The Effects of Institutional Investors on Firm Outcomes: Empirical Pitfalls of Quasi-Experiments Using Russell 1000/2000 Index Reconstitutions
43 Pages Posted: 30 May 2018
Date Written: May 13, 2018
Several studies identify the effect of institutional investors on firm outcomes by comparing firms that lie close to either side of the Russell 1000/2000 index threshold. Surprisingly, these studies find very mixed results on the difference in institutional ownership. This paper discusses five empirical approaches of the Russell quasi-experiment and develops three criteria to evaluate them. Using appropriate empirical approaches, I find that firms ranked at the top of the Russell 2000 have at most a 2 percentage points higher ownership of passive investors than firms ranked at the bottom of the Russell 1000 between 1998 and 2006. These results contribute that the quasi-experiment is suitable to identify the effect of passive investors, but not the overall effect of institutional investors. Studying corporate social responsibility (CSR) as an example for a firm outcome, I do not find that passive investors have a significant effect on CSR scores.
Keywords: Institutional Investors, Institutional Ownership, Quasi-Index Investors, Passive Mutual Funds, Regression Discontinuity, Russell Indexes, Corporate Social Responsibility
JEL Classification: G23, G30, M14
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