Abstract:
Ownership diversity is defined as the distribution of ownership and control among various
categories of shareholders. Many organizations' ownership structures have become
increasingly diversified in terms of race, nationality, gender, and socioeconomic level in
recent years. Globally, there's little consensus on how ownership diversity affects financial
distress. Using the agency theory and entrenchment hypothesis, this study investigates how
the diversity of ownership affects the financial distress of business firms. This research makes
a contribution to the empirical literature by applying panel data analysis on 181 non financial companies from 2012 to 2019 on the Colombo Stock Exchange of Sri Lanka. The
study uses Herfindahl-Hirschman Index to measure ownership diversity. In contrast, Altman
Z Score Analysis, Emerging Market Score, and Interest Coverage Ratio measure financial
distress. The results of the logistic regression models demonstrate that ownership diversity
significantly and positively affects financial distress. This signifies that the diversified
ownership structure raises the agency cost as it incurs high monitoring costs to monitor
diverse shareholders, leading to financial distress within business firms.
