Does Institutional Ownership Improve Firm Investment Efficiency?

Abstract

Our study examines the influence of institutional investors on firm investment efficiency based on the non-financial firms listed on Chinese stock exchanges over the period of 2009–2014. Our results show that institutional ownership generally improves firm investment efficiency. However, after considering the independence of institutional ownership, we find that only pressure-resistant institutional ownership increases firm investment efficiency by alleviating both over-investment and under-investment. We also find that the pressure-resistant institution investors’ horizon matters. In particular, the pressure-resistant institution investors that have higher shareholdings are more stable, i.e. they tend to hold shares for a longer term, and thus have more intensive effect on firm investment efficiency. Our results also show that relaxing external financing constraints, reducing agency costs and increasing executive incentives significantly improve firm investment efficiency. The results are robust to controlling for endogeneity. Documenting the positive influence that pressure-resistant institutional investors have on firm investment efficiency and the channels through which they improve firm investment efficiency should be of interest to investors, regulators and academics.

Keywords: Institutional Ownership; Investment Efficiency; Corporate Governance