Download this Paper Open PDF in Browser

Does Institutional Ownership Promote the Transformation of Underperforming Firms?

41 Pages Posted: 5 Mar 2012 Last revised: 11 Aug 2013

Grigori Erenburg

University of Western Ontario - King's University College

Janet Kiholm Smith

Claremont McKenna College - Robert Day School of Economics and Finance

Richard L. Smith

University of California, Riverside - Anderson Graduate School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: July 15, 2013

Abstract

We focus on firms that chronically underperform and evaluate ways that institutional investors can facilitate the redeployment of assets to higher valued uses. Our evidence indicates that institutional holdings affect firm survival. Increases in institutional holdings are associated with subsequent acquisition and decreases are associated with subsequent failure. For surviving underperformers, institutional holdings and changes are associated with improved performance, but long-run abnormal returns are still negative and Tobin’s Q is still low. Our findings indicate that this association between holdings and improved performance is not causal. Rather, it can be explained by “flight to quality” combined with persistence of financial performance, including persistence of abnormal returns for underperformers. The evidence casts doubt on interpretations of some previous findings of positive relationships between holdings and performance.

Keywords: institutional investors, monitoring, corporate governance, underperforming firms, acquisition, bankruptcy, distressed firms

JEL Classification: G3, L2, G20, G33, G34

Suggested Citation

Erenburg, Grigori and Smith, Janet Kiholm and Smith, Richard L., Does Institutional Ownership Promote the Transformation of Underperforming Firms? (July 15, 2013). Claremont McKenna College Robert Day School of Economics and Finance Research Paper No. 2012-02. Available at SSRN: https://ssrn.com/abstract=2015514 or http://dx.doi.org/10.2139/ssrn.2015514

Grigori Erenburg

University of Western Ontario - King's University College ( email )

266 Epworth Avenue
London, Ontario N6A 2M3
Canada

Janet Kiholm Smith

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
909-607-3276 (Phone)

Richard L. Smith (Contact Author)

University of California, Riverside - Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States
951-827-3554 (Phone)

HOME PAGE: http://www.agsm.ucr.edu/

Paper statistics

Downloads
98
Rank
116,389
Abstract Views
897