How Ownership Structure Influences Firm Performance in Relation to Its Life Cycle

Corporate governance is a much-discussed topic of conversation in the world of global business. The 1997 economic crisis in Asia, global economic pressure in 2008, and the downfall of Enron in 2001 and Worldcom in 2002 in the US, became the starting points where the importance of good corporate governance practices was acknowledged (Solomon, 2007; Liang et al., 2011). According to Parkinson, corporate governance is a supervisory and control process intended to ensure Vol. 5 | No. 3 ISSN: 2089-6271 How Ownership Structure Influences Firm Performance in Relation to Its Life Cycle that the firm management acts in accordance with the stockholders’ interest (Solomon, 2007). In the preamble to Organization for Economic Cooperation and Development (OECD), corporate governance is deemed as a key element in improving the efficiency of economy and growth (Holm and Schøler, 2008). Agency problems arise from the relationship between stockholders and managers, due to a conflict of interests in the firm (Fazlzadeh et al., 2011). The conflict of interests eventually leads to agency cost. Jensen and Meckling (1976) define agency cost as the overall cost that includes the monitoring expenses paid for by the principals, expenses for firm relations with agents, and residual losses. In theoretical literature, there are six mechanisms to keep agency cost under control in the corporate governance process (Fazlzadeh et al., 2011). Perrini et al., (2008) confirms that the effect of ownership structure on firm performance has become an important subject and an ongoing topic of debate in the financial literature. It begins with the research conducted by Berle and Means (1932) and Chandler (1962) as quoted by Perrini et al., (2008) on the connection between ownership concentration and firm performance, as well as the actual role of the management. Basically there are two dimensions in ownership structure: insider ownership or managerial ownership and institutional ownership. Morck et al., (1988) studied the connection between managerial ownership and the firm market value, and the connection is non-monotonic in nature. Insider or managerial ownership is essentially a method to reduce agency cost (Crutchley and Hansen, 1989). Rose (2005) confirms that, in order to synchronize the interest of the management and that of investors from outside the firm, incentive is provided for the managers, in that the management becomes a co-owner of the firm. Incentive for managers in the form of stock ownership is expected to reduce agency cost. The managers will implement policies that conform to firm objectives, namely maximizing the values of stockholders, including the managers themselves. Meanwhile, Pound (1988) studied the effect of institutional ownership on firm performance (Liang et al., 2011). Pound offers three hypotheses on the relationship between stock ownership by institutional investors and firm performance: efficient monitoring, conflict of interest, and strategic alignment. Cornet et al., (2007), Huse (2007) and Jara-Bertin et al., (2012) divide institutional ownership into two types: pressuresensitive and pressure-insensitive/resistant. Pressure-sensitive ownership refers to investors who not only invest in the form of ownership, but also have business partners, such as with banks, pension funds, holding firms/group firms, as well as with non-financial firms with business relationships, such as in sales, purchases, and others. In Indonesia, there have been a number of studies on the effect of ownership structure on firm performance. Research by Suranta and Midiastuty (2003) shows a linear and negative con-nection between the managerial ownership structure and firm value. Research by Sari (2004) shows that the ownership structure (the largest stock ownership, stock ownership by the public, foreign stock ownership, stock ownership by financial institutions, stock ownership by non-financial firms, and managerial ownership) affected firm value during the 1993-2000 period in firms listed in the Indonesian Stock Exchange. Unlike in previous researches, Liang et al., (2011) examined the role of ownership structure on firm performance by taking into account the firm’s life cycle. The research was conducted on firms listed in the Taiwan Stock Exchange during the period between the two global financial crises in 1999 and 2008. METHODS The current research examines the effect of structure ownership on firm performance based on its life cycle during the 2005-2010 period. Samples are the manufacturing, IT, and multimedia firms. The three firm categories are chosen because they, especially manufacturing, contributed significantly during the 2000-2010 period to the Indonesian GDP (Ministry of Industry, 2011). The sample data is acquired from the Indonesian Stock Exchange (BEI), Bapepam-LK (Indonesia Capital Market and Financial Institution Supervisory Agency), and the Indonesian Capital Market Directory (ICMD). The samples consist of 121 firms; the outliers are deleted, resulting in an imbalanced panel data with 121 firms and 695 firm-year observations. In categorizing the firms based on their life cycles, the current researcher uses variables that refer to Ramaswamy et al., (2008), Liang and Lin (2008), and Liang et al., (2011) (see Table 1). The life cycle stages used in the current research are growth, mature, and stagnant. Each stage is categorized as follows: 0 for growth; 1 for mature; and 2 for stagnant. The variables used to describe the characteristics of each cycle are shown in Table 1. The scores from the six variables are then combined, where the minimum value is 0 and the maximum value is 10. The total score is divided into three score ranges: growth stage (0 – 3), mature stage (4 – 6), and stagnant stage (7 – 10). From the categorization of firm life cycle, we see that the growth stage consists of 199 firmyear observations, the mature stage 385 firm-year observations, and the stagnant stage 111 firm-year observations. The variable of ownership structure in this research is insider ownership (INSID) and institutional ownership (INS). INSID is the fraction of shares held by insider—board and managerial. INSID is divided into two categories which is board and manager ownership (BMO) and blockholder ownership (BLOCK). BMO is the fraction of shares less than 5% and BLOCK is over 5% (Abor and Biekpe, 2006). Furthermore, INS is the fraction of shares held by the institutional investors. Herfindahl Index was used to measure the institutional ownership concentration. INS is categorized into two types which is pressureinsensitive (INSPRI) and pressure-sensitive (INSPRS). The firm performance is measured by using industry-adjusted return on asset (IAROA). IAROA equals firm ROA minus ¬industryaverage ROA. The previous studies, Tobins’ Q and ROA were commonly used to measure firm performance. According to Liang et al., (2011), the use of Tobins’ Q and ROA have weaknesses. In the developing countries, accounting standard is not applied well and the profit rate may not be absolutely accurate to measure firm performance (Wiwattanakantang, 2001). However, ROA can be used as the measurement of firm performance because ROA focuses on the current performance. Meanwhile, Tobins’ Q reflects growth opportunities or expectations of the firms’ prospects in the future years and Tobins’ Q regression would be more susceptible to endogeneity problems (Cornett et al., 2007). In addition, the control variables are firm size (NLA—natural logarithm of asset), leverage (LER— liabilities to equity ratio), research expenditures rate (RD— R&D expenditures to sales), marketing expenditure rate (ME— marketing expenditures to sales), and asset growth rate (AG— asset growth divided the current net assets). The current research uses two research models:

that the firm management acts in accordance with the stockholders' interest (Solomon, 2007).
In the preamble to Organization for Economic Cooperation and Development (OECD), corporate governance is deemed as a key element in improving the efficiency of economy and growth (Holm and Schøler, 2008).Agency problems arise from the relationship between stockholders and managers, due to a conflict of interests in the firm (Fazlzadeh et al., 2011).The conflict of interests eventually leads to agency cost.Jensen and Meckling (1976) define agency cost as the overall cost that includes the monitoring expenses paid for by the principals, expenses for firm relations with agents, and residual losses.In theoretical literature, there are six mechanisms to keep agency cost under control in the corporate governance process (Fazlzadeh et al., 2011).Perrini et al., (2008) confirms that the effect of ownership structure on firm performance has become an important subject and an ongoing topic of debate in the financial literature.It begins with the research conducted by Berle and Means (1932) and Chandler (1962) as quoted by Perrini et al., (2008) on the connection between ownership concentration and firm performance, as well as the actual role of the management.Basically there are two dimensions in ownership structure: insider ownership or managerial ownership and institutional ownership.Morck et al., (1988) studied the connection between managerial ownership and the firm market value, and the connection is non-monotonic in nature.
Insider or managerial ownership is essentially a method to reduce agency cost (Crutchley and Hansen, 1989).Rose (2005) confirms that, in order to synchronize the interest of the management and that of investors from outside the firm, incentive is provided for the managers, in that the management becomes a co-owner of the firm.Incentive for managers in the form of stock ownership is expected to reduce agency cost.The managers will implement policies that conform to firm objectives, namely maximizing the values of stockholders, including the managers themselves.Meanwhile, Pound (1988) studied the effect of institutional ownership on firm performance (Liang et al., 2011).Pound offers three hypotheses on the relationship between stock ownership by institutional investors and firm performance: efficient monitoring, conflict of interest, and strategic alignment.Cornet et al., (2007) In Indonesia, there have been a number of studies on the effect of ownership structure on firm performance.Research by Suranta and Midiastuty (2003) shows a linear and negative con-nection between the managerial ownership structure and firm value.Research by Sari (2004) shows In categorizing the firms based on their life cycles, the current researcher uses variables that refer to Ramaswamy et al., (2008), Liang andLin (2008), andLiang et al., (2011) (see Table 1).
The life cycle stages used in the current research are growth, mature, and stagnant.Each stage is categorized as follows: 0 for growth; 1 for mature; and 2 for stagnant.The variables used to describe the characteristics of each cycle are shown in In the developing countries, accounting standard is not applied well and the profit rate may not be absolutely accurate to measure firm performance (Wiwattanakantang, 2001).However, ROA can be used as the measurement of firm performance because ROA focuses on the current performance.
Meanwhile, Tobins' Q reflects growth opportunities or expectations of the firms' prospects in the future years and Tobins' Q regression would be more susceptible to endogeneity problems (Cornett et al., 2007).In addition, the control variables are firm size Furthermore, the second model is similar to the first model.However, each type of ownership structure is divided into its categories, Model 2   based on the research by Morck et al., (1988).For example, if insider ownership is 27%, on the 0-5% range it is noted at 5%; on the 5%-25% range noted at 20%; and on the more than 25% range noted at 2%.The examination shows that a 0-5% ownership has a positive effect, 5%-25% ownership a negative effect, and more than 25% ownership a positive effect.This indicates that 0-5% and more than 25% ownerships tend toward the convergence of interest hypothesis, while the 5%-25% ownership tends toward the entrenchment effect hypothesis.

Institutional ownership (INS) in the current
research refers to the concentration of institutional ownership calculated using the Herfindahl Index.
In all the samples in Model 1, the INS coefficient is -0.0497 which is significant on the 1% level; this means it is negatively connected to firm performance (t-stat = -4.6302).This is consistent with findings by Fazlzadeh et al., (2011), where the concentration of institutional ownership has a negative and significant effect on firm performance.Negative effect occurs when investors have a large number of stocks, and the management, impressed with their dominance, does not provide benefits or advantages for all stockholders.The management only serves stockholders from certain institutions who hold a majority of the firm's stocks, which will lead to failure in financial performance.According to Sari (2004), ownership concentration in a firm leads to a situation where agency cost exceeds firm profit.
One of the reasons is that stockholders, who also control the firm, are allowed to instruct managers in their management of the firm (in operational Note: activities, investment, and funding).Thus, managers tend to follow orders from stockholders who also control the firm.In addition, the negative effect from concentrated institutional ownership on firm performance is also visible in firms at the growth stage, where the coefficient is -0.0190 (t-stat = -0.5062),but the effect is insignificant.
Unlike in the overall sample results, INS has a positive and significant effect on firm performance in mature firms; this is shown by a coefficient of 0.0361 on the 5% level (t-stat = 2.2857).This is consistent with the research by Kapopoulos and Lazaretou (2007) and Perrini et al., (2008); they discovered that a more concentrated ownership structure positively influences firm profitability.
A concentrated ownership will encourage a more intensive monitoring and better financial performance.There is an advantage in concentrated stock ownership and having stockholders who control the firm: the stockholders' ability to monitor and discipline the management will both obligate the management to submit regular reports and directly influence the organization (Surya and Yustiavananda, 2008).Similar results are shown in stagnant firms, although the effect is insignificant and the coefficient is 0.0416 (t-stat = 0.5980).(Rose, 2005).Thus, managers will prevent the decrease of firm value, as they have paid a large amount in proportion to their level of ownership in the firm.The positive effect of blockholder ownership is found in mature firms; in such firms, when moderate sales and profit margin begin to decrease, the strategy taken to prevent this is to distribute a larger share of managerial ownership.Therefore, managers will strive to improve firm performance in order to obtain greater returns.On the contrary, in firms at the growth stage where the sales and profit margin are high, a larger managerial ownership will reduce firm performance.Blockholder ownership will result in entrenchment, in which managers or agents are able to expropriate the wealth of minority stockholders (Thomsen et al., 2006;Morck et al., 1988).
On the split of institutional ownership for all the samples, INSPRI has a negative and insignificant effect with a coefficient of -0.0140 (t-stat = 0.7936).
Otherwise, INSPRS has a negative and significant effect at 5% level.This result is consistent with Bhattacharaya and Graham (2007).Pressuresensitive investors are less willing to against management decisions and to follow them because they want to protect their business relations.
When the investors just follow the management, they can not monitor well.This result is consistent with strategic-alignment hypothesis (Pound, 1988, in McConnell andServaes, 1990).
On the mature firms, both market and customers perform relatively good (stable condition) so corporate governance framework can be applied.
Besides, organization structure and management system of mature firms are not flat and hierrarchically has been etablished very well.As the implication, good corporate governance really needed (Ramaswamy, 2008).

MANAGERIAL IMPLICATIONS
Insider ownership has a significant effect on firm performance.Therefore, the stock compensation becomes an option to reduce the agency costs or to increase firm performance.However, there are things to consider, namely there is a point where insider ownership can reduce firm performance.
that the ownership structure (the largest stock ownership, stock ownership by the public, foreign stock ownership, stock ownership by financial institutions, stock ownership by non-financial firms, and managerial ownership) affected firm value during the 1993-2000 period in firms listed in the Indonesian Stock Exchange.Unlike in previous researches, Liang et al., (2011) examined the role of ownership structure on firm performance by taking into account the firm's life cycle.The research was conducted on firms listed in the Taiwan Stock Exchange during the period between the two global financial crises in 1999 and 2008.METHODS The current research examines the effect of structure ownership on firm performance based on its life cycle during the 2005-2010 period.Samples are the manufacturing, IT, and multimedia firms.The three firm categories are chosen because they, especially manufacturing, contributed significantly during the 2000-2010 period to the Indonesian GDP (Ministry of Industry, 2011).The sample data is acquired from the Indonesian Stock Exchange (BEI), Bapepam-LK (Indonesia Capital Market and Financial Institution Supervisory Agency), and the Indonesian Capital Market Directory (ICMD).The samples consist of 121 firms; the outliers are deleted, resulting in an imbalanced panel data with 121 firms and 695 firm-year observations.

(
NLA-natural logarithm of asset), leverage (LERliabilities to equity ratio), research expenditures rate (RD-R&D expenditures to sales), marketing expenditure rate (ME-marketing expenditures to sales), and asset growth rate (AG-asset growth divided the current net assets).The current research uses two research models: Model 1 This model is used to examine the effect of insider and institutional ownership on firm performance.The use of INSID2 is to test the non linear relationship between insider ownership and firm performance as stated on the previous studies.
control a large part of the firm's substantial asset and therefore have sufficient effect to secure the desired work relationship, including an attractive salary.The advantages gained through their reputation (superior qualifications and appealing personality) can determine their voting power, which constitutes the managers' control over their ownership of the firm.From the connection between the two hypotheses, shown with a non-linear curve, we see that insider ownership positively influences firm performance up to a certain point.This means increasing insider ownership has positive effects on firm performance; however, increasing insider ownership on purpose reduces firm performance.The connection is shown on the inverted U-shaped curve in Figure 1.In the current research, a more thorough examination is conducted on the non-linear connection where INSID is divided into three categories based on the range of ownership: 0-5% of ownership, 5%-25% of ownership, and more than 25% of ownership.The categorization is

Figure 1 .
Figure 1.The Relationship between Firm Performance and Insider Ownership

Furthermore, when investors
invest their money, they should consider ownerhsip structure and firms' life cycle.They relate to firm performance and return on investment.Besides, the institutional ownership concentration can affect negatively on firm performance.Types of institutional ownership have different results to firm performance at the diffent stage of life cycle..CONCLUSION Previous researches have examined the connection between ownership structure and firm performance in relation to corporate governance.The current research examines the same subject, but in relation to the firm's life cycle.The purpose is to verify whether ownership structure influences firm performance differently at each life cycle.The results are (1) insider ownership has a significantly non-linear effect on firm performance, indicated by the U-shaped curve, and (2) the concentration of institutional ownership has a significantly negative effect on firm performance, which is proven by the findings at all samples.However, in firms at the mature stage, the concentration of institutional ownership has a significantly positive effect on firm performance.Blockholders have a significantly positive effect on firm performance in firms at the mature stage, but the effect is significantly negative in firms at the growth stage.Meanwhile, pressure-insensitive and pressuresensitive institutional ownerships have a positive and significant effect on firm performance in firms at the mature stage; in firms at the growth stage, the effect in negative and significant.The current research shows that ownership structure influences firm performance differently, depending on each firm's life cycle.Therefore, it is our hope that this research contributes toward underlining the importance of a firm's life cycle in relation to the effect of ownership structure on firm performance.However, the current research has several limitations: it only covers firms from the manufacturing, IT, and multimedia businesses during a six-year (2005-2010) period.In addition, only three life cycles are studied in this research: growth, mature, and stagnant.The other life cycles, start-up and renewal, are not included.R E F E R E N C E S Abor, J., and Biekpe, N. (2006).An Emperical Test of the Agency Problems and Capital Structure of South African Quoted SMEs.SAJAR, Vol. 20, No. 1, pp. 51-65.Bhattacharya, P.S., and Graham, M.. (2007).Institutional Ownership and Firm Performance: Evidence from Finland.Working Paper SSRN.Cornett, M.M., et al. (2007).The Impact of Institutional Ownership on Corporate Operating Performance.Journal of Banking & Finance, 31, pp.1771-1794.

Table 1 .
The scores from the six variables are then combined, where the minimum value is 0

Table 1
shows the descriptive statistics for the variables used to measure the firms' life cycle in each life cycle category.The variables include years of firm life (YL), sales growth rate (SG), dividend payout rate (DP), capital expenditure rate (CE), and marketing expenditure rate (ME).

Table 2 ,
the mean of ROA and IAROA are relatively low.The mean of insider and institutional ownerships represent 2.10% and 33.00%.In

Table 2 .
Descriptive Statistic for Firms of Life-Cycle StagesTable3, which is the result of the regression of