State ownership and firm value: simultaneous analyses approach
| Pages | 50-61 |
| DOI | https://doi.org/10.1108/JABS-02-2019-0062 |
| Date | 10 January 2020 |
| Published date | 10 January 2020 |
| Author | Sami R.M. Musallam |
| Subject Matter | International business,Strategy |
State ownership and firm value:
simultaneous analyses approach
Sami R.M. Musallam
Abstract
Purpose –The purpose of this paper is to investigatethe endogeneity effect of state ownership on firm
value in Indonesia.
Design/methodology/approach –Using a sample of 139 Indonesian non-financial listed companies
from 2009to 2013, thisstudy uses two-stage least square (2SLS) methods.
Findings –The results of2SLS show that state ownership as ‘‘continuousmeasure, dummy variable and
after adjusting the outliers’’ are negatively and significantly influenced firm value, implying that state
ownership tends to lower firm value. Moreover, the results also show that U-shaped effect of state
ownership with firm value, implying that the size of shareholders by state increases, firm value initially
decreasesand then increases.
Practical implications –The study intends to provide the shareholders, managers and investors with
clear guidancebefore their investment decisions.
Social implications –This paper provides evidence that the agency costs may increase in firms with
state ownershipshare.
Originality/value –This is the first paper contributes to the corporate governance literature by
investigating the endogeneity effect between state ownership and firm value using 2SLS method in
Indonesia.
Keywords State ownership, Control variables, 2SLS, Firm value, Indonesia
Paper type Research paper
1. Introduction
Empirical studies about the relationshipbetween ownership structure and firm performance
or firm value yield conflicting results. Berle and Means (1932) suggest that ownership
impacts firm value negatively. This suggestion has been challenged by Demsetz (1983),
who indicates that the ownership structures of a company should be thought of as an
endogenous outcome of decisions that ought to be effected by profit-maximizing interests
of shareholders. Demsetz (1983) argues that there should be no systematic relation of
variation in ownership structures with variation in firm values. Demsetz and Lehn (1985) use
the five largest shareholding ownership structure as an endogenousvariable and profit rate
as a measure of firm performance. They provide evidence of the endogeneity of a firm
ownership structure argued for by Demsetz and also assess the validity of the Berle and
Means’s (1932) study. They also find no evidence of any effect of ownership structure on
firm performance.
State ownership as a type of ownership structure in a firm and its firm value has been
debated among researchers. Green and Liu (2005) argue that state ownership associated
with better performance becausethey are more market oriented and freer from government
interference. State ownership has various objectives than other ownerships such as private
or foreign ownership. For example, state ownership is likely toconsider social objectives i.e.
help to reduce unemployment by over hiring workers and to stimulate the economy
Sami R.M. Musallam is
based at the Faculty of
Business and
Administration,
International University of
Sarajevo (IUS), Ilidz
ˇa,
Bosnia and Herzegovina.
Received 20 February 2019
Revised 3 August 2019
Accepted 26 September 2019
PAGE 50 jJOURNAL OF ASIA BUSINESS STUDIES jVOL. 14 NO. 1 2020, pp. 50-61, ©Emerald Publishing Limited, ISSN 1558-7894 DOI 10.1108/JABS-02-2019-0062
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