An analysis of the effects of ownership structure on corporate policy choices

The effects of ownership structure on corporate policy choices are examined. Insider holdings and institutional holdings are the two classes of corporate ownership and the policy choices studied are the levels of debt and dividend yield.

The analysis is conducted in three stages, namely, descriptive statistics analysis, panel data analysis, and three-stage least squares simultaneous system of equations regression analysis. A sample of 516 firms that have ownership data available over the period 1988 to 1994 is collected from Disclosure data base.

The results of the study show that a determination of the true relation between corporate ownership and corporate policy must include institutional ownership.

When the full sample of firms is examined, insider holdings shows no significant relation with either debt or dividend yield. Institutional ownership shows a strong negative relation with debt, and no significant relation with dividend yield.

On dividing the sample into sub-samples based on level of insider holdings, it is seen that a non-linear relation exists between corporate policy and insider holdings. At low levels, insider holdings has a negative relation with dividends and a positive relation with debt. At higher levels of insider holdings, the relation between debt and insider ownership is negative, while the relation with dividends is now insignificant.

For the sample studied, the role of institutional ownership is not endogenous to the system, but more appropriately should be treated as an exogenous variable.