Firm behavior is largely affected by the major institutions of an economy, like the legal system, civil liberties or political rights. If institutions are not well developed, ownership concentration as a feature of corporate governance may substitute for institutional shortfalls. Thus, especially in weak institutional environments ownership concentration may influence firm performance to an economically meaningful extent. The present paper tests this perception empirically by investigating the relationship between ownership structure and firm growth in 28 central and eastern European countries, where the state of institutional development varies considerably. The analysis is based on three waves of the European Bank for Reconstruction and Development (EBRD) and the World Bank's Business Environment and Enterprise Performance Survey (BEEPS) from 2002 to 2009. For those firms that operate in non-EU-member countries as well as those firms that are situated in less developed legal systems according to Freedom House ratings, regression results show an inverted u-shaped relation of ownership concentration and firm performance. We interpret these findings as evidence for a classic agency problem emanated from weaker monitoring by the shareholders if ownership concentration is low. With rising ownership concentration this effect is dominated by a 'private benefits of control' problem. Larger shareholders apparently let value enhancing growth opportunities forgo to avoid contests of control and save private benefits of being the sole controlling firm owner. An alternative explanation for this finding is that rising new equity for growth enhancing investments is especially challenging in less developed countries due to weak investor protection rights. But whoever is actually afraid of investing, the incumbent firm owner or potential new investors, staying with either highly or lowly concentrated ownership seems not to be growth maximizing for firms in institutionally less developed economies.
Balsmeier, Benjamin and Dirk Czarnitzki (2010), Ownership Concentration, Institutional Development and Firm Performance in Central and Eastern Europe, ZEW Discussion Paper No. 10-096, Mannheim, published in: Managerial and Decision Economics.