The purpose of this paper is to analyze the relationship between ownership structure and firm performance, including judicial system efficiency as a moderator to investigate the joint effects of both explanatory variables. Although prior studies have considered judicial system efficiency by examining de jure investor protection, this study identifies another useful proxy and explores de facto legal protection.
Ordinary least square multiple regression models were used to examine the influence of judicial efficiency, which was measured using the disposition time (DT) and legal origin, as a moderator of the relationship between ownership concentration and firm performance for a sample of 565 non-financial companies listed in Italy, France, Germany and Spain in 2013.
This paper shows that de facto investor protection ensured by an efficient judicial system is relevant to the relationship between firm performance and ownership structure. As a moderator variable, DT strengthens the intensity of this relationship in countries with low judicial efficiency, showing that ownership concentration leads to a better enhancement of firm performance and is, therefore, a more efficient governance mechanism in countries in which investor protection is weak.
The evidence presented expands the understanding of the link between firm performance and ownership structure. The institutional deficiencies suggest that internal governance mechanisms may substitute for external mechanisms in facilitating efficient governance. This study corroborates policymakers’ concerns regarding the efficiency of judicial systems and their role in protecting the rights of minority shareholders. The results suggest a need for more efficient external mechanisms of investor protection to facilitate investment in equity capital. Moreover, this study shows that DT is a more accurate measure of investor protection than the traditional measure of de jure legal protection.
