients of the ownership of the ve largest shareholders are
managerial ownership negatively affects rm valuation. In positive and statistically signicant (t = 2.57, p < .01). In
non-concentrated rms, where the average managerial own- Column III of Table 7, the rst equation estimates show that
ership is lower, an increase in insider shareholding gener- the ownership concentration of the ve largest shareholders
ates a positive effect on rm valuation. are positively related to Tobins Q and managerial owner-

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322 CORPORATE GOVERNANCE

TABLE 7
Ownership structure and rm performance when Ownership is modeled as endogenous
This table reports results of ordinary least square and 2SLS regressions when ownership is modeled as an endogenous
variable. The dependent variable in equations I is Tobins Q. The dependent variable in equations II is Ownership 5sh.
Variable OLS-Estimates 2SLS-Estimates

Q t-values Ownership t-values Q t-values Ownership t-values

(eq. 1) 5 sh (eq. 2) (eq. 1) 5 sh (eq. 2)
(I) (II) (III) (IV)

Intercept -1.61 -1.40 0.99** 18.46 -12.13 -1.83 0.98** 18.06

Ownership 5sh 3.07** 4.47 18.75** 2.57
Managerial ownership 1.48 1.51 -0.25 -.19
Managerial ownership * -2.35* -2.53 -27.86* -1.96
Concentrated ownership
dummy
Multiple blockholders -0.32 -1.26 0.07** 4.85 -2.57* -2.16 0.06** 4.62
dummy
Family ownership dummy 0.12 .38 0.02 1.59 5.89 1.88 0.02 1.57
Financial ownership dummy 0.41 1.07 0.08** 3.88 -0.84 -.80 0.08** 3.66
Tobins Q 0.01** 3.94 0.02** 2.81
Return on Equity -0.01 -1.63 0.00 1.59 -0.01 -.96 0.00 1.75
Growth 0.00 1.49 -0.00 -.15 0.00 .11 -0.00 -.31
Debt to Asset ratio -0.02** -3.75 -0.00 -.99 -0.00 -.04 -0.00 -.58
Liquidity ratio -0.02 -1.65 -0.00 -.34 -0.07* -1.96 0.00 .55
Firm size 0.32 1.71 -0.03** -3.13 0.34 .68 -0.04** -3.40
Board size -0.00 -.06 -0.01** -6.77 0.13 1.30 -0.01** -6.32
Directorships per director -0.07 -.42 -0.01 -.88 -0.56 -1.13 -0.01 -.74
Market risk 0.53* 1.97 -0.04** -2.96 0.60 .90 -0.05** -3.04
Firm risk 0.51** 4.69 -0.01 -1.23 0.78** 2.78 -0.01 -1.83
Adjusted R2 0.09 0.26
F-value 5.27** 19.86**
Durbin-Watson 2.00 1.86 1.96 1.85

p < .10, *p < .05, **p < .01.

ship in concentrated rms negatively affects rm valuation
(t = -1.96, p < .05). The second equation estimates conrm
that rm valuation is a positive predictor of ownership struc-
ture measures (t = 2.81, p < .01). This result suggests that the
coefcient of a single equation model on the relationship
between ownership and performance is biased, providing
evidence for the endogeneity of ownership structure. Taken
together, these results show that a reverse causality problem
might exist, but, after controlling for endogeneity, the effect
of ownership concentration on rm valuation remains. The
value of Durbin-Watson statistic also allows us to exclude
autocorrelation between our variables. Our sensitivity
analysis conrms the robustness of our ndings and sup-
ports their interpretation as evidence of value creation or
destruction.
Finally, to take into consideration the panel nature of our
data, we replicate the estimates using Random Effects panel
data models. These results are presented in Table 8. The
results are similar to those of the robust regressions with
clusters in Table 6 and of the simultaneous equations esti-
mates in Table 7. Ownership concentration of the ve largest
shareholders remains positively related to rm valuation
(Z = 3.33, p < .01) but the managerial ownership in concen-
trated companies is negatively related to the Tobins Q
(Z = -3.61, p < .01). Even when we consider the panel nature
of our data, we nd that the Family Ownership dummy
remains insignicant. This conrms that family ownership
does not create or destroy value unless combined with
certain forms of control and management, in line with what
suggested by Villalonga and Amit (2006).
DISCUSSION AND CONCLUSIONS
Our study examines the roles played by two aspects of own-
ership structure, the fraction of shares owned by the ve
largest shareholders and the fraction of shares owned by
management, to reect the fact that the interests of different
type of stakeholders might diverge. By examining the
relationship between ownership concentration and rm per-

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DOES OWNERSHIP STRUCTURE AFFECT PERFORMANCE? 323

TABLE 8 et al. (1988) and supported by Welch (2003). While low levels
Panel Data Analysis of managerial ownership are benecial, once ownership
This table reports results from Random Effects panel data levels rise past a certain level, managers become entrenched
model. The dependent variable is Tobins Q. and this is reected in rm performance.
These ndings have implications for the debate on the
Variable Coefcients Z-values performance of concentrated companies and on the role of
managerial ownership to align conicting interests. Taken
Intercept .71 .42 together, our results suggest that ownership concentration
of the ve largest shareholders is benecial to rm valuation,
Ownership 5sh 3.06** 3.33
whereas managerial ownership is not benecial in concen-
Managerial ownership 2.33* 2.10 trated rms, at least within the Italian context. Incremental
Managerial ownership * Concentrated -3.81** -3.61 testing on the sample shows that a reverse causality problem
ownership dummy might exist, but, after controlling for endogeneity, the effect
Multiple blockholders dummy -.28 -.96 of ownership concentration on rm valuation remains
Family ownership dummy -.56 -1.42 strong. Our sensitivity analysis conrms the robustness of
Financial ownership dummy 1.59** 3.15 our ndings and supports the view that the Italian market
Return on Equity -.00 -.37 does not succeed in bringing forth ownership structures that
Growth .00** 2.60 are appropriate for the rms they serve. We nd that the
Debt to Asset ratio -.01 -1.69 market in which ownership structures are formed is far from
Liquidity ratio -.00 -.43 perfect, as a systematic relationship between ownership
structure and rm valuation can clearly be detected.
Firm size .04 .16
We believe our study contributes to the recent debate on
Board size -.02 -.50 the effects of government regulations inspired by the Anglo-
Directorships per director .16 .67 Saxon model of corporate governance in the small European
Market risk -.41 -1.19 countries. In the last decade, many governments around the
Firm risk .45** 3.89 world have been strengthening regulations affecting outside
investors in order to reinforce equity markets (Cronquist
p < .10, *p < .05, **p < .01. and Nilsson, 2003), on the basis of the so called law matter
thesis suggested by La Porta, Lopez-de-Silanes and Shleifer
(1999). This thesis relies on the assumption that the Berle-
formance for all companies publicly traded on the Italian Means corporations, known for their widely dispersed own-
market between 2000 and 2003, this paper shows that con- ership and their clear separation between ownership and
centrated ownership is associated with higher rm valua- control, are the logical winner of a Darwinian struggle
tion. The results show that ownership concentration of the between different forms of corporate structure (Chefns,
ve largest shareholders generates a positive effect on 2002). This assumption suggests to policy makers that coun-
Tobins Q and managerial ownership has a negative effect tries will struggle to switch to this US-style economy
on valuation in concentrated companies. An increase in without the help of laws protecting minority shareholders.
managerial ownership does negatively affect rm valuation Although we support Chefns (2002: 378) view that
of concentrated companies, which indeed show above the increasing the legal protection available to outside inves-
average levels of managerial ownership, whereas the effect tors will constitute a potentially useful addition to the orga-
disappears in non-concentrated companies, whose manage- nizational toolkit, our results suggest that, in practice, the
rial ownership is well below the average of the total sample. situation is considerably more complex. Overall, our results
In addition, we focus on the nature of the main shareholder, support the view of Bianchi and Bianco (2006: 2) that no
and we verify that family companies do not perform better radical change occurred in the Italian market after the
than non family-ones. introduction of the new body of regulation, as the Italian
On the one hand, our ndings regarding the role played by rms are still largely controlled by concentrated sharehold-
the rst aspect of ownership structure, the fraction of shares ers. Anyway, we nd that ownership concentration is not
owned by the ve largest shareholders, are consistent with detrimental for rm valuation. In questioning the alleged
the idea that the greater monitoring provided by concen- competitive superiority of the widely held company, our
trated ownership leads to stronger rm performance. This paper also suggests that the existence of good corporate law
evidence conrms that large blockholders tend to be better is not a sufcient condition for the development of a corpo-
monitors than dispersed shareholders (Coffee, 1999; La rate economy resembling the US model. In line with previ-
Porta, Lopez-de-Silanes, Shleifer and Vishny, 2000), thus con- ous literature, we argue that other variables may play a role
rming that the Berle and Means (1932) widely owned cor- in determining the pattern of ownership and control, such as
porations do not offer the intrinsic economic advantages the size of a countrys economy (Claessens, Djankov, Fan
traditionally associated with them. Our study yields and Lang, 2000; Bebchuk and Roe, 1999) and the role of
unequivocal evidence for the lack of benecial effects of supporting institutions Black (2000). These factors open up
dispersed share ownership on company performance. On to further future lines of research.
the other hand, the ndings regarding the effects of mana- Further developing Kapopoulos and Lazaretou (2007),
gerial ownership are consistent with the management this paper adds to the limited empirical evidence on the
entrenchment argument advanced, among others, by Morck relationship between corporate ownership structure and

2008 The Authors Volume 16 Number 4 July 2008

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324
rm performance in the small European capital markets. We
conrm their major ndings on a more comprehensive data
set, both with respect to the time horizon of the analysis and
the monitored shareholdings thresholds. Additional sugges-
tions for future research include the development of a gen-
eralized non-linear model specication that also takes into
account the possible endogeneity of a rms ownership
structure. A few studies (Morck et al., 1988; McConnell and
Servaes, 1990; Welch, 2003) have investigated the relation-
ship between ownership and performance by developing a
non-linear single equation model specication. However,
these papers do not control for the possible endogeneity of a
companys ownership structure. Developing a non-linear
equation model taking into account both endogeneity and
non-linearity may help to better understand the effect of
ownership on corporate performance. Further, the data
sample used in this study covers a comprehensive but geo-
graphically limited data set. It might be informative to rep-
licate the estimates using a broader sample of rms from
other European capital markets, so that the results could be
generalized.
ACKNOWLEDGEMENTS
The authors gratefully acknowledge the help of Marcello
Bianchi (Consob) for providing data and two anonymous
reviewers for the helpful comments of on earlier versions of
the manuscript.
NOTES
1. Among the new rules, we nd: the maximum length of three
years for pacts between controlling shareholders, the reduction
in the threshold to call an extraordinary meeting to 10 percent of
the voting capital and the the obligation on the part of the bidder
to launch a compulsory offer for all remaining shares once
shares representing 30 per cent of the voting power have been
acquired.
2. In nancial literature, the concept of family business has been
dened in many different ways. Shanker and Astrachan (1996)
point out that, operationally, family rms can be dened nar-
rowly or broadly, implying that there is a range of familiness.
Using Chua, Chrisman and Sharmas (1999) theoretical deni-
tion of family business as a starting point, Chrisman, Chua and
Steier (2002) show that it is possible to statistically differentiate
family rms from non-family rms on the basis of ownership,
management, and intention for family succession without the
use of arbitrary cut-off points. Astrachan, Klein and Smyrnios
(2002) nd a solution to the family business denition
dilemma, by proposing the application of a scale that assesses
the extent and the quality of family inuence via the measure-
ment of three dimensions: power, experience, and culture. For a
broad analysis of the denitions of family business, see also:
Sharma (2004) and Zahra and Sharma (2004). In this paper, we
use a narrow denition of family business, focusing on the
voting right of the ultimate shareholder.
3. We choose to focus on these two variables as the evidence pro-
vided by studies focusing on board composition has been
mostly inconclusive (Bhagat and Black, 1999). Rosenstein and
Wyatt (1990) and Dahya and McConnell (2003) nd a positive
and statistically signicant stock price reaction to the announce-
ment of outside director appointments to the board of directors,
thus suggesting that outside director appointments are associ-
Volume 16 Number 4 July 2008
CORPORATE GOVERNANCE
ated with increased rm value. Contrary to these results, a
number of studies report no signicant correlation between
board composition and various measures of rm performance.
Some representative studies include Agrawal and Knoeber
(1996), Baysinger and Butler (1985), Bhagat and Black (2002),
Hermalin and Weisbach (1991) and Mehran (1995). Researchers
have also long suspected that other board characteristics, such as
director expertise, the presence of active investors and nancial
institutions on the board of directors and the CEO/Chairperson
duality (Jensen, 1993), may affect board effectiveness. However,
the analysis of these proles goes far beyond the scope of this
paper. For a good review of the main potentially relevant board
characteristics, see Lipton and Lorsch (1992). As an additional
note, it has to be considered that, in the Italian market, it still
seems particularly difcult to properly identify independent
directors, because of a systematic lack in the communication of
this prole. Only 51 per cent of listed companies properly dis-
close precise information on the directors labelled as indepen-
dent (Assonime, 2007).
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Volume 16 Number 4 July 2008