A FINANCIAL STATEMENT ANALYSIS OF COMPANIES WITH DIFFERENT OWNERSHIP CONCENTRATION ACKNOWLEDGEMENT

A FINANCIAL STATEMENT ANALYSIS OF COMPANIES
WITH DIFFERENT OWNERSHIP CONCENTRATION
Candidate NO.: ______
Module Code: 874N1
Supervisor: ______
Number of words: 9019
Date of submission: 29/08/2014

ACKNOWLEDGEMENT
First and foremost, I would like to show my deepest gratitude to my supervisor, ______ , a
respectable and responsible scholar, who has provided me with valuable guidance and
suggestions in writing this report. Without his enlightening instructions, impressive kindness
and patience, I could not have completed my report.
My sincere appreciation also goes to all lecturers who have provided many supports to help
me to develop the fundamental and essential academic competencies.
Last but not least, I shall extend my thanks to my family and all my friends for their respected
encouragement and spiritual support during my research.

Table of Contents
ACKNOWLEDGEMENT .................................................................................2!
INTRODUCTION..............................................................................................1!
Background of the Study ...........................................................................................................1!
Problem Statement.....................................................................................................................2!
Aims and Objectives..................................................................................................................3!
Research Question .....................................................................................................................4!
Significance of the Study...........................................................................................................4!
LITERATURE REVIEW..................................................................................6!
Theories of Ownership Structure and Firm Value.....................................................................6!
Financing..................................................................................................................................11!
Types of corporate finance.......................................................................................................13!
Difference between Internal and External Financing ..............................................................14!
Impact of Ownership Structure on Financial Performance......................................................14!
METHODOLOGY...........................................................................................20!
Method and Model...................................................................................................................20!
Data..........................................................................................................................................21!
FINANCIAL STATEMENT ANALYSIS......................................................23!
Financial Statement Analysis of Ted Bakers: A Comparison with French Connection..........23!
1.! Ownership,Concentration,.......................................................................................................................,23!
2.! Leverage,Analysis,....................................................................................................................................,25!
3.! Liquidity,Ratio,Analysis,............................................................................................................................,30!
4.! Profitability,Ratio,Analysis,.......................................................................................................................,35!
5.! Investor,Ratios,
.........................................................................................................................................,38!
CONCLUSIONS...............................................................................................42!
Discussion................................................................................................................................42!
Limitations...............................................................................................................................42!
Conclusion ...............................................................................................................................43!
REFERENCES .................................................................................................45!
APPENDICES...................................................................................................54!
Appendix A: Financial statements of Ted Bakers ...................................................................54!
Appendix B: Financial statements of French Connection .......................................................63!
Appendix C: Spreadsheet used ................................................................................................63!

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INTRODUCTION
Background of the Study
Corporate Finance is a part of financial management, which has a slightly broader in scope
and applies in addition to private sector entities and to all other forms of organizations.
Jegadeesh and Titman (1993) then determined momentum was also relevant. More recent
research seems to have taken three paths. The first path is one that continues in the approach
of Fama and French and Jegadeesh and Titman, and looks to see if there are characteristics of
the portfolios themselves that could affect cross-sectional variations in performance.
Kacperczyk, Clemens, and Zheng (2005) evaluated whether domestic equity mutual funds
that hold positions concentrated in a few industries perform better than mutual funds that are
more diversified. Cremers and Petajisto (2007) also conducted important. With the ever-
increasing number of investment firms and the proliferation of exotic investment strategies,
there is now an unprecedented number of investment offerings available to investors.
Combined with the sheer volume of data available on said offerings, investors can find it
difficult to determine what information is relevant in their quest to find a strong performing
management firm. Companies need to grow its financial resources. These resources are
defined as sources of financing, which may be internal and external (Stern, Chew, 2003, 80).
The internal financing are the equity and are contributions made by members that the
entrepreneur is in the process of formation and duration; legal reserves, accrued since the law
requires and extraordinary, aside free enterprise; and reinvestment of profits forgone by the
entrepreneur or not distributed to shareholders (Chirinko Shingha, 2000, 417). The operations
research literature has largely ignored corporate financing decisions on the assumption that a

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firm's optimal investment level or production decisions can be fully financed by internal
capital.
Overoptimistic managers are found to perceive that their firm's stock is undervalued by the
market. This leads managers to possibly turn down positive net present value projects that
must be financed externally. Optimistic managers overvalue their own corporate projects and
may wish to invest in negative net present value projects even when they are loyal to
shareholders (Chirinko Shingha, 2000, 417). Also, overoptimistic managers underestimate
the uncertainty about a potential project. This leads to them making the decision to move
forward with a project faster than an unbiased manager. These managers tend to overinvest if
they have sufficient internal funds for investment and are not disciplined by the capital
market or corporate governance mechanisms.
Problem Statement
A problem for investors is that they often have difficulty choosing an investment manager,
and a single erroneous investment decision can have terrible consequences for lifelong
financial security. As has been seen with investors in funds managed by Bernard Madoff, the
effect of an erroneous investment decision can have severely negative and life-changing
consequences (Fuerman, 2009). Some variables, namely, prior performance and assets under
management, have been proven to be effective in selecting strong performing investment
managers and can be used by investors. However, those variables alone do not ensure good
investment manager selections. To the extent that additional variables can be uncovered that
are also effective in identifying strong performing managers, investors will be able to avoid
making investment decisions that may negatively affect their lifelong welfare.

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This problem impacts all investors who use investment managers, whether it be through
mutual funds, limited partnerships, or separately managed accounts, because when poor
performing investment managers are chosen, consequences can be dire. Retirement savings
can be wiped out, debts can begin to mount, and all financial stability can be lost. The
investor not only loses money, but also can see huge impacts on lifelong welfare. There are
many possible factors contributing to this problem, one of which is the volume of information
available to investors. With so much information to evaluate, it is challenging to determine
what is relevant. In the past, getting access to data on investment managers was the challenge.
Now the challenge is figuring out what to do with all of the information that is available and
ascertaining what data to consider when selecting an investment manager.
Possible lines of research can follow two main paths. First, variables that are qualitative can
be evaluated to determine if they have a relationship to investment performance. Second,
variables that are quantitative can be evaluated to determine if they have a relationship to
performance. This research project contributed to the body of knowledge needed to address
this problem by focusing on a quantitative variable, specifically the level of employee
ownership. The project focused on determining if the level of ownership concentration was
related to performance over the sample period. The benefit of evaluating ownership as a
variable was its easy identification by prospective investors. Had there been a positive
relationship between ownership concentration and firm performance?
Aims and Objectives
The main aims and objectives of this study will be:

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• To explore the concept of ownership structure.
• To analyse the relationship between ownership structure and financial performance of
the company.
Research Question
In quantitative research, a researcher has both research questions and hypotheses. Research
questions are meant to be directly answered during the research. The research questions of
the study are the following:
What is the relationship between ownership concentration and the corporate performance
of the company?
Significance of the Study
The constituents who may benefit from the findings of this study are investors and the
consultants and advisors who provide service to investors. Using the findings of the study,
these groups may be able to improve their manager selection processes by gaining knowledge
about which factors affect investment manager performance. Investors may able to increase
the likelihood of meeting their investment objectives via increased investment performance.
The types of investors who may benefit are wide-ranging and diverse. Individual investors
may be able to use the findings to assist themselves in evaluating mutual funds in their
defined contribution plans, annuities, and brokerage accounts. The improvement in their
investment manager selections in these areas will improve the level of income, savings, or
both, depending on how investor selects to utilize the gains from investment performance. In

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general, investors can obtain greater financial security as a result of incorporating the study's
findings into their investment process. Plan sponsor investors may be able to use the findings
to assist in their own selection process for investment managers in the pension plans they
oversee. The stronger the manager selection methodology employed by the plan sponsor, the
greater the likelihood of maintaining a well-funded and beneficial plan for employees. This in
turn could lead to more options to employees in terms of when and how they retire. Non-
profit investors may be also able to use the findings to assist their committees and boards in
the investment manager selection process.

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LITERATURE REVIEW
There is a material amount of research on factors that affect the performance of investment
managers. This literature review was intended to focus on research that supports the research
question. Research related to market capitalization and investment style will be presented
first, as support for the construction of the research study. Other researchers have found that
performance is affected by both market capitalization and investment style; I have chosen to
focus on a single market capitalization range (small cap) and investment style (value) in order
to eliminate the influence of these two variables on results.
Research that directly relates to the variables in question will appear next. Given that the
impact of ownership has not been studied, articles related to the issue of incentives will be
summarized. The underlying principle is that ownership concentration functions similar to
properly aligned incentives. The economics of ownership is such that employee owners will
focus their attention on investment performance first. In this way, incentives are aligned
directly with their investors. Therefore, research related to the issue of incentives is presented
in this literature review. Specifically, research related to the levels of personal investment by
the board and fund managers will be discussed. In addition, articles will be included that
relate to the other variables in the research study: assets under management and historical
firm performance. Research related to how performance can be affected by the level of assets
under management and prior performance will be presented. Finally, research in support of
the chosen methodology will be evaluated. Specifically, studies that have been successfully
executed with the chosen research methodology will be reviewed.
Theories of Ownership Structure and Firm Value

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Berle and Means (1932) take the view that there is a separation of ownership and control in
the modem large corporation. Large modern corporations, "quasi-public corporations” in
their term, rely on the public capital market for their financing. This dilutes their ownership,
and the result is that neither shareholders nor managers have a significant stake in the firm.
The shareholders in diffusely owned firms would not monitor the managers because they bear
all the monitoring cost.
Small managerial ownership does not provide the managers enough incentive to serve
shareholders. Instead, managers pursue their own utility-maximizing objectives even at the
expense of shareholders. Those presumptions imply that diffuse ownership structure is related
to lower firm value. Any self-interested individual does not allow her wealth to be
systematically exploited.
Demsetz argues that realized ownership structures are the outcome of shareholders’ capital-
raising decisions. A more concentrated ownership structure increases the effectiveness of
monitoring and hence reduces agency cost, but it also increases the cost of capital. This is
because a risk-averse investor would purchase additional share only at lower price due to the
burden of taking firm-specific risk from concentrated ownership. Thus this raises the cost of
capital. After all agency cost is just a part of production cost and is allowed up to the level
where the bearing of it increases profit through the reduced capital cost that it brings. Thus,
depending on the severity of the agency problem and the importance of capital cost, each firm
may choose a different ownership concentration.1 This leads to the conclusion that there
should be no relationship between ownership structure and firm performance. Demsetz and
Lehn (1985), hereafter referred to as D-L study, investigate the determinants of ownership

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structure and show that the fraction of shares owned by five largest shareholders, as
determined by firm size, control potential, systematic regulation and amenity potential of a
firm’s output, is unrelated to accounting profit rate. For a large firm the proportion of shares
needed for control purposes is small. Also, this large firm size increases the cost of capital for
a given proportion of shares. Control potential is the potential gains from a more effective
monitoring on managers. D-L suggests that under an unstable business environment, it is
difficult for owners to observe managers’ behaviour. Thus, a more concentrated ownership
structure is needed when a firm shows a high firm specific risk. Systematic regulation may
reduce control potential and plays a substitution role of monitoring managers. For some
industries, for example professional sports clubs and media industry, investors are interested
in being a controlling shareholders rather than the profit from the business. D-L terms this
factor as amenity potential of a firm's output. Other researchers seek to examine the
entrenchment effect of management shareholding. Morck, Shleifer, and Vishny (1988)
develop the hypothesis of "convergence of interests and managerial entrenchment." hereafter
referred to as MSY hypothesis. The "convergence of interests” part says that as managerial
ownership increases, firm value should increase due to an incentive aligning effect. However,
the "managerial entrenchment” part asserts that as managerial holdings become larger,
managers become more entrenched. This is because higher managerial ownership protects the
managers from the corporate control market. This means that firm value should decrease with
managerial ownership. Taken together, the MSV hypothesis argues that there is a nonlinear
relationship between managerial ownership and firm performance.
The differences between the two theories lie in the different concepts of ownership
concentration and in whether ownership structure is viewed as an equilibrium decision or not.
Demsetz and Lehn study the controlling role of large ownership interests and examine the

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determinants of ownership structure, focusing on various conditions that require better
monitoring. Morck et al. (1988) do not seek to explain ownership structure, but seek to
examine the entrenchment of managerial holding on firm performance. In other words, there
is no equilibrium concept in their model. Consequently, their model cannot explain the
different management ownership structures across firms. According to their logic, managers
should seek an entrenched position with a very large management shareholding.
Capital Structure Theories
Capital structure theories focus on two areas. One area stresses that there is an optimal capital
structure for each company and the company should always be making changes to try to
achieve this optimal value. The other area does not center on a target capital structure. Instead
this area explains capital structure through a variety of market and manager influences that
are based on asymmetric information. Each of the capital structure theories that have been
proposed combine these two areas in different ways to explain what a firm takes into
consideration when making capital structure decisions. The first area of capital structure
theory focuses on an optimal capital structure target. Bradley, Jarrell, Kim, (1984, 1260) did
the first work that proposed that capital structure has an optimal target. The research in this
area has focused on finding the optimal capital structure for a firm to minimize their cost of
capital or to maximize the firm value by using a mixture of debt and equity financing. The
optimal capital structure is determined by various tradeoffs between the costs and benefits of
debt versus equity.
Bradley, Jarrell, Kim, (1984, 1260) explored how capital structure affects the cost of capital.
Their work showed that in perfect capital markets with no taxes, capital structure does not
affect cost of capital or company value. In this scenario, capital structure essentially does not

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matter and capital goes to the most efficient users. Bradley, Jarrell, Kim, (1984, 1260) added
corporate taxes to the analysis. This addition changed their conclusion about capital structure.
The interest tax shield causes the value of the firm to increase with the increase of interest on
the debt being carried. Therefore, the firm value is maximized when the firm is financed
entirely with debt. Bradley, Jarrell, Kim, (1984, 1260) incorporated personal taxes in to the
analysis. This addition showed that the optimum capital structure could be either at 0% debt
or 100% debt thereby shifting the conclusion back to capital structure being irrelevant.
Flannery, (1986, 18) incorporated the addition of tax shields other than interest payments on
debt. This study found optimal levels of capital structure that are a mix of debt and equity.
Flannery, (1986, 18) also found optimal levels of capital structure as a mix of debt and equity
when personal and capital gains taxes were considered with respect to default conditions.
Theory X and Theory Y
The way managers think about is work and what they want to lead them to adopt different
behaviors. There are two conflicting approaches.
X theory is based on a negative activity compared to the employee. Managers presume that
no one wants to work or would like to work at work. Employees dislike work and avoid it
where possible. That leads to some consequences on the performance of the leader (Chirinko
Shingha, 2000, 417).
A deduction of Theory X is that employees would flee from any liability, since all that really
matters is to keep working. The consequence is that the leader focuses all decisions in a spirit
of authority. Theory Y is contrary to the previous one. Considers that the worker does not

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mind making the effort necessary to perform their activity, and they are interested in the goals
of the company and is willing to take responsibility.
The worker is able to enjoy the tasks performed and considered a disgrace not to apply their
ability, creativity and imagination. This leads to a type of behavior management at which the
delegations of responsibilities, flexible working and participatory are the essential part in the
conduct of the company.
Model of Hersey and Blanchad
Leadership styles are produced by very different motives. One model of leadership is the
best known and Blanchad Hersey. The situational leadership theory is a contingency that
contra in the followers (Bertrand, Schoar, 2003 1208).
The maturity of the followers is the variable of situation into account in this model. Maturity
considered in two aspects:
• Disposition: the maturity to want to do the job and take responsibility.
• Capacity: the maturity to do to have sufficient knowledge.
The leadership style is not recommended for people who are motivated and trained to do the
job order is a style called. Delegate: the style of leadership that recommend when followers
are motivated and trained on the job. Enter: are the fans to act before they are trained but are
not motivated. Persuade and support: the style when fans want to do if you work, i.e., they are
motivated but are not trained (Loxley, 1986, 75).
Financing
For a company, there are many and diverse ways of financing their impending investments
(Davey, 1982, 34). A distinction is made between equity and debt, and between internal and

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external financing. Debt and equity differs in a number of different factors. Shareholders'
equity of the company is usually made available indefinitely, while borrowings are usually
paid back at some point be. The equity investors have in general not only wealth but also
membership rights, which means that they have the opportunity to influence corporate policy
(Eastaugh, 1987, 537). Securitization is the equity in the joint-stock companies, for example
by means of shares, the shares. Stocks have the advantage that they are usually very liquid,
because the equity holders of their shareholdings can usually just keep on the stock exchange.
Borrowing is usually limited, and leaves with a fixed interest rate.
If the capital loss offset as buffers so that the company can not operate its liabilities, it must
file for bankruptcy. The administrator of the observed residual value is then divided among
the creditors according to their share of their demand to the total liabilities of the company
(Kuo, 1989, 40).
Borrowing may be in very different ways provided. It goes from normal loan agreements
with the bank to marketable debt securities. The latter are highly standardized and very liquid,
whereas the normal resale credit agreements can be quite expensive, however. This is done
using so-called asset-backed securities. External financing is characterized in that cash flow
into the company, while preventing the internal financing that cash flow from the company.
On the catchiest is in the inner-self-financing, which is called self-financing. These are, for
example, the retention and reinvestment of profits gained. If corporations reinvest their
profits, so do not pour in the form of a dividend, corporate income tax of currently 25%
becomes due (Eastaugh, 1987, 537).
An internal financing is also caused by an over-estimation of liabilities and an undervaluation
of the assets of the company. In this way, the gain is reduced and remaining cash in the

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company. Since this form of internal self-financing is very difficult to detect, we speak here
of the so-called silent self-financing. Also, depreciation and provisions to reduce the gain and
thus ensure that cash will remain in the company. Here, however, the allocation to the equity
or debt financing is difficult. Provisions against potential losses of banks are clearly assigned
to equity. Pension provisions are however classified as internal debt financing (Ross,
Westerfield, Jordan, 2004, 537).
Basically, is not a clear-to-one, as the assets of a company are financed, as no direct
correlation between the liabilities and the assets side of the balance sheet is. Therefore, it is
also in the financing of disinvestment, which - of course is ultimately nothing more than an
exchange of assets is not, whether this is an inner self or inner-party financing - if they are in
equity (Parrino, Kidwell, 2009, 99).
Types of corporate finance
Internal financing
The money comes from the self-financing or to raise capital from reserves from within the
company (Brealey, Myers, 1991, 34). The Company retains a maximum of independence.
Neither lenders nor shareholders are in a position to influence company policy. One danger is
that the company escapes through a rigorous pursuit of self-sufficiency of capital for
additional profits.
External financing
If the equity base of the company used for many loans, this can be done at the expense of
security and independence. After all, lenders can obtain some influence - for example in the
area of spending (Berk, DeMarzo, 2007, 80).

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In the case of equity financing, the money also comes from outside. Here is granted to
investors, depending on the type of investment, partly massive participation rights, although
these may be restricted in practice (Stern, Chew, 2003, 80).
Difference between Internal and External Financing
When analyzing capital structure decisions, it is important to distinguish between the sources
of internal and external funding. The Internal Financing comes from the operations of the
company it includes sources such as retained earnings, wages due or accounts payable (Berk,
DeMarzo, 2007, 80). For e.g. the company makes profits and reinvested in new plant and
equipment, i.e. domestic financing. External Financing occurs whenever managers of the
company have to obtain funds from outside investors or lenders. For e.g. a company issues
bonds or shares to finance the purchase of plant and new equipment, this is External
Financing (Brealey, Myers, 1991, 34).
Usually, time management is the effort required to make these decisions of domestic
financing and the degree of scrutiny of the planned expenditures are lower than in the
External Financing. As a result, the domestic financing plans hold the company more directly
to the discipline of capital markets than domestic financing (Ross, Westerfield, Jordan, 2004,
537).
Impact of Ownership Structure on Financial Performance
The research question I proposed is that employee ownership is related directly to
performance. The rationale is twofold. First, employee owners have more control over the

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overall level of assets they manage and can close their strategies to capital inflows when the
overall size of the fund, as measured by assets under management, becomes problematic.
Second, employee owners have interests that are directly aligned with investors in that their
personal wealth is tied directly to investment performance.
Kacperczyk et al. (2005) evaluated how assets under management play a role in performance.
They hypothesized funds with lower assets under management (i.e., smaller funds) would
outperform larger ones because of diseconomies of scale. The authors confirmed the
hypothesis and found that smaller funds tend to perform better than larger ones. The return
differential of 0.32% per quarter was found to be statistically significant. One possible cause
is that more concentrated funds tend to have lower assets under management. This is not
particularly surprising as many investors look for broadly diversified, benchmark-like
portfolios.
Funds that do not fulfil the criteria may not see much investor interest in the form of capital
inflows. The same conclusion was reached by Chen et al. (2004). The authors found a fund's
performance to be inversely correlated to lag assets under management. More specifically, a
two standard deviation shift in lagged AUM led to a 5.4 to 7.7 basis point move in
performance the subsequent month. The performance shift was more significant in small cap
funds where liquidity becomes a problem when asset size grows. The authors noted the effect
also could be attributed to hierarchy costs, where small organizations do better than large
ones at processing and acting on "soft" information, which is information that is not easily
verified. At large organizations, such information is difficult to get up the hierarchy structure
whereas at smaller organizations soft information is easier to disseminate and act upon.

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Chen et al. (2004) found that a high level of AUM did not adversely affect the performance
of funds with a larger cap investment focus. Also of note is the finding that fund performance
improved as the fund size for other strategies offered by the same firm increases. This could
be because of better rates being available for trading and lending. The authors' work provided
strong support for the belief that managers who have control over assets under management
may have a leg up on generating excess performance. The finding is particularly relevant
because my study focuses specifically on small cap managers, the group most affected by
lagged AUM. According to the authors' work, if the group of managers studied had been
different (e.g., large cap), AUM would not have been expected to play such a significant role.
It seems feasible then that employee-owned firms, which have more control over the level of
assets they choose to manage and have more flexibility about making a decision about
whether or not to take on new assets, have an inherent advantage over other firms. While
employee-owned firms are able to readily control the level of AUM, non-employee owned
firms are at the mercy of upper management (i.e., the firm president, directors, etc.) about
determining whether AUM can be limited. This could be considered an extension of
hierarchy costs because the prospective loss of performance if the firm were to take on more
assets is not always readily calculable and may be a form of soft information.
Persistence of performance is not addressed in either study, however, and support for relying
on persistence of returns needs to be found elsewhere. Carhart (1997) provided such support.
Carhart examined diversified equity mutual funds from 1962 to 1993 and evaluated whether
there is persistence in mutual fund returns. To conduct the analysis, he combined several
factors that may account for fund returns. He focused on a four-factor model that combines
the Fama-French (1992) three-factor model with Jegadeesh and Titman's (1993) momentum
factor. Thus, the four factors are essentially a market equilibrium model with four risk factors:

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beta, capitalization, valuation (book to market), and return momentum. He found these four
factors could explain a considerable amount of the variation in mutual fund returns.
Capitalization, valuation, and momentum account for most of the variation. Carhart noted the
low correlation between all four factors, indicating multi-collinearity is not a problem in the
model. In essence, cross-sectional variations in fund returns can be determined by whether
they hold high beta stocks as opposed to low beta, whether they invest in smaller cap
companies or larger caps, whether they invest in value stocks or growth, and whether they
pursue a momentum oriented strategy or one that is more contrarian.
The relevance of Carhart's (1997) work to this study is that he clearly showed there are
factors that need to be accounted for when evaluating mutual fund performance. Beta, cap,
valuation and momentum all account for some differences in fund returns. To best deal with
these factors in my work, I will focus specifically on a certain universe within domestic
equity fund managers, namely small cap value managers. This approach will fully and
effectively deal with cap, valuation and momentum, and, to a lesser extent, with beta. While
differences in beta may be detected within the small cap value manager universe, one would
expect the differences to be small and not material enough to effect results.
Further support for the studies mentioned above comes from Chevalier and Ellison (1999a).
While the main purpose of their study was to evaluate the relationship between performance
and a manager's age, SAT score and degree achievement, Chevalier and Ellison also
evaluated the portion of the return differences between managers is attributable to the
common risk factors of Fama and French (1992) and Jegadeesh and Titman (1993). The
remaining excess return is then attributed to managers' stock picking ability, which is related
to their choice of weights on the factors. They found managers with MBAs tend to buy

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growth stocks, that is, those with low book-to-market ratios. In addition, older managers tend
to use momentum-oriented strategies. Chevalier and Ellison confirmed that large differences
in performance are explained by investment style and cap.
Taking into account valuation, momentum and capitalization becomes a necessity when
evaluating investment manager performance. Effects of these factors need to be controlled for
in order for a robust analysis to take place. To control for the effect in my study, I chose to
focus on a specific grouping of managers who employ similar weightings to these factors.
Specifically, by focusing on only small cap value managers, I controlled for the effect of
valuation, momentum, and capitalization. Differences between managers in terms of
exposure to these factors will, of course, remain. But differences will be less material than if
a broader grouping of managers were being used. It could certainly be said that within the
small cap value universe, differences in factor loadings are a function of skill itself in that
managers are identifying which parts of the small value universe are more attractive. This
sort of periodic 'style drift' could be seen as part of the manager's skill set. Chevalier and
Ellison (1999a) also found that expenses have an impact on differences in manager returns.
This is a rather intuitive result as higher expenses make it more difficult to generate higher
net-of-fee results. To eliminate the impact of fees on my analysis, I used gross of fee returns
only. This levelled the playing field for all managers. It also allowed for a true equitable
comparison of performance data.
Finally, Kacperczyk, Sialm and Zheng (2005) confirmed that market capitalization, value and
momentum have an impact on cross-sectional returns. They confirmed findings that small
capitalizations do better than large cap. Contrary to other researchers' findings, however, they
found growth does better than value. Their results are influenced by the time period used for

19
analysis, which is from January 1984- December 1999. This time period captures the
significant rise in technology stocks (growth stocks) while failing to incorporate the
subsequent massive declines, which started in March 2000. As a result, the authors found the
differential between small growth funds and large value funds to be the widest differential
between any cap-style groupings at 0.39% per quarter. They indicated that concentrated funds
tended to overweight both small and growth during their sample period. The authors also
found expenses have a negative impact on returns, thereby supporting the use of gross of fee
returns as a neutralizing method.

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METHODOLOGY
Method and Model
The method chosen to conduct a research study should be selected on the basis of
appropriateness for the study. In quantitative methodology research questions are used to
structure the study, and in many cases a theory is used as the basis for the research. The
theory often relates variables and poses the relationships in terms of a hypothesis or research
question (Black, 1999). The objective proposed in this study is to discover the relationship
between the ownership concentration and firm performance. Reviewing the previous studies,
the method that researchers use are mainly regression model, and the instruments typically
used by the quantitative researcher to reveal relationships are surveys and experiments. In this
study, however, it was not possible to use experiments because, as is typical in financial
market research, it was not possible to have a control group and a test group. Therefore, ratio
analysis through financial statements has been conducted in this research.
Financial statements are often seen as a mirror to reflect the company’s real performance. It
may be useful to identify the users of the financial statements before analysing them, since
different users may have different needs. To achieve a complete interpretation for financial
statements, the research will cover the following aspects: profitability, liquidity, working
capital cycle, financial risk, and investment return.
Financial ratio analysis has been perceived as a very important tool for making an analysis of
the performance of an organization. It can provide assistance to the interpretation and show a
logical year- to- year comparison between companies when applying the same ratios to the

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different years’ financial statements. Some ratios are calculated using fixed formulas, such as
working capital ratios, return on capital employed, net asset turnover, quick ratio and gearing,
etc. Others are calculated by the proportional method, for example, changes in turnover and
profit margins. Comparing financial performances between the two will enhance accurateness
of the research conclusion.
The two companies, which will be examined in this research, Ted Baker PLC and French
Connection Group, are from apparel industry and has a similar range of firm size which is
measured by the total assets and employee numbers. However, Ted Baker has a lower
ownership concentration, and French Connection is relatively higher concentrated.
Data
As the use of existing data is widely accepted in financial market research, this study was a
study of existing data. Because the data were not gathered me, the data were considered
secondary. All data was collected from Orbis database and the annual reports of selected
companies, which is professional and highly reliable. I believe the number of data points
appearing on the database and annual reports is higher than the number that I could have
collected. In addition, the database contains the same information that I would have collected
if a primary data study had been pursued. I believe the use of secondary data was justifiable
for the purposes of this study.
Moreover, for financial analysis performance in this research, three years data is adequate for
the in-depth ratio analysis. The selected company had significant policy and marketing

22
structural changes before 2010 and if the research incorporated the data of five years, it could
not have reflected the results which the core purpose of this research.
The dependent variable in this study is the corporate performance, which is measured by the
profitability ratios like ROE, operating profit margin and profit margin. And the independent
variable is ownership concentration, which can be represented by the proportion of large
shareholders among all the shareholders in the firm. In this case, we define large shareholders
as the shareholders who own more than 5% of the total share in the company.

23
FINANCIAL STATEMENT ANALYSIS
This section will analyse the financial and business performance of Ted Bakers and will
compare the financial performance of Ted Bakers with the financial performance of French
connection in the past three years. This section will first focus on analysing the financial
performance analysis of Ted Bakers, which will involve comparison with the financial
performance of French Connection.
Financial Statement Analysis of Ted Bakers: A Comparison with French Connection
For the purpose of financial performance analysis, the researcher had decided to focus on
four major areas of financial performance of Ted Bakers, i.e. leverage, liquidity, profitability,
and investor perception of Ted Bakers (Eisenbeis 2011). Focusing on these areas of Ted
Baker with the help of financial ratios would assist the researcher in covering every major
facet of the financial performance of Ted Bakers in the past three years and will assist in
depicting a comprehensive picture regarding the financial performance of Ted Bakers
(Eisenbeis 2001).
1. Ownership Concentration
As discussed above, the proportion of large shareholders among all the shareholders in the
firm has been used to represent the ownership concentration in this study. The statistics from
Orbis shows that Ted Baker has 8 shareholders own more than 5% of total shares in the firm;
the ownership concentration of Ted Baker is 13.79%.

24
Ted Baker PLC (First 12 out of 58 shareholders)
Shareholder name Total share ownership (%)
1 A 35.59
2 B 7.91
3 C 7.88
4 D 7.02
5 E 6.95
6 F 6.75
7 G 6.52
8 H 5.45
9 I 4.83
10 J 4.04
11 K 3.67
12 L 3.08
Table 1: Current Shareholders of Ted Baker
(Source: Orbis)
In French Connection Group, 6 large shareholders owns more than 5% of total share among
all shareholders, but there are only 28 shareholders currently. The ownership concentration of
French Connection is 21.43%. Therefore, French Connection has a relatively higher
concentrated ownership comparing with Ted Baker.
French Connection Group PLC (First 12 out of
28 shareholders)
Shareholder name Total share ownership (%)
1 A 39.19

25
2 B 12.07
3 C 12.05
4 D 8.48
5 E 6.30
6 F 5.00
7 G 3.84
8 H 3.80
9 I 2.86
10 J 1.61
11 K 1.36
12 L 1.31
Table 2: Current Shareholders of French Connection
(Source: Orbis)
2. Leverage Analysis
Leverage was the major and the first factor of the assessment of the financial performance of
Ted Bakers. The analysis of the leverage of Ted bakers would help in analysing the amount
of dependency of Ted Bakers on debt financing for their running their business and carrying
out their daily operations (Foster 2006). This would help in analysing the amount of default
risk that might be associated with Ted Bakers (Galai and Masulis 2002).
Debt to Assets Ratio Analysis
2012 2011 2010
Total Debts to Assets-Ted Baker 0.36 0.35 0.31
Total Debts to Assets-French connection 0.40 0.39 0.44

26
Table 3: Total Debts to Assets comparison
The first ratio for analysing the leverage of Ted Bakers and French Connection is the debt to
assets ratio. Debt to assets ratio helps inn analysing the amount of company assets that they
have financed through debts and is a very useful indicator of the debt dependency of a firm
(Hansen 1997). Table 3 has summarized the debt to assets ratio of Ted Bakers and French
Connection in the past three years.
Figure 1
(Source: www.frenchconnection.com, www. tedbakerplc.com)
Figure 2
The above table is showing that Ted Bakers was not so much dependent on debt financing for
managing their assets in comparison to French Connection and over the past three years, Ted
Bakers (on an average had financed around 30 to 35% of their total assets through debt
financing. However, on the other hand, French Connection was much more dependent upon

27
debt financing for financing and managing their assets, and in the past three years, their
average debt dependency was around 40% in the past three years.
Figure 3: Total Debts to Assets comparison
Figure 3 has summarized the trend of the debt to assets ratio of Ted Bakers and French
Connection in the past three years. It can be seen from the trend in the past three years that
Ted Bakers had somehow increased their dependency on debt financing; however, French
Connection had managed to reduce their debt dependency in the same period. However, it is
easily observable that the Ted Bakers had lower level of debt financing as compared to
French Connection.
Capitalization Ratio Analysis
2012 2011 2010
Capitalization Ratio-Ted Baker 1.64% 1.99% 1.95%
Capitalization Ratio-French connection 1.20% 1.26% 1.09%
Table 4: Capitalization ratio comparison
The second ratio in the ratio analysis was the capitalization ration, through which the
researcher has assessed the leverage element of the capital structure or capitalization of Ted

28
bakers and French Connection to manage their operations and growth (Holmen 2008). Table
4 has summarized the capitalization ratios of Ted Bakers and French Connection and from
the above figures. It is evident that both of the companies were not dependent on long-term
debt financing for managing their operations.
Figure 4: Capitalization ratio comparison
The trends of capitalization ratios of Ted Bakers and French Connection in figure 4 are
showing that both of these companies had reduced their dependency on long-term debt
financing in the past three years. However, in this case, table 4 is showing that Ted Baker was
slightly more dependent upon long-term debts in comparison to French Connection.
Debt to Equity Ratio Analysis
2012 2011 2010
Debt to Equity-Ted Baker 0.56 0.54 0.45
Debt to Equity-French connection 0.67 0.66 0.80
Table 5: Debt to Equity Comparison

29
In the previous section, it was seen that both Ted bakers and French Connection did not had
much dependency on dent financing for managing their business. Therefore, this section had
analysed the debt to equity ratio of both these companies that would help in analysing the
capital structure and financing priorities for both of these companies. Table 5 is representing
the analysis of the previous section and is showing a very low level of debt dependency of
Ted Bakers and French Connection.
Figure 5
Figure 6

30
Figure 7: Debt to Equity Comparison
The trend of debt to equity of French Connection and Ted Bakers is showing that Ted bakers
had been increasing debt financing in the past three years, which is supporting the analysis of
the capitalization ratio of Ted bakers. Therefore, it could be said that both Ted Bakers and
French Connection were majorly dependent upon equity financing and short-term debt
financing with a minimal amount of long-term debt financing. This heavy dependence on
short-term debt financing is justified as both French Connection and Ted Bakers are
operating their business in the menswear business in US and they had to invest heavily in
current assets for managing their daily operations.
3. Liquidity Ratio Analysis
As discussed in the previous section, Ted Bakers and French Connection had high level of
dependence on the equity financing and short-term debt financing. A heavy dependence on
short-term debt financing have pros and cons, as short-run debt financing like running finance
or over draft would mean that a company would have ample amount of finance at all times.
However, it can also create liquidity problems in the short-run (Prahalad & Ramaswamy

31
2009). Therefore, this section would analyse the liquidity position of Ted Bakers and French
Connection.
Current Ratio Analysis
2012 2011 2010
Current ratio-Ted Baker 1.98 2.14 2.36
Current ratio-French connection 2.19 2.19 1.93
Table 6: Current ratio comparison
Figure 8: Current ratio comparison
Current ratio was the first financial ratio that has been used to analyse the liquidity position of
Ted Bakers and French Connection. Table 6 has summarized the current ratios of Ted Bakers
and French Connection in the past three years and figure 8 is representing the trend
comparison of Ted Bakers and French Connection. It is evident that the current ratio of both
the companies was very similar and both the companies had a very current ratio of nearly 2,
in the past few years. This is showing that both French Connection and Ted Bakers had
almost £2 of current assets for every £1 of current liability. This is showing that the liquidity
position of Ted Bakers and French Connection was pretty satisfactory, as the previous section

32
had showed that French Connection and Ted Bakers was heavily dependent upon short-term
debt financing and a current ratio of 2:1 is showing that they had enough liquidity to manage
there short-run obligations. The coming sections would further analyse the liquidity positions
of Ted Bakers and French Connection in more depth and would analyse the liquidity position
of Ted Bakers and French Connection from a critical perspective.
Quick Ratio Analysis
2012 2011 2010
Quick ratio-Ted Baker 0.86 1.05 1.19
Quick ratio-French connection 1.24 1.31 1.21
Table 7: Quick ratio comparison
Figure 9: Quick Ratio comparison
For the purpose of in-depth analysis of liquidity position of Ted Bakers and French
Connection, the quick ratio has been used. Quick ratio compares the liquid assets of a
company (i.e. Current assets – inventory) against the current liabilities of the company (Chow
Gritta & Leung 1991). Table 7 has summarized the quick ratio of Ted Baker and French

33
Connection in the past three years and figure 9 is displaying the trend of the quick ratio of
both the company’s over the past three years.
It is evident that the quick ratio of Ted Baker had deteriorated in the past three years; while,
the quick ratio of French Connection had somehow fluctuated. From figure 10 and 11, it is
evident that the difference between the quick ratio and current ratio of Ted Baker was more
than the same difference for French Connection. The difference between quick ratio and
current ratio for Ted Bakers had been increasing in the past three years; while, the difference
for French Connection had somehow fluctuated in the same period.
Figure 10: Liquidity ratios comparison French Connection

34
Figure 11: Liquidity ratios comparison Ted baker
This comparison is showing that Ted Bakers had made more comparison in inventory in
comparison to French Connection in the past three years. This investment from Ted bakers
could be justified from the fact that Ted Bakers is aiming to explore global markets.
Therefore, it is imperative for Ted Bakers to make sure that they have enough inventories to
support this expansion. Furthermore, being a retailer it is very important for a large retailer to
have a good portion of money in inventories to support ongoing sales (Carey 2006).
Cash Ratio Analysis
2012 2011 2010
Cash ratio-Ted Baker 0.18 0.35 0.48
Cash ratio-French connection 0.70 0.75 0.63
Table 8: Cash ratio comparison
Figure 12: Cash ratio comparison

35
After the quick ratio, the other ratio that has been used for in-depth liquidity analysis of Ted
Bakers and French Connection is the cash ratio. The cash ratio makes a comparison between
the cash and equivalents of a company with the current liabilities of a company (Brealey and
Myers 2004).
Figure 13: Liquidity comparison
From table 8 and figure 12, it is evident that the French Connection had a heavy amount of
their current assets in form of cash as compared to Ted Bakers, which had invested a
comparatively smaller amount of cash in current assets. It is a very important ratio as it shows
the amount of cash a company has for paying its current liabilities. However, a very high cash
ratio of French Connection is indicating that they had made a heavy investment in their cash.
Figure 12 is implying that a big amount of cash of French Connection is not earning anything
for them. On the other hand, the cash ratio for Ted Baker is comparatively lower. The heavy
amount of investment from French Connection in short-term debt financing, as shown in the
previous section, is supporting such a high level of cash ratio for French Connection.
4. Profitability Ratio Analysis

36
Operating Income Margin Ratio Analysis
2012 2011 2010
Operating Income Margin-Ted Baker 11.28% 12.88% 12.10%
Operating Income Margin-French connection 1.95% 4.46% -4.24%
Table 9: Operating Income Margin Comparison
The first financial ratio that has been used to analyse the profitability of Ted Baker and
French Connection is the operating margin ratio. This ratio analyses the operating ratio
margin of a company as compared to its sales and is an important indicator of the ability of a
company to generate profits. From table 9, it is evident that Ted Bakers clearly had the upper
edge in terms of profitability against French Connection as the operating profit margin of
French Connection was very low and was even negative in the year 2010 and it had managed
to reach a figure of around 2% in the year 2012. However, on the other hand, as could be seen
in figure 14, as well, the operating profit margin of Ted Bakers was much greater than French
Connection.
Figure 14: Operating Income Margin Comparison

37
Ted Bakers had been operating at an operating profit margin of around 11-12% in the past
three years in comparison to 1% operating profit margin of French Connection. This has
shown that the Ted Baker was much more profitable as compared to French Connection in
the past three years.
Return on Equity (ROE) Ratio Analysis
2012 2011 2010
Return on Equity-Ted Baker 20.61% 22.73% 20.42%
Return on Equity-French connection 7.15% -4.39% -34.44%
Table 10: ROE (using net income) comparison
Figure 15: Return on Equity (ROE) Comparison
After the operating profit margin, the next financial ratio for comparing the profitability of
Ted Bakers and French Connection was the Return on equity, which is an important measure
of profitability of a company (Bhattacharya 2009). In this study, net income has been used in
calculating ROE. As this ratio measures the amount of profit that a company is generating on
its investments (Beneish 2008). Table 10 is once again showing that the performance of Ted

38
Baker in this aspect was once again way above French Connection as the return on equity for
French Connection was very low as compared to the return on equity for Ted Baker.
Profit Margin Ratio Analysis
2012 2011 2010
Net profit margin-Ted Baker 8.14% 9.21% 8.27%
Net profit margin-French connection 2.46% -1.12% -11.72%
Table 11: Profit margin comparison
The last financial ratio for measuring the profitability was the net profit margin, which
compares the net profit of a company against the sales of that company (Bragg 2007). The
comparison of net profit margin of these companies is showing that even though French
Connection showed net loss in the years 2010 and 2011, it has improvement in the past three
years in terms of performance. However, the net profit margin of Ted Baker has been a bit
smooth in the past three years.
Figure 16: Net Profit Margin Comparison
5. Investor Ratios

39
When analysing the financial performance of a company, it is imperative to analyse the
investor perception and suitability of a company, as well (Bell 2006). This would enable a
researcher in analysing every aspect of the financial and business performance of a company
(Begley, Ming, and Watts 2006).
Earnings Per Share (EPS) and Price to earnings ratio
2012 2011 2010
EPS-Ted Baker £ 48.90 £ 41.40 £ 32.60
EPS-French connection £ 5.5 -£ 2.4 -£ 9.6
Table 12: EPS Comparison
Figure 17: EPS Comparison
2012 2011 2010
Price-Earnings Ratio-Ted Baker 15.52 17.16 16.91
Price-Earnings Ratio-French connection 8.28 -34.93 -5.10

40
Table 13: Price to earnings comparison
Figure 18: Price to earnings comparison
EPS and price to earnings ratio were the initial financial ratios used to analyse the advantage
for the investor, if the investor would purchase that particular stock. Table 12 has
summarized the three-year EPS for Ted Bakers and French Connection and once again, the
performance of Ted Baker was much better than the performance of French Connection.
French Connection had reported loss in the years 2010 and 2011; therefore, the EPS was also
negative. On the other hand, Ted Bakers had reported very healthy EPS in the past three years
and had shown an improvement in the EPS in the past three years. It was the vase with the
Price to earnings ratio of both the companies.
Dividend Yield Ratio Analysis
2012 2011 2010
Dividend Yield-Ted Baker 4.08% 2.90% 4.11%
Dividend Yield-French connection 4.51% 1.23% 1.02%

41
Table 14: Dividend yield comparison
The dividend yield ratio helps in assessing the approximate return that an investor is earning
on the stock of a particular company. Once again, the dividend yield of Ted Bakers was better
than the dividend yield of French Connection in the past three years except the year 2012, in
which the dividend yield of French Connection exceeded the dividend yield of Ted Baker.
The reason for this increase in the yield of French Connection was the lower price of Ted
Baker.
Figure 19: Dividend yield comparison

42
CONCLUSIONS
Discussion
The analysis of the leverage position of Ted Bakers and French Connection had showed that
both Ted Bakers and French Connection are heavily dependent on equity financing and short-
term debt financing for managing their business. This strategy has resulted in the reduction of
default risk for both of these companies as long-term debt carries with it a risk of default. The
reduction in the default risk and dependency on short-term debt financing might have made a
positive impact on the liquidity of these companies. The liquidity position of both the
companies, i.e. Ted Baker and French Connection is good. However, Ted Baer has an edge
over French Connection in terms of liquidity and both of them have a comparatively low
level of liquidity risk.
Also, the profitability ratios shows that Ted Baker is much more profitable than French
Connection from 2010 to 2012. Both ROE, operating profit margin and profit margin of Ted
Baker is much high than French Connection. Moreover, the profitability ratios of French
Connection is negative in 2010, which represents a badly performance at that time. Overall,
Ted Baker performed well than French Connection in these three years. As Ted Baker has a
relatively lower concentration in ownership, it represent that a company with a lower
concentrated ownership may have better corporate performance than the higher ownership
concentration counterpart.
Limitations

43
The tool of financial ratio analysis has a limitation that it only analyzes past performances,
and ratio analysis is based on historical figures; variables such as inflation are ignored from
comparison. As a result, interpretation may not show a true picture of organization
performance (Kaplan F7, 2010). When comparing performances, we are assuming the same
accounting policy is consistently applied each year; however, there may be matters affect
management’s mind to change accounting treatments, thus, comparison is invalid.
The balances on financial statements indicate the company’s whole year performance, while,
throughout the year, performances may vary upon seasonal demands. Ted Baker operates in
designer brand business. Collections are often on sale at the end of each season. Therefore, it
is improper to conclude good financial performances while turnovers are mainly generated
from on-sale seasons.
Conclusion
The main purpose of this research is to discover the underlying relationship between
ownership concentration and firm performance, in order to present a clear picture for
investors and help them make right selection. In summary, the analysis from the financial
statements testifies that through comparing the profitability ratios between firms, lower
concentrated firm perform well than higher ownership concentration ones. Therefore, we can
conclude that the ownership concentration has a negative correlation with firm performance.
However, due to the limitation of ratio analysis, more researches about the underlying
relationship between ownership concentration and firm performance should be conducted in
the future. Moreover, during the analysis, we find that the leverage level and liquidity of a

44
firm may positively link with the ownership concentration. Hence, the connection between
leverage level and ownership concentration needs to discover in the future as well.

45
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