Ownership Breadth, Institutional Ownership, and Firm Performance

Abstract

Due to costly incomplete information, investors' awareness of a firm is a precondition for them to buy its shares. Accounting for firm characteristics and managerial strategic choices, this paper disentangles the interrelationships among the breadth of ownership (firm visibility), the depth of ownership (institutional ownership), and subsequent firm performance. Using a sample of U.S. firms between 1990 and 2004, we document three sets of new findings: First, institutional investors are attracted to firms with better information quality, less information heterogeneity, and better growth opportunities. In contrast, a firm attracts more shareholders if it has lower information quality, and higher agency problem. Second, institutional ownership is positively associated with future firm operating performance, and this relation is stronger for firms with higher growth opportunities, lower information quality, more information heterogeneity, and higher visibility. We also find that ownership breadth is positively related to future firm performance, and that this relation is stronger for firms with low visibility. Our evidence demonstrate that, condition on firm characteristics, ownership breadth and ownership depth have differential impact on firm values. For high growth firms with low information quality, institutional investors maybe the influential investors who can improve future firm performance. Third, an increase in firm's advertising expenditures and dividends can attract more outside investors, and enhances subsequent firm performance. This suggests that advertising can increase the visibility of the firm, and signal future firm performance in financial markets.