Does US financial crisis influence the relationship between ownership holdings and stock performance? The case of a developing economy

Abstract

This study investigates the influence of the U.S. financial crisis on the relationship between ownership holdings and stock performance by assessing the asymmetries between the effects of insider and institutional ownership before, during and after the U.S. financial crisis. The study examines NIFTY 500-listed companies over a period of 16 years, from 2002 to 2017, and distinguishes between three economic phases, namely the pre-crisis (2002–2007), the crisis (2008–2009) and the post-crisis (2010–2017) period. To test our hypothesis, we employ the panel-data techniques of feasible generalised least squares and system-generalised methods of moments to control for autocorrelation, heteroscedasticity and endogeneity issues. The findings reveal that insider ownership had significant U-shaped and inverted-U-shaped effects during the pre-crisis and the post-crisis phase, respectively, which confirms the existence of the monitoring and expropriation effects of insiders. The favourable effect of domestic institutions during the crisis phase supports the notion that such owners engage in efficient monitoring during periods of economic turbulence. The adverse effect of foreign institutional ownership during the pre-crisis period implies either a conflict of interest or capital-gain motives that resulted in selling behaviour when the market economy was growing. The time-variant effects of insider and institutional ownership are noted. Our findings have immense significance for investors and executives who wish to understand the varied effects of insider and institutional ownership as they pertain to the management of a crisis that is caused by an exogenous shock.