Does common institutional ownership restrain corporate financialization?

Abstract

Using a sample of Chinese non-financial listed firms from 2007 to 2021, we investigate the impact of common institutional ownership on corporate financialization. Our results show that common institutional ownership generates the “synergy effect” by restraining corporate financialization. We then assess the channels and find that common institutional ownership plays dual roles as an “information disseminator” and a “governance practitioner,” effectively curbing corporate financialization by enhancing information acquisition abilities and mitigating managerial myopia. Our cross-sectional tests reveal that the “synergy effect” is more pronounced when there is common institutional ownership without business affiliations or with larger network size, and when firms have lower state or management ownership. Finally, common institutional ownership guides firms toward developing the core business while enhancing firm value. Our findings have potential implications for regulatory authorities in guiding the benign interaction between real and virtual economies and preventing systemic financial risks.