Institutional Ownership and Firm Performance: Evidence from India

Abstract

Institutional investors with large ownership stakes have strong incentives to maximize their firms’ value as their ultimate objective is to earn maximum return for their own shareholders. By virtue of their large stockholdings, they have the opportunity, resources, and ability to monitor, discipline and influence managers, which can force them to focus more on corporate performance and less on opportunistic or self-serving behaviour. Their active involvement in the corporate affairs can help overcome one of the principal-agent problems in the modern corporation as they have both the general interest in profit maximization and enough control over the assets of the firm to have their interest respected. Present study intends to establish the relationship between institutional holdings/constituents of institutional holdings and firm performance measured in terms of balance sheet data viz., return on capital employed and earning per share as well as market data in terms of Tobin’s q and risk-adjusted excess return. The study documented that large size of institutional holdings in India do significantly influence the firm performance reported in terms of higher returns on capital employed,
higher earnings and market capitalization. However, the mutual funds have failed conspicuously to deliver any impact over firm performance. The Banks, FIs and ICs have also not been successful to enhance the firm value substantially. But the substantial holdings of foreign institutional investors have improved firm performance better than other constituents