Higher Levels Of Institutional Ownership Research Articles

The power of institutional investors: empirical evidence on their role in investment in internal audit function

PurposeInstitutional investors are major shareholders in publicly traded firms and play crucial roles in the financial and governance aspects of these firms. Despite their importance, little is known about their role in internal auditing. This study aims to fill this gap by investigating the relationship between institutional investors’ ownership and investment in the internal audit function (IAF).Design/methodology/approachThe study uses ordinary least squares regressions with two-way cluster-robust standard errors (firm and year) to estimate the relationship between institutional investors’ ownership and investment in IAF for Malaysian listed firms between 2009 and 2020.FindingsThe findings show that companies with higher levels of institutional ownership invest more in IAF, suggesting that institutional investors can effectively monitor managers due to their large holdings. Moreover, both transient and dedicated institutional investors are more likely to invest in IAF.Originality/valueThe results highlight the importance of institutional investors as a significant determinant of investment in IAF, which can aid regulators and managers in understanding the institutional investors’ role in governing and optimizing the efficient use of a firm’s resources. The findings also provide insight into institutional investors’ behavior regarding monitoring systems, which may inspire regulators and policymakers to consider increasing institutional investors’ participation to enhance governance structures.

THE EFFECT OF IMPLEMENTING GREEN ACCOUNTING AND CSR DISCLOSURES ON THE QUALITY OF FINANCIAL REPORTING WITH INSTITUTIONAL OWNERSHIP AS A MODERATION VARIABLE

The purpose of this study was to investigate the effects of incorporating green accounting and corporate social responsibility (CSR) disclosure on the quality of financial reporting, with a focus on the energy sector companies listed on the Indonesia Stock Exchange from 2019 to 2021. The researchers collected secondary data from the official website of the Indonesia Stock Exchange (www.idx.co.id) or the company websites using purposive sampling. To analyze the data, the researchers employed panel data regression analysis and moderating regression analysis. The results of the study showed that both green accounting and CSR disclosure had a significant impact on the quality of financial reporting. This suggests that companies that incorporate green accounting practices and disclose their CSR activities tend to have higher-quality financial reports. Furthermore, the study found that institutional ownership played a moderating role in the relationship between CSR disclosure and the quality of financial reporting. Specifically, companies with higher levels of institutional ownership showed a stronger relationship between CSR disclosure and financial reporting quality. This implies that institutional investors, who often have a long-term perspective and a focus on sustainability, may place more importance on CSR disclosure when evaluating the quality of financial reports. However, the study did not find any significant impact of institutional ownership on the relationship between green accounting and the quality of financial reporting. This suggests that institutional ownership does not play a significant role in strengthening the relationship between green accounting practices and financial reporting quality.

The Moderating Effect of Institutional Shareholders on the Relationship between Board Attributes and Auditor Selection among Listed Financial Service Firms in Nigeria

The study examines the moderating effect of institutional ownership on the relationship between board attributes and auditor selection among listed financial service firms in Nigeria. It investigated whether institutional shareholding moderate the relationship between board size, board independence, board gender diversity, board meeting attendance and auditor selection among listed financial firms in Nigeria. The study used secondary data extracted from the published financial statements of the sampled firms for the period 2007 to 2020. The population of the study consists of 53 listed financial service firms in Nigeria. The study adopts correlational research design using logistic regression as a tool of analysis. This study presents evidence that higher levels of institutional ownership strengthen the effect of board attributes (gender diversity and board meeting attendance) on auditor selection. Hence, the result implies that managers may face stringent monitoring when institutional investors, board gender diversity and board meeting attendance interacts. Such superior monitoring may compel managers to consider hiring an industry specialist auditor to audit the firm which leads to boosting the firm’ value. The finding of this investigation has an important policy implication on enhancing sound corporate governance practices, particularly for firms operating in developing countries where the market for corporate control is ineffective.

CEO Political Ideology and Voluntary Forward-Looking Disclosure

Abstract This study investigates whether the management earnings forecasts of Republican and Democratic CEOs differ due to systematic differences in their information disclosure preferences. We find that Republican CEOs prefer a less asymmetric information environment than Democrat CEOs, and thus make more frequent, timelier, and more accurate disclosures than Democrat CEOs. Results using the propensity score matched sample and difference-in-differences analysis show that our results are unlikely to be driven by potential endogeneity. Our results are robust to controlling for various CEO characteristics and are stronger for firms with higher levels of institutional ownership and litigation risk.

Which Environmental, Social, or Governance (ESG) Activities are More Informative to Stock Prices?

While prior literature has investigated the impact of ESG activities on investors and other stakeholders, our paper is the first to disaggregate firms' activities into each of the Sustainability Accounting Standards Board (SASB)’s definition of Material Environmental, Social, and Governance activities and determine which of these ESG activities provide the greatest information content of stock prices. We find that material Social activities provide the greatest stock price informativeness and after further disaggregating each of the ESG classifications we find that both Social Capital and Human Capital activities provide informative stock prices, while Business Model and Innovation activities reduce stock price informativeness. Cross-sectionally, this effect is strengthened by higher levels of institutional ownership, further supporting the idea that material Social activities are important to sophisticated investors. Our results are consistent in a battery of sensitivity analyses.

Institutional investors and earnings management associated with controlling shareholders' promises: Evidence from the split share structure reform in China

We examine the effectiveness of institutional investors in constraining aggressive earnings management induced by strong contractual incentives. To this end we focus on the consequences of earnings-related promises (covenants) negotiated between corporate controlling shareholders and minority shareholders during China’s split-share structure reform, wherein failure to achieve profit benchmarks had the potential to transfer significant wealth from controlling to minority shareholders. Our initial analysis provides evidence that profit-promised firm-years are, on average, associated with income-increasing earnings management, and that this association is stronger for: (i) firm-years in which the profit-promise was satisfied, and (ii) firm-years in which proxies for the level of unmanaged earnings suggest that earnings management was needed to satisfy the promise. However, such benchmark-beating behavior is weaker for firms with higher levels of institutional ownership. Further analysis documents that the exit threat of institutional shareholders can discipline earnings management associated with profit promises. We also show that the effect of institutional shareholders in reducing earnings management associated with profit promises is greater for domestic mutual funds and for privately controlled firms. Interestingly, our evidence suggests that institutional investors only play an effective monitoring role over earnings management when their incentives are strongly aligned with those of other minority owners. In other cases, our evidence suggests that these investors may exacerbate the level of earnings management.

Does institutional ownership discourage investment in corporate R&D?

We examine the influence of institutional investor ownership in a firm on their investment in R&D. We find partial support for managerial myopia in that at a higher level of institutional ownership, we find managers cut back R&D investment. We find a positive relation between institutional holdings in a firm and their investment in R&D till the institutional holdings in the firm reaches a threshold. Our results are consistent with the notion that managerial myopia sets in as the managers yield to institutional pressure when the institutional ownership level exceeds a threshold. Our results suggest that managers become sensitive to the pressure from institutional investors when the institutional ownership crosses a threshold.We find the greater the stock undervaluation, the lower the investment in R&D. We find stronger negative relation between institutional ownership and R&D when the firm's stock is more undervalued, consistent with the notion that managerial myopia worsens when the firm is more likely to be a takeover target as their stock becomes undervalued. We find banks, insurance companies, and public pension funds have a positive influence on the firm's R&D, but mutual funds and hedge funds have a negative influence on R&D. We find positive influence of dedicated institutional investors but negative influence of transient investors and quasi-indexers on corporate R&D.

The differential effect of new product preannouncements in driving institutional and individual investor ownership

Firms often use new product preannouncements (NPPAs) to attract investors and inform them about innovative offerings in the pipeline. We observe that the appeal of an NPPA differs for retail and institutional investors. Utilizing prospect theory, we argue that the two types of investors face unequal levels of uncertainty and are dissimilarly loss averse due to varying levels of knowledge and access to resources. This results in varying attitudes towards investment horizon, risk-taking, and preference for information sources. We find investor proclivity toward an NPPA depends on several factors, including the short-term abnormal return, the valence of coverage in media and analyst reports, the firm's risk profile, and the exploration emphasis of the firm. Moreover, we show that higher levels of institutional ownership ultimately contribute to new product success. The results hold implications for strategies that managers can employ to increase investor ownership within the firm to fund innovation.

Equity analysts' recommendation revisions and corporate bond price reactions

This paper analyzes bond price reactions to examine the information spillover from equity analysts' recommendation revisions into the bond market. We document a positive relation between bond price reactions and recommendation revisions. On average, bond prices react positively to recommendation upgrades and negatively to recommendation downgrades. The strongest reactions are observed among speculative-grade bonds. While, on average, bond price movements are in the same direction as analysts' recommendation revisions, these revisions can also lead to bond price reactions in the opposite direction to share price reactions. We find evidence of negative bond return reactions relative to share price reactions among firms that are closer to distress, especially when they have high levels of institutional ownership or discretionary accruals. The negative relative price reaction between shares and bonds indicates that equity analyst recommendations sometimes carry security-specific information.

BOARD INDEPENDENCE AND CAPITAL STRUCTURE OF NIGERIAN NON-FINANCIAL LISTED FIRMS: THE MODERATING ROLE OF INSTITUTIONAL OWNERSHIP

The Nigerian corporate environment has the potentials for high information asymmetry and less disclosure due to the weak institutional structure and an ineffective market for corporate control. These instances may undermine the monitoring capacity of independent directors in the boardroom. Thus, signifying the need for a complementary corporate governance mechanism to boost investors’ confidence. This research views that institutional investors have the incentives to strengthen board governance, given their sophisticated financial expertise and management skill. Therefore, this paper measures the moderating role of institutional ownership on the relationship between board independence and firms’ capital structure. The study analysed the balanced panel data of 56 Nigerian non-financial listed companies for seven years (2012-2018) using the random effects technique. This study presents evidence that higher levels of institutional ownership strengthen the effect of board independence on the firms’ leverage and vice versa. Hence, the result implies that managers may face stringent monitoring when institutional investors and independent directors interact. Such superior monitoring may compel managers to take on higher leverage to boost firm’ value. Our finding has an important policy implication on enhancing sound corporate governance practices, particularly for firms operating in developing countries where the market for corporate control is ineffective.

Chief executive officer power and board gender diversity

This study explores the role of chief executive officer (CEO) power in determining board gender diversity. We constructed a CEO power index to measure gender diversity. We find that CEO power exerts a positive influence on board gender diversity. This finding is robust when compared to alternate measures of CEO power and board diversity. We also conduct various robustness and endogeneity tests, such as entropy balancing, two-stage least squares regression analysis, lead-lag specification, and system generalized method of moments, and our results survive in all cases. In the cross-sectional setup, we determine that firms with a larger board, a younger board, and higher level of institutional ownership most effectively influence the association between CEO power and gender diversity.

Board reforms around the world: The effect on corporate social responsibility

AbstractResearch Question/IssueThis study examines the effects of major board reforms on firms' corporate social responsibility (CSR) performance in countries around the world.Research Findings/InsightsUsing a difference‐in‐differences design, we find robust evidence that worldwide board reforms can have significant effects on various stakeholders, resulting in increased firm CSR performance in both the environmental and social dimensions. Relative to countries that have implemented comply‐or‐explain reforms, countries with rule‐based reforms tend to drive the increase in CSR performance post‐reform. Our results hold for both first board reforms and major reforms, across different types of reforms, and across various dimensions of CSR performance. In addition, the effect of reforms on CSR performance is more pronounced for firms with higher levels of institutional ownership or lower levels of insider ownership and in countries with weaker CSR awareness and more stringent legal and regulatory environments. Further analyses show that reforms strengthen the relationship between CSR performance and future financial performance. Finally, we explore the possible mechanism through which board reforms could have a significant effect on firms' CSR performance. We find that board reforms increase a firm's likelihood of integrating CSR criteria in executive compensation.Theoretical/Academic ImplicationsThe findings of this study suggest that worldwide board reforms that aim to increase shareholders' value can also have significant effects on various stakeholders, resulting in increased firm CSR performance in both the environmental and social dimensions, a non‐financial dimension of firm performance.Practitioner/Policy ImplicationsOur evidence suggests that increases in CSR performance are an important channel through which board reforms can increase shareholder value. In addition, our findings suggest that the effectiveness of reforms on CSR varies with both firm‐ and country‐level characteristics related to the relative influence of external shareholders. Thus, this study offers insights to policy makers interested in enhancing CSR performance in their country.

Dynamic behaviour of institutional ownership and firm life cycle: Evidence from Taiwan

ABSTRACT We find that firms in the growth and maturity stage generally have higher levels of institutional ownership, higher Tobin’s Q ratios, and are more likely to remain in their life cycle stage over the subsequent six-year period. Further analysis indicates a feedback effect between domestic and foreign institutional ownership. Finally, we find that the impact information transmission of foreign institutional ownership is faster than that of domestic institutional ownership. We conclude that Taiwan’s government has been successful in its efforts over the last 20 years to increase economic growth, strengthen corporate governance, and improve the country’s capital markets.

Institutional Ownership Board Characteristics and Firm Performance

This research study attempts to investigate the moderating role of financial institutions with corporate governance and firm performance variables in the light of a purposely developed contingent theoretical framework. The current study analyzed an unbalanced panel of 287 non-financial sector firms listed on Pakistan Stock Exchange (PSX) from 2005 to 2015 by using the technique Arellano-Bond dynamic panel-data estimation under assumptions of generalized methods of moments (GMM). The contingency framework proposed in this study confirmed the moderating role of financial institutions in corporate governance and performance variables. Empirical evidence revealed that higher level of institutional ownership in firm's ownership structure although discourages the large size board but encourages higher ratio of independent directors in the governing body. To the best of the authors' knowledge, the current study provides a deeper understanding regarding the role of financial institutions in corporate governance and performance mechanism particularly in the context of Pakistani emerging economy.

The role of institutional investors in pension risk transfers

Risk transfers represent a preferred method for removing pension liabilities from corporate balance sheet. We examine the role of institutional shareholders on firm’s decision to offload pension liabilities to professional risk managers. We find that the likelihood of pension risk transfers is higher for firms with higher level of institutional ownership and independent institutional owners. Firms with higher concentration of institutional ownership adopting a passive investment strategy are less likely to complete pension risk transfers. We also document the plan and sponsor-level factors affecting firms’ decision to undertake pension risk transfers.

Board Reforms around the World: The Effect on Corporate Social Responsibility

This study examines the effects of major board reforms on firms’ corporate social responsibility (CSR) performance in countries around the world. Using a difference-in-differences design, we find robust evidence that worldwide board reforms can have significant effects on various stakeholders, resulting in increased firm CSR performance in both the environmental and social dimensions. Relative to countries that have implemented comply-or-explain reforms, countries with rule-based reforms tend to drive the increase in CSR performance post-reform. In addition, the effect of reforms on CSR performance is more pronounced for firms with higher levels of institutional ownership or lower levels of insider ownership and in countries with weaker CSR awareness and more stringent legal and regulatory environments. Further analyses show that reforms strengthen the relationship between CSR performance and future financial performance. Finally, we explore the possible mechanism through which board reforms could have a significant effect on firms’ CSR performance. We find that board reforms increase a firm’s likelihood of integrating CSR criteria in executive compensation.

The Role of Institutional Investors in Pension Risk Transfers

Risk transfers represent a preferred method for removing pension liabilities from corporate balance sheet. We examine the role of institutional shareholders on firm’s decision to offload pension liabilities to professional risk managers. We find that the likelihood of pension risk transfers is higher for firms with higher level of institutional ownership and independent institutional owners. Firms with higher concentration of institutional ownership adopting a passive investment strategy are less likely to complete pension risk transfers. We also document the plan and sponsor-level factors affecting firms’ decision to undertake pension risk transfers.

How does CEO tenure affect corporate social and environmental disclosures in China? Moderating role of information intermediaries and independent board.

The present study provides empirical evidence on how chief executive officer (CEO) tenure influences the corporate social and environmental disclosures (CS&ED) of all listed non-financial Chinese firms from 2008 to 2016. We used fixed-effect panel data regression model to test our hypothesis. The findings show a negative impact of CEO tenure on CS&ED. Our study provides evidence that CS&ED increases in the early service tenure of CEOs than in their later service periods, as the early increase followed by a decline indicates the presence of non-linear inverted U-shaped association between CEO tenure and disclosure practices. In further analyses, we find that the negative effect of CEO tenure on CS&ED is more pronounced for the firms having a larger number of information intermediaries and independent directors, such as higher level of institutional ownership, analyst's coverage, and more independent directors in a firm. We found the stronger and robust outcomes after controlling the endogeneity problem. In conclusion, this study can be useful for policymakers to link CS&ED with firm economic practices to attain sustainable development goals. Moreover, CS&ED implementation can be an effective means for the managers to mitigate career-concerns.

Does recognition versus disclosure affect risk relevance? Evidence from finance leases in Japan

This study examines the risk relevance of recognized versus disclosed finance leases in Japan. More specifically, this study investigates whether and why equity investors treat recognized and disclosed finance lease obligations differently when assessing firms’ equity risk. This study shows that recognized finance leases are associated with equity risk while disclosed finance leases are not. Moreover, the relationships between recognized versus disclosed finance leases and equity risk are substantially different. However, for firms with higher levels of institutional ownership, the risk relevance of disclosed finance leases is similar to the risk relevance of recognized finance leases. These results suggest that institutional investors are more sophisticated at processing disclosed finance leases and treating disclosed and recognized finance leases similarly when assessing firms’ equity risk. Thus, this study provides evidence that investors’ information processing has significant effects on the risk relevance of lease arrangements.

Geographic diversification in real estate investment trusts

AbstractWhether geographic diversification within property portfolios is ideal remains an open question, with most studies finding either a diversification discount or no evidence of benefits. Using a sample of equity real estate investment trusts (REITs) from 2010 to 2016, we find a nonlinear relation between geographic diversification and firm value. Specifically, geographic diversification is associated with higher REIT values for firms that can be described as being more transparent (i.e., they have high levels of institutional ownership or invest in core property types). Whereas, geographic concentration is associated with higher REIT values for firms that can be described as being less transparent (i.e., they have low levels of institutional ownership or invest in noncore property types). Operating efficiency, at both the property‐ and firm‐levels, are the means by which the diversification value is realized. Operations improve as property portfolios become more geographically diversified for more transparent firms. When the improvements are decomposed into revenue generation and expense efficiency portions, we find revenue generation to be the main operational channel through which the benefits are obtained.