Does Institutional Ownership Promote the Transformation of Underperforming Firms?
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
July 15, 2013
Claremont McKenna College Robert Day School of Economics and Finance Research Paper No. 2012-02
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.
Number of Pages in PDF File: 41
Keywords: institutional investors, monitoring, corporate governance, underperforming firms, acquisition, bankruptcy, distressed firms
JEL Classification: G3, L2, G20, G33, G34
Date posted: March 5, 2012 ; Last revised: August 11, 2013