Does institutional ownership engagement matter for greater financial performance? Evidence from a developing market

Abstract

Purpose

Previous empirical evidence scrutinizing the impact of the institutional ownership on the firm performance has produced inconclusive results and mostly concentrated in the developed market. Hence, the purpose of this paper is to assess the impact of the ownership engagement by pressure-resistant, pressure-sensitive and foreign institutions on the corporate financial performance in a developing market like India post US financial crisis.

Design/methodology/approach

This study considers a panel data set of 361 Indian listed firms from National Stock Exchange (NSE) 500 index for a period of eight years from financial year (FY) 2008-2009 to FY 2015-2016. The panel data regression (pooled ordinary least square [OLS], fixed-effect [FE] and random-effect [RE]) and simultaneous equation modeling are used by considering the institutional ownership engagement as both exogenous and endogenous variable.

Findings

The test results show that institutional ownership engagement by the pressure-resistant and foreign institution have a robust and positive effect, while ownership engagement by the pressure sensitive institution has an adverse impact on the financial performance of the Indian listed firms.

Research limitations/implications

The findings will boost the monitoring activities of the institutional owners in the developing markets. The investment from pressure-resistant and foreign institutions needs to be augmented in Indian firms to improvise their governance functions and performance.

Originality/value

This research will enrich the governance literature of the developing economies as the studies on institutional ownership engagement are limited in the developing world. Further, this study adds value by capturing two emerging institutional ownership category such as the pressure-resistant and pressure-sensitive, which are still untouched in the Indian context. Next, the consideration of the institutional ownership as both exogenous and endogenous is also novel to the Indian literature.

Citation

Panda, B. and Leepsa, N.M. (2019), "Does institutional ownership engagement matter for greater financial performance? Evidence from a developing market", International Journal of Law and Management, Vol. 61 No. 2, pp. 359-383. https://doi.org/10.1108/IJLMA-09-2017-0228