The effect of ownership composition on corporate financial performance in the European frontier markets

PurposeThis study investigates the influence of ownership composition on market-based and accounting-based financial performance in the European frontier markets (EFMs), a target region for global investors.Design/methodology/approachOwnership composition is defined as shareholders' concentration and structure (i.e. foreign, domestic, state and free-float), whereas financial performance is measured as Tobin's Q and return on assets. The system generalised method of moments panel data estimation technique is employed on a sample of 241 companies.FindingsFindings reveal that companies from European Union (EU) frontier markets are controlled, on average, by one to five large shareholders. Being a signal of expropriation rationale of majority shareholders regardless of the capital structure, this highly concentrated ownership and decision-making model negatively affects the market-based and accounting-based financial performance of the companies and thereby supports the agency theory in the frontier markets.Research limitations/implicationsThe findings provide empirical evidence for authorities, investors, analysts and corporations regarding the effect of ownership percentage and structure in the Eastern European region, assisting also other frontier and emerging markets in corporate governance and other regulatory decisions.Originality/valueThe ownership–performance relationship varies from developed to emerging markets with conflicting results. This study provides evidence on monitoring and expropriation effects of majority shareholders in the context of different categories of shareholders. In doing so, it combines the analysis of both ownership concentration and structure in the EFMs.