Dancing with giants: Contextualizing state and family ownership effects on firm performance in the Gulf Cooperation Council

Highlights

• Firm ownership structure influences financial firm performance depending on who retains control.

• State, as the largest shareholder, has a negative effect on financial firm performance.

• Family ownership does not affect financial firm performance.

• The negative effect of state ownership disappears when it co-exists with families as other blockholders.

• The Control role of families emerges when the state owns between 15%–50% of the shares.

Abstract

While principal–principal problems are prevalent in emerging economies, the severity of these problems could vary based on the identity of shareholders and the institutional context. This study theoretically and empirically analyzes the effect of state and family blockholders as well as their possible interaction on financial firm performance in the Gulf Cooperation Council (GCC) countries. Using a dataset of 389 non-financial firms and 2607 observations (2009–2015), we found that ownership held by the state as the largest shareholder has a negative effect on firm performance, whereas this negative effect disappears when the state owns between 15 % and 50 % of shares and coexists with local families as other large shareholders. Our findings contribute to the nexus between the family business and corporate governance literature by studying principal–principal agency problems and the impact of owner combinations on firm performance in emerging economies in the GCC region.

Introduction

Empirical evidence undermines the traditional assumption of dispersed ownership in modern corporations by showing that ownership concentration is a common pattern globally (e.g., Borisova, Fotak, Holland, & Megginson, 2015; Claessens, Djankov, & Lang, 2000; Faccio & Lang, 2002; Gonzalez, Molina, Pablo, & Rosso, 2017). The two most common types of investors are controlling shareholders, namely, the state and families. While state ownership accounts for about one-fifth of market capitalization globally (Borisova et al., 2015), family ownership is the most prevalent type of ownership worldwide (La Porta, Lopez-De-Silanes, & Shleifer, 1999). Ownership concentration and the identity¹ of firms’ primary large owners matter for corporate governance because of principal–principal agency problems (Kumar & Zattoni, 2017), or Type II agency problems, which may affect firm performance. Principal–principal problems lie in the conflicts of interests not only between large and small shareholders (e.g., tunneling) but also among large shareholders whose objectives, risk preferences, and investment horizons often differ (Bennedsen & Wolfenzon, 2000; Boyd & Solarino, 2016; Sutton, Veliyath, Pieper, Hair, & Caylor, 2018; M. N. Young, Peng, Ahlstrom, Bruton, & Jiang, 2008).

The effect of multiple large shareholders on firm performance cannot be considered in isolation, however, as the institutional and developmental conditions vary across countries (Basco, 2017a; Whetten, 2009). Indeed, institutional factors shape cross-national differences in corporate ownership patterns, such as ownership concentration and the identity of the main shareholders (Aguilera & Jackson, 2003; Morgan, Campbell, Crouch, Pedersen, & Whitley, 2010). In particular, emerging economies are characterized by weaker formal institutions than developed countries as well as different informal institutions (Armitage, Hou, Sarkar, & Talaulicar, 2017). As a result, larger shareholders—especially families and the state—frequently hold controlling stakes in firms (Claessens & Yurtoglu, 2013), making principal–principal agency problems even more pervasive (Boyd & Solarino, 2016; Young et al., 2008). Following Armitage et al. (2017), who addressed the importance of ownership structures and controlling shareholders in emerging economies and drawing on agency theory, this study focuses on principal-principal agency problems that may emerge when the state and families are large shareholders, and on these shareholders’ impact on financial firm performance in the institutional contexts of emerging economies.

In particular, this study analyses the effect of state and family ownership on financial firm performance across Gulf Cooperation Council (GCC) countries, namely, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE).² We focus on GCC countries not only because less research on corporate governance has been conducted in these countries (with some exceptions; e.g., Abdallah & Ismail, 2017) but also because of the specificities of the GCC region. GCC countries share homogeneous characteristics in both their formal institutional contexts (e.g., Arab monarchies) and their informal institutional contexts (e.g., patriarchal culture). In addition, the economic development of all GCC countries has been based on the exploitation of natural resources, a rentier economic system, the power of the state, and the association between ruler families and the network among local and regional business family elites (Hanieh, 2011). GCC countries are examples of state-led capitalism, with real estate markets and financial sectors often linked to state interests (Young, 2018). Under these circumstances, the ownership concentration of listed firms across GCC countries is high (Eulaiwi, Al-Hadi, Taylor, Al-Yahyaee, & Evans, 2016). All these characteristics allow us to answer the following research questions: Does state and family ownership matter for financial firm performance in GCC countries? How does the coexistence of families—as large shareholders—with the state—as the largest shareholder—affect financial firm performance in GCC countries?

Building on principal–principal agency problems, we hypothesize that both state and family blockholders as the largest shareholders negatively affect financial firm performance in GCC countries because each of these blockholders pursues its own agenda at the expense of the other blockholders and minority owners. We also theorize that the close social connections and local embeddedness of these two large shareholders in GCC countries lead families to monitor the state when families are not the largest shareholders but coexist with the state when they are the largest shareholders. Consequently, the negative impact of the state as the largest owner on financial firm performance is mitigated when families coexist as blockholders with the state. To test our hypotheses, we built a dataset taking the entire population of firms listed on GCC stock markets between 2009 and 2015 as the initial sample. Using the universe of all listed firms in the region enables us to overcome the frequent limitation of using only the largest listed firms (Sacristán-Navarro, Cabeza-García, & Gómez-Ansón, 2015). After applying filters and focusing on non-financial firms only, we ended up with a longitudinal dataset consisting of 389 non-financial listed firms and 2607 observations.

After controlling for firm heterogeneity and endogeneity issues, we found that ownership identity matters for firm performance. Consistent with our hypothesis on the prevalence of principal–principal agency problems in emerging economies, the results indicate that the state as the largest shareholder has a negative effect on financial firm performance, whereas families as the largest shareholders do not seem to affect financial firm performance. Additionally, we found that the negative effect of state ownership on firm performance disappears when the state as the largest shareholder owns between 15 % and 50 % of the shares and coexists with local families as other blockholders. Finally, there is evidence to support that, at least under certain circumstances, families can control and contest the state, reducing the negative impact of state ownership on financial firm performance.

Our findings contribute to the nexus between the family business and corporate governance literature in several ways. First, we empirically contribute to Maury and Pajuste’s (2005) thesis that the relationship between multiple blockholders and financial firm performance is significantly affected by blockholders’ identity. In this sense, we shed new light on whether family ownership creates or destroys firm value (Kammerlander, Sieger, Voordeckers, & Zellweger, 2015). Specifically, we found that when a family is the largest shareholder, there is no evidence that it creates or destroys value; however, the combination of families as other large shareholders with the state alleviates the principal–principal problems associated with state ownership, thus improving financial firm performance. Second, we respond to the call by Peng and Sauerwald (2013) to challenge the general claim that ownership concentration and a poor formal institutional context increase the probability of principal–principal agency problems (Young et al., 2008) by demonstrating that principal–principal agency problems do not necessarily always have to occur. The identity of blockholders and coexistence of large owners (in different combinations) matter, and they may determine whether multiple blockholders collude or control one another and, consequently, how they affect firm financial performance. Third, our study responds to the call by Armitage et al. (2017) to study ownership structure and concentration in emerging economies by contextualizing the principal–principal agency problems between large blockholders in GCC countries. Addressing the research gap that family business research is contextless (Gomez-Mejia, Basco, Müller, & Gonzalez, 2020), we show that the effect of family ownership on firm financial performance changes when combined with other large blockholders in GCC countries.

The remainder of this article is organized as follows. Owing to the importance of the context for our research, we first discuss the peculiarities of emerging GCC countries to identify the characteristics that play a role in contextualizing the theory (Whetten, 2009). Second, we discuss the theoretical framework and reasoning used to develop our hypotheses. Next, we explain the sample, data, and methodology adopted in this study. Finally, we report the results and discuss the findings, along with concluding remarks and practical implications.