Relationship between black ownership, capital structure and company performance

Abstract

ownership structure and performance continues to attract the attention of scholars in the financial field (Aluchna & Kaminski 2017). Previously, studies focused on ownership distribution and relationships between principals and agents, as illustrated in the conflict between shareholders and managers (Aluchna & Kaminski 2017; Coles, Lemmon & Meschke 2012; Kumar & Zattoni 2014). Subsequently, apart from the effect of a controlling shareholder and multiple large shareholders (Jara-Bertin, López-Iturriaga & López-de-Foronda Background: The notion that a company’s ownership structure may affect performance and capital structure has been the attraction, but few studies have looked at the effect of black ownership (BO). Aim: This paper contributes to the literature by examining the possible interactions between BO, performance, and capital structure. Within an agency cost framework, the study indicated that the distribution of equity ownership among black shareholders might significantly influence the performance and leverage of companies listed on the Johannesburg Stock Exchange (JSE). Setting: Altogether 187 companies on the JSE were selected for the period of 2007 to 2014. Method: Data on the sampled companies were sourced from the Iress database, a prominent source of financial data in South Africa, as well as annual reports. The research used a pooled fixed-effects model, random effects model and two-step generalised method of moments in the analysis. Results: The findings of the research provided support for the agency cost theory. The empirical findings indicated that BO was negatively correlated with debt ratio (long-term debt) and performance (Tobin’s Q [TQ]). Surprisingly, BO was positively and significantly correlated with return on assets. Finally, the empirical findings indicated that the proportion of long-term debt and total debt based on market value was lower for BO than for total ownership, while TQ was higher for BO than for total ownership. The finding supports the prediction that companies with a relatively small proportion of black ownership cannot support high leverage and high performance Conclusion: Although the introduction of BO by way of government intervention has been partially successful, more can be done to improve the relationship between the proportion of BO, performance and capital structure in a developing economy.