Does Institutional Ownership Improve Firm Investment Efficiency?

49 Pages Posted: 30 Oct 2018

See all articles by Cao Yue

Cao Yue

Hunan University - Business School

Yizhe Dong

University of Edinburgh Business School

Yu Lu

Beijing Technology and Business University - Business School

Diandian Ma

University of Auckland Business School

Date Written: October 6, 2018

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

Suggested Citation

Yue, Cao and Dong, Yizhe and Lu, Yu and Ma, Diandian, Does Institutional Ownership Improve Firm Investment Efficiency? (October 6, 2018). Emerging Markets Finance and Trade, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3261975

Cao Yue

Hunan University - Business School ( email )

Changsha, Hunan 410082
China

Yizhe Dong (Contact Author)

University of Edinburgh Business School ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

Yu Lu

Beijing Technology and Business University - Business School

11/33, Fucheng Road
Beijing, 102488
China

Diandian Ma

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

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