The Impact of Institutional Ownership on Corporate Operating Performance

NYU Stern Finance Working Paper No. 03-033

38 Pages Posted: 9 Jan 2004

See all articles by Anthony Saunders

Anthony Saunders

New York University - Leonard N. Stern School of Business

Marcia Millon Cornett

Bentley University - Department of Finance

Alan J. Marcus

Boston College - Department of Finance

Hassan Tehranian

Boston College - Department of Finance

Date Written: November 7, 2003

Abstract

This paper examines the relationship between institutional investor involvement in and the operating performance of large firms. We confirm a significant relationship between a firm's operating cash flow returns and both the percent of institutional stock ownership and the number of institutional stockholders. However, the positive relationship between the number of institutional investors holding stock and operating cash flow returns is found only for pressure-insensitive institutional investors (those with no business relationship with the firm). The number of pressure-sensitive institutional investors (those with an existing or potential business relationship with the firm) has no impact on performance. These results suggest that institutional investors that need to protect actual or promote potential business relationships with firms in which they invest are compromised as monitors of the firm, and lend credence to calls for greater independence of board members from firms.

Suggested Citation

Saunders, Anthony and Cornett, Marcia Millon and Marcus, Alan J. and Tehranian, Hassan, The Impact of Institutional Ownership on Corporate Operating Performance (November 7, 2003). NYU Stern Finance Working Paper No. 03-033. Available at SSRN: https://ssrn.com/abstract=468800 or http://dx.doi.org/10.2139/ssrn.468800

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Marcia Millon Cornett

Bentley University - Department of Finance ( email )

175 Forest Street
Waltham, MA 02154
United States

Alan J. Marcus

Boston College - Department of Finance ( email )

Fulton Hall
Chestnut Hill, MA 02467
United States
617-552-2767 (Phone)
617-552-0431 (Fax)

Hassan Tehranian (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-3944 (Phone)
617-552-0431 (Fax)

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