The Effect of Institutional Ownership on Firms’ Thrust to Compete
45 Pages Posted: 12 Feb 2018
Date Written: June 21, 2016
This paper develops a measure of a firm’s thrust to compete, which captures the relative importance of corporate values that propel a firm to achieve superior financial performance by emphasizing organizational effectiveness, fast response to external information, and enhanced competitiveness. Using this measure, we provide causal evidence that institutional investors’ preferences significantly affect firms’ thrust to compete. Particularly, we find that transient institutional ownership intensifies firms’ thrust to compete, while dedicated institutional ownership lessens it. Further, we demonstrate that as firms intensify their thrust to compete, they become more susceptible to future stock price crash risk, a phenomenon observed solely among those firms with a high proportion of transient, and a low proportion of dedicated, institutional ownership. Our findings have policy implications, since they identify thrust to compete as a channel through which institutional investors intervene to affect firms’ operating philosophy and decision-making. While this is true for both transient and dedicated institutional investors, we show that interventions from transient investors happen at the expense of shareholder value (i.e. increased crash risk).
Keywords: Thrust to compete; Institutional ownership; Transient investors; Crash risk; Firm value
JEL Classification: G20, G32, G34, G38, M48
Suggested Citation: Suggested Citation