Corporate Ownership and Stock Returns, Article Critique Example

Corporate ownership and stock returns: An explanation to the capital asset pricing model. IUP Journal of Financial Economics, 7(3/4), 64-70.

The article begins by stating the most common facts found within the financial management industry: 1) higher diversity in a portfolio leads to higher performance (other things remaining equal) and typically a higher ROI and 2) it is difficult to define a specific calculation to represent a strong predictability of a stock considering risk, market and consumer behavior are sometimes unknown or difficult to quantify.  However, the authors complete a strong analysis of stocks for both small and large firms by grouping the stocks into three separate groups, identified by all firms combined, promoter holding less than 50% and promoter holding more than 50%.  The study acquired data from the Prowess database, which only contained stocks owned in India, analyzing monthly performance indexes on 25 different stocks.  The intention of this study was to determine is corporate ownership in its own stock impacts the performance of the stock and, therefore, also has a correlation to purchasing behaviors of potential stockholders.  The results showed that there appears to be some type of relationship between a company’s ownership in its own stock to the overall performance of the stock itself.  However, unclear results were found to show a correlation between company ownership and purchasing behaviors of potential stockholders.

The implied intention of this article was to begin discussions to determine if a true behavioral correlation exists between stock performance and a company’s ownership in its own stock.  The small sample size of 25 stocks was enough to begin conducting research; however, the cumulative results of all stocks showed less than 20% of a correlation relationship.  This is not likely to hold enough weight to warrant additional research on the issue, despite the author’s claims that the results are definitive.  The results of this study fail to hold empirical value and cannot be used as a value-added representation of either theory or fact in the financial management industry.  The authors simply conclude by stating that the failure of the study is in researching only stocks owned in the Indian stock exchange and should be conducted more thoroughly other markets internationally.  The research lacks conclusive results.  It would appear that the implied intention of the study does in fact initiate discussion of this correlation, but without more concrete data the discussion also ends with this research study.