Research Proposal

on

Impact of Ownership Structure on Stock Returns Volatility: Evidence From KSE-

100 Index Islamic Republic Of Pakistan

By:
Mustafa Kamal
MBA-C
Session 2010-2012

Submitted to:

Mr. Hamid Ullah

February 06, 2013

Institute of Management Sciences, Peshawar.

INTRODUCTION

1.1 BACKGROUND

After the identification of agency problems in corporate sector, especially in public

limited companies around the globe, it is very to determine the structure which
suits the corporation. Ownership structure is different across a country thats why
we are interested only in Pakistani context to determine that structure which
resolve the problem of agency and take care for the performance of the company
and decrease the stock returns uncertainty of the company.

1.2 SPECIFIC OVERVIEW

The area of study of this research is to discuss the impact of ownership structure
on stock returns volatility of listed firms in KSE, Pakistan.

1.3 SIGNIFICANCE OF THE STUDY

The study simply investigates the relationship between ownership structure and
stock returns volatility with the aim of, adopting that structure which result in
decreasing the stock returns volatility and improve performance of the company.

SCOPE OF THE RESEARCH

The focus is to validate the relationship between ownership structure and stock
returns volatility.

PURPOSE OF THE RESEARCH

The purpose of the research is to enhance understanding of ownership structure which in

a real sense cares for the shareholders and their wealth.

1.4 PROBLEM STATEMENT

To determine the impact ownership structure on stock returns volatility in KSE-

100 index.
1.5 RESEARCH QUESTIONS

1) What is the impact of managerial ownership (MANGR) structure on stock returns

volatility (RV)?

2) What is the impact of institutional ownership (INS) structure on stock returns volatility

(RV)?

3) What is the impact of individual ownership structure (INDVD) on stock returns volatility

(RV)?

4) What is the impact of foreign ownership structure (FO) on stock returns volatility (RV)?

5) What is the impact of block holder ownership structure (BH) on stock returns
volatility (RV)?

1.6 HYPOYHESIS

H-1: There is a significant relationship between institutional ownership and stock returns

volatility

H-2: There is a significant relationship between managerial ownership and stock returns

volatility

H-3: There is a significant relationship between individual ownership and stock

returns volatility

H-4 There is a significant relationship between foreign ownership and stock returns

volatility

H-5 There is a significant relationship between block holder ownership and stock returns

volatility
1.7 OBJECTIVES OF THE RESEARCH

The objectives of the research study are:

1) To investigate the impact of managerial ownership structure on stock returns volatility

(RV).

2) To investigate the impact of institutional ownership structure on stock returns volatility

(RV).

3) To investigate the impact of individual ownership structure on stock returns volatility

(RV).

4) To investigate the impact of foreign ownership structure on stock returns volatility (RV).

5) To investigate the impact of block holder ownership structure on stock returns volatility

(RV).
2. LITERATURE REVIEW

Maher and Andersson (1999) as we know that corporate governance system is different across
countries. It can be distinguished by ownership structure and controlling of shareholders. The two
systems i.e. insider and outsider adopt by different countries. Under both systems conflicts arises
between manager and shareholders, majority and minority shareholders, which affect the
performance of the company which materialize in the shape of stock price volatility.

Demsetz and Villalonga (2001) developed a research paper to find the relationship between
corporate performance and ownership structure. They argued that no significant relationship exist
between corporate performance and ownership structure. However, the findings are consistent
with the claim that diffused ownership aggravate agency problem but compensation advantages
offset these problems.

Fernando et al. (November, 2006) argued that corporations set stock prices by the tradeoff
institutional ownership benefits against the cost of information generated by intermediaries to
shareholders. The firms with large institutional ownership benefits should set high prices of stock
and vice versa. In case of equilibrium, higher priced firms have large institutional ownership.

Rubin and Smith (2007) developed a research paper to find the relationship between ownership
and share return volatility. They study, indeed, the effect of dividend policy on these two variables
i.e. ownership and share return volatility and their relationship. It was found that correlation exist
between these two depends on companys dividend policy. The results showed that institutional
ownership is positively related to volatility and dividend paying shares and vice versa. Finally it
is investigated that dividend policy has significant effect on stock returns.

Zeitun (2009) argued that volatility is related to two forms of ownership i.e. concentrated and
institutional ownership. The findings of this research are not in line with previous results.

However, it is found that default chances are negatively correlated with Govt ownership, but it
has negative impact on companys performance as well. However, fraction of both type of
ownership i.e. Government and concentrated is necessary for firms performance and for the
reduction of default chances.
Ongore and Obonyo (2011) investigated interrelations among ownership, managers and board
characteristics and firm performance at the Nairobi Stock Exchange. These characteristics are
designed to mitigate the agency problems. They argued that positive relationship exist between
foreign, institutional, insider and diverse ownership with firm performance, while a significant
negative relationship exist between ownership concentration and government and performance of
the firm. The results are consistent w.r.t government, foreign, insider and institutional ownership;
however, differ in considering the effect of diverse and concentrated ownership on firm
performance.

Yasser et al. (August, 2011) examined the four corporate governance mechanisms and firm
performance measures. Corporate governance mechanisms are audit committee, CEO duality,
board size and board composition. Firm performance measures they took for this study are return
on equity, ROE, and profit margin, PM. They argued that positive relationship exist between
corporate performance measures i.e. ROE and PM and three corporate governance mechanisms
i.e. board composition, board size and audit committee. However, they are uncertain about the
relationship between firm performance measures and CEO duality. These findings are applicable
and in line with earlier studies.

Ezazi et al. (2011) stated that corporate governance has played an important role, after ENRON
collapse, in determining the power and control of company. Corporate governance whether it is
observing or none observing has a direct impact on the company.

In the research it is investigated that different ownership structures have some effect on stock
returns volatility. Ownership structure issue came into consideration when corporate governance
introduced as a subject in the last decade. The main purpose of this subject is to increase utility
and efficiency of an organization and allocating excess money to high return investment
opportunities.

Ezazi et al. (2011) took two variables into consideration i.e. shareholder structure as an
independent variable and stock returns volatility as a dependent variable. The finding of this
research shows that companies have greatest stock returns volatility if more shares are held by
greatest shareholders and vice versa.
3. RESEARCH METHODOLOGY

3.1 DATA TYPE

For the research secondary type data is used.

3.2 DATA SOURCE

Brecorder.com

www.kse.com

3.3 VARIABLE OF INTEREST

The impact of ownership structure in stock returns volatility.

3.3.1 MAJOR & MINOR VARIABLE

The study also validates the impact of the independent variables i.e.

Ownership Structure

One dependent variable i.e.

Stock returns Volatility (RV)

3.4 SAMPLE DESIGN

The sample design used in this research is random sample.

3.5 SAMPLE SIZE

Sample of eighty companies listed at Karachi stock exchange are taken for analysis

purpose.

3.7 Method/Procedure

SPSS is used to get the regression analysis of the data collected and so we are able

to interpret the results we want.

REFERENCES

Demsetz, H., &Villalonga, B. (2001).Ownership Structure and Corporate Performance.SSRN

Electronic Journal. doi:10.2139/ssrn.266101

Ezazi, M. E., Faculty, A., Sadeghi, S. J., Alipour, M., Branch, Z., &Amjadi, H. (2011). The
Effect of Ownership Structure on Stock returns Volatility of Listed Companies in Tehran
Stock Exchange: An Empirical Evidence of Iran, 2(5), 163169.

Fernando, C. S., Gatchev, V. a., &Spindt, P. a. (2007). Ownership Structure, Stock returns
Levels, and the Value of the Firm.SSRN Electronic Journal. doi:10.2139/ssrn.968303

Maher, M., &Andersson, T. (1999). CORPORATE GOVERNANCE: EFFECTS ON FIRM

PERFORMANCE AND by.

Ongore, Vincent O, & Box, P. O. (2011). Implications of Firm Ownership Identity and
Managerial Discretion on Financial Performance: Empirical Evidence from Nairobi Stock
Exchange School of Business , University of Nairobi School of Business , University of
Nairobi, 1(13), 187195.

Rubin, A., & Smith, D. R. (2008).Institutional Ownership, Volatility and Dividends.SSRN

Electronic Journal, 137. doi:10.2139/ssrn.927345

Yasser, Q. R., Entebang, H., &Mansor, S. A. (2011). Corporate governance and firm
performance in Pakistan: The case of Karachi Stock Exchange ( KSE ) -30, 3(August),
482491.

Zeitun, R., Hv, P. L., Vljqlilfdqw, K., Rqo, F., Xvlqj, L. Q. V, &Pdwfkhg, W. K. H. (2009).
OWNERSHIP STRUCTURE , CORPORATE PERFORMANCE AND FAILURE:
EVIDENCE FROM PANEL DATA OF EMERGING MARKET, 6(4).