Indian companies are often owned by promoters and families, resulting in a concentration of ownership. Family-owned firms are prevalent in India, with promoters or founders holding significant shares. These firms typically manage agency conflicts well, reduce costs associated with private benefits for owner-managers, and address financing concerns for growth opportunities. Prior research suggests that ownership concentration positively impacts firm value, as owner-managers focus on reputation and growth and have limited incentives to exploit private benefits. However, contrary to expectations, we believe that more dispersed ownership structures in Indian firms could lead to higher expected returns due to reduced incentives for small owners to monitor managers, potentially increasing the incentives for large owners to expropriate minority shareholders. This study aims to explore the relationship between the investor base and expected returns using ex-ante cost of capital models for listed firms in India over six years from 2016 to 2021. The Earnings Persistence (EP) model is used to estimate expected returns, incorporating three implied models: the price-earnings growth (PEG) model, modified price-earnings (MPEG) growth model, and Ohlson and Juettner-Nauroth (2005) model. Empirical evidence supports our prediction that firms with a larger investor base tend to exhibit higher expected returns. These findings have significant implications for managers when making financing decisions and for regulators aiming to enhance investor protection standards.
