Institutional Investor Preferences Research Articles

ESG Disclosure, Institutional Investor Preferences and Firm Value

Based on stakeholder theory and signal and reputation theory etc,this paper evaluates the quality level of ESG disclosure of listed companies using Wind ESG score, and introduces the variable of institutional investors' shareholding ratio, selects 2780 listed companies from 2018-2022 as samples, analyses whether institutional investors have ESG investment preferences, and investigates the value of the quality level of ESG disclosure on the value of listed companies' impact mechanism, and further heterogeneity analysis on this basis. The empirical results show that, firstly, improving the quality of ESG information disclosure by listed enterprises in China is conducive to significantly increasing their enterprise value; secondly, institutional investors have ESG investment preferences and attach more importance to the ability of listed enterprises to develop in the long term; thirdly, the proportion of institutional investor shareholding plays a partly intermediary role in the process of the impact of ESG information disclosure quality on the value of the enterprise, i.e., listed enterprises with high-quality ESG disclosure level can attract the attention of institutional investors to the enterprise value. Third, the proportion of institutional investors' shareholding plays a partial mediating role in the process of ESG disclosure quality level affecting enterprise value, i.e., listed firms with high-quality ESG information disclosure can attract institutional investors to increase their shareholding, thus enhancing their enterprise value. Fourthly, the extent to which the quality level of ESG disclosure affects the value of listed firms varies according to the attributes of the firms: there is a significant difference between large-scale and small-scale, highly marketised and low-marketised listed firms; and there is no difference shown between state-owned and non-state-owned, light-pollution and heavy-pollution listed firms, and all of the above conclusions are robust. Accordingly, this paper puts forward recommendations to strengthen the construction of the domestic ESG disclosure and governance system, encourage listed enterprises to practice the concept of ESG responsibility, and develop medium- and long-term institutional investors, aiming to promote listed enterprises to achieve sustainable development, and thus promote the construction of the domestic ESG disclosure system.

Corporate ESG Performance and Shareholding Preference of Institutional Investors

With the widespread recognition of ESG investment concept, institutional investors in China's securities market are paying more and more attention to ESG performance of enterprises. However, different types of institutional investors pay different attention to ESG performance, and their shareholding preferences may be different. This paper takes A-share listed companies from 2018 to 2021 as samples to conduct an empirical study. The results show that: on the whole, institutional investors have an obvious ESG preference in China's A-share market, and corporate ESG performance is significantly positively correlated with institutional shareholding ratio. The research on different types of institutional investors shows that independent institutional investors have more obvious ESG preference for shareholding compared with non-independent institutional investors.

Mandatory corporate social responsibility and foreign institutional investor preferences

This study examines whether the heterogeneity among foreign institutional investors (FIIs) matters when investing in socially responsible investee firms. Exploiting a mandated corporate social responsibility (CSR) regulation in India and using manually collected CSR expenditure data, the results of a quasi-natural experiment confirm that firms that comply with the CSR mandate attract greater investment from FIIs. This positive nexus holds for both existing and new FIIs. However, the heterogeneity of FIIs plays a significant moderating role because FIIs from civil law origin countries and those considered independent and long-term investors invest more in mandated CSR firms.

Institutional Ownership Volatility and Investment Behavior of REITs

We find that the volatility of institutional ownership affects the investment behavior of real estate investment trust (REIT) managers. REITs exhibit stronger growth in real estate assets when they experience more volatility in institutional ownership. Debt is the likely source of financing these investments, whereas institutional ownership volatility does not explain for the equity issuance decisions of REITs. The effect of ownership dynamics on the investment decisions of REITs is mostly driven by institutions that hold highly diversified portfolios, which are classified as quasi-indexers and transient investors. The contribution of ownership volatility emerging from individual trading decisions of institutional stakeholders matters more than the ownership volatility of the institutional sector as a whole. Our findings suggest that REITs may cater their portfolios to the preferences of certain institutional investors.

The green effects of fund market – analysis based on institutional investors’ preference

PurposeAs Chinese stock market develops and grows, mutual fund plays an increasingly important role for strong financial strength and good social resources. This paper aims to present an overview of fund investment effect, identify the investment preference of institutional investors and explore the socially responsible investment value of mutual fund, especially green fund.Design/methodology/approachIn order to test the green effects in the fund market, especially from the perspective of institutional shareholding, the authors build three panel data models to examine the attention, promotion and network effect respectively.FindingsIn general terms, the authors obtain a positive relationship between mutual funds and green firms (attention effect). This positive relationship is conducted by the comparison of institutional shareholding level between green firms and non-green firms by using two-sample t-test. The authors find that although all the coefficients of mutual funds' shareholding variables are positively related to social performance, only the number of mutual fund shareholders shows slight significance. The authors observe a stronger promotion effect of green funds on social performance than the other mutual funds (promotion effect). From a network perspective as well as previous social capital research, the mutual funds shareholding network shows a significant and positive effect on the firm's social performance in the firm–fund network (CFClose) as well as in the firm–firm network (CCClose), while the coefficients of closeness in the firm and green fund network are positive but non-significant (network effect).Research limitations/implicationsAlthough some valuable findings have been documented, there is a great potential to be further explored. For example, how to guide more green funds to solve the finance problem of middle and small-sized firms may be another crucial task for the point of view of government or industry level. While at the mutual fund level, it is essential to positively participate in and fulfill the environment duty of listed firms which can not only satisfy the expectation of environment value investment.Practical implicationsThe fund market has witnessed unprecedented growth in China and plays an important role in promoting the development of green industries. This indicates the practice of mutual funds as socially responsible investment in China. Some effective measures should be taken to incentive the mutual funds to continually invest in environment-friendly firms, which would benefit to the promotion of social performance driven by financing innovation.Social implicationsThe ESG issue is a global one that needs the participation of the countries worldwide. As one of the most important emerging markets, regulators in China should consider taking more action in promoting ESG concerns. To some extent, institutional investments can actually reflect how the responsible investments are going in this market.Originality/valueThis paper provides a systematic empirical analysis of Chinese fund market in the view of institutional investor preference. Three green effects, namely attention, promotion and network effects, are put forward, which have not been employed in previous studies. Our work is useful for understanding sustainable finance which has been elevating into national strategy.

Risk-adjusted preferences of utility companies and institutional investors for battery storage and green hydrogen investment

Achieving climate-neutrality requires considerable investment in energy storage systems (ESS) to integrate variable renewable energy sources into the grid. However, investments into ESS are often unprofitable, in particular for grid-scale battery storage and green hydrogen technologies, prompting many actors to call for policy intervention. This study investigates investor-specific risk-return preferences for ESS investment and derives policy recommendations. Insights are drawn from 1,605 experimental investment-related decisions obtained from 42 high-level institutional investors and utility representatives. Results reveal that both investor groups view revenue stacking as key to making ESS investment viable. While the expected return on investment is the most important project characteristic, risk-return preferences for other features diverge between groups. Institutional investors appear more open to exploring new technological ventures (20% of utility respondents would not consider making investments into solar photovoltaic-hydrogen), whereas utilities seem to prefer greenfield projects (23% of surveyed institutional investors rejected such projects). Interestingly, both groups show strong aversion towards energy market price risk. Institutional investors require a premium of 6.87 percentage points and utilities 5.54 percentage points for moving from a position of fully hedged against market price risk to a scenario where only 20% of revenue is fixed, underlining the need for policy support.

Does Board Diversity Attract Foreign Institutional Ownership? Insights from the Chinese Equity Market

The study aimed to empirically investigate the impact of board diversity variables (age, gender, nationality, education, tenure, and expertise) on the investment preferences of foreign institutional investors in an emerging market, China. For this, sample data consisted of 1374 nonfinancial Chinese firms from 2009 to 2018. The study used OLS regression as a baseline regression, a fixed effect model to control omitted variable bias, and the two-step systems GMM model to control the endogeneity problem. The study revealed that board diversity variables (gender, nationality, education, and financial expertise) are positively associated with foreign institutional ownership in Chinese nonfinancial firms, implying that foreign institutional investors own a high percentage of Chinese nonfinancial firms with diversity of gender, nationality, education, and financial expertise. Age and tenure of board diversity, on the other hand, have little correlation with foreign institutional ownership. Further, the robustness regressions also confirmed the relationship between board diversity and foreign institutional ownership. This study made a unique attempt to provide empirical evidence that firms having diverse boards attract foreign institutional ownership by reducing asymmetric information.

Corporate social responsibility and inside debt: The long game

We examine the effect of CEO inside debt on corporate social responsibility (CSR). We document a positive relation between CEO inside debt and CSR. This positive relation is attenuated not only when firms face high risk, but also when firms have high short-term institutional ownership. Our evidence supports the view that CEOs with large inside debt holdings are more concerned about firm sustainability and, are therefore more likely to prefer CSR for long-term firm benefits, i.e., the long game. We also find that CSR and CEO inside debt jointly exert a significantly positive impact on long-run stock performance, particularly in the presence of a low level of short-term institutional holdings. Overall, our findings highlight the importance of aligning institutional investor preferences with CEO incentives in order to maximize shareholder benefits from CSR investment.

The signaling roles of ownership and board structure for foreign institutional investors in the tourism industry

Foreign institutional capital performs a critical role in the development of the tourism industry. Little research has been conducted to understand how foreign institutional investors choose tourism firms from the governance perspective. The primary purpose of the current study is to bridge this research gap by examining the signaling roles of CEO ownership, domestic institutional ownership, and institutional directors in preferences of foreign institutional investors. Outcomes show foreign institutional investors are more likely to invest in tourism firms who have higher CEO ownership, lower domestic institutional ownership, and a higher level of institutional directors. Implications and limitations are accordingly discussed.

Preferences of Institutional Investors in Commercial Real Estate

In this paper we analyze market segmentation by firm size in the commercial real estate transaction process. Using novel micro-level data, we look at the probability distribution of investors acquiring a specific bundle of real estate characteristics, distinguishing between investors based on the size of their real estate portfolio. We find evidence of market segmentation by investor size: institutional investors segment across property characteristics based on the size of their real estate portfolio. The probability that a large (small) seller will sell a property to a similar-sized buyer is higher, keeping all else equal. We explore potential drivers of this market segmentation and find that it is mainly driven by investor preferences. During the Global Financial Crisis (GFC), large investors were less likely to buy the ‘average’ property, as compared to the period before or after the crisis, indicating time-varying investor preferences.

Director attributes and institutional investor choices: evidence in Latin America

PurposeThis paper examines how the board of directors' attributes in terms of educational and professional backgrounds –that is board capital-, and demographics influence institutional ownership across listed companies in Latin America.Design/methodology/approachBased on unique hand-collected information of directors' educational and professional attributes across 427 firms in Latin America, the authors analyze the effects of directors' educational attainment, professional experience and demographic diversification on institutional investors' holdings.FindingsResults show that grey investor ownership favors directors with graduate studies and diverse boards regarding gender and nationality. Independent investors value the directors' professional experience like former founders of a firm. Grey investors are more concerned with firm corporate governance mechanisms, consistent with the agency view. In contrast, independent institutional investors focus on business opportunities following the board of directors' resource-based view.Research limitations/implicationsThis study shows that board capital becomes a key determinant for institutional ownership in emerging markets.Originality/valueThis study extends previous literature on institutional investor preferences by providing empirical evidence that firm board capital becomes a collective asset that is central for institutional investors' investment choices for an emerging market case.

Standard or Sustainable - Which Offers Better Performance for the Passive Investor?

This research report studies the risk-adjusted performance of the major international equity indices against their ESG screened equivalents (MSCI World, MSCI USA, MSCI Emerging Markets, and MSCI Europe). The daily closing prices, returns, standard deviations, and Sharpe ratio characteristics are analyzed from 2013 to 2020. The current literature available from highly rated journals on the subject is also considered, which provided mixed results on the subject matter. We found no academic papers focusing specifically on analyzing the performance of indices and their ESG screened equivalents. With this paper, we intend to fill this gap in the current research available. We conclude that for the passive investor, choosing ESG screened indices over the conventional equivalent has consistently provided better risk-adjusted returns over the long-term period. These findings are robust with the consistently higher Sharpe ratios over the eight-year period for each index. We predict ESG investments may continue to outperform due to changing retail and institutional investor preferences.

Standard or Sustainable - Which Offers Better Performance for the Passive Investor

This research report studies the risk-adjusted performance of the major international equity indices against their ESG screened equivalents (MSCI World, MSCI USA, MSCI Emerging Markets, and MSCI Europe). The daily closing prices, returns, standard deviations, and Sharpe ratio characteristics are analyzed from 2013 to 2020. The current literature available from highly rated journals on the subject is also considered, which provided mixed results on the subject matter. We found no academic papers focusing specifically on analyzing the performance of indices and their ESG screened equivalents. With this paper, we intend to fill this gap in the current research available. We conclude that for the passive investor, choosing ESG screened indices over the conventional equivalent has consistently provided better risk-adjusted returns over the long-term period. These findings are robust with the consistently higher Sharpe ratios over the eight-year period for each index. We predict ESG investments may continue to outperform due to changing retail and institutional investor preferences. Keywords: Sustainable, Passive, Investment, ESG, Asset, Management, Wealth

Why do firms manage their stock price levels?

Building on the catering hypothesis and institutional investor preference literature, we propose a generalized catering hypothesis that managers cater their share price level to different types of investor (individual vs institutional) in order to attract them, conditional on the firm’s preferences as to ownership mix. We show that an institutional ownership premium provides strong explanatory power to the change in share price norm. This evidence supports our hypothesis that managers cater their share price level to the preference of institutional investors, but only when there is substantial benefit in doing so. Further tests reveal that the premium is higher for long term than for short term investors.

Investor ideology

We estimate institutional investor preferences from proxy voting records. The W-NOMINATE method maps investors onto a left-right dimension based on votes for fiscal year 2012. Public pension funds and other investors on the left support a more social and environment-friendly orientation of the firm and fewer executive compensation proposals. “Money-conscious” investors appear on the right. The proxy advisor ISS makes voting recommendations that place it center, to the left of most large mutual funds. A second dimension reflects a more traditional governance view, with management-disciplinarian investors, the proxy advisor Glass Lewis among them, pitted against more management-friendly ones.

Should we invest more in multinational companies when domestic markets decline?

Investments in domestic multinational firms can provide an indirect route for investors to diversify internationally (Farooqi, Huerta, & Ngo, 2015). Therefore, a priori, one would expect investors to increase their exposure to MNCs when the domestic market is declining, and decrease their exposure to domestic firms. Using a 20 year dataset of all publicly listed US firms spanning 1995 to 2014 we find the opposite. We find that investors favour domestic firms to MNCs in declining markets. We analyse share ownership data and propose that the diverging investment preferences of institutional and retail investors may be driving our results.

Preferences of Institutional Investors in Commercial Real Estate

In this paper we analyze market segmentation by firm size in the commercial real estate transaction process. Using novel micro-level data, we look at the probability distribution of investors acquiring a specific bundle of real estate characteristics, distinguishing between investors based on the size of their real estate portfolio. We find evidence of market segmentation by investor size: institutional investors segment across property characteristics based on the size of their real estate portfolio. The probability that a large (small) seller will sell a property to a similar-sized buyer is higher, keeping all else equal. We explore potential drivers of this market segmentation and find that it is mainly driven by investor preferences. During the Global Financial Crisis (GFC), large investors were less likely to buy the ’average’ property, as compared to the period before or after the crisis, indicating time-varying investor preferences.

The Role of Institutional Investors in Voting: Evidence from the Securities Lending Market

This paper investigates the voting preferences of institutional investors using the unique setting of the securities lending market. Institutional investors restrict lendable supply and/or call back loaned shares prior to the proxy record date to exercise voting rights. Recall is higher for investors with greater incentives to monitor and exert governance, for firms with poor performance and weak governance, and for proposals where the returns to governance are likely to be higher such as those relating to corporate control. Loan demand and the borrowing fee also increase around the record date. In the subsequent vote outcome we find higher share recall to be associated with less support for management and more support for shareholder proposals. Our results indicate that institutions value their vote and use the proxy process as an important channel for affecting corporate governance.

Influence of Social Media Emotional Word of Mouth on Institutional Investors’ Decisions and Firm Value

This paper examines how customer sentiment expressed through social media influences institutional investors’ investment decisions and firm value. We use psychology theory to classify the emotional content of social media-based word of mouth, which we refer to as ESWOM. We examine whether ESWOM influences institutional investors’ stockholdings differentially based on investor type and if institutional investors’ stockholdings mediate the relation between ESWOM and firm value. We identify eight types of ESWOM by linguistically interpreting web scrapings of millions of social media posts on 38 corporate brands for the 2007–2015 period. We find differential effects of ESWOM on stockholdings of institutional investors. Dedicated and quasi-index institutional investors increase their stockholdings in response to increases in positive ESWOM such as joy and trust. Transient investors decrease their stockholdings in response to increases in negative ESWOM such as anger, disgust, and fear. Competitive intensity and intangible asset intensity influence these results. Path analysis indicates that ESWOM influences firm abnormal stock returns and idiosyncratic risk both directly and indirectly through its effects on institutional investors’ stockholdings. These findings support our hypothesis that investors’ responses to customer sentiment vary based on whether they follow long-term or short-term investment strategies. Our research highlights the importance of understanding the heterogeneous preferences of institutional investors and their use of social media information for decision making. This paper was accepted by Suraj Srinivasan, accounting.

Institutional Investors’ Views and Preferences on Climate Risk Disclosure

Employing disclosure theory, we develop hypotheses regarding the preferences of institutional investors with respect to firms’ climate risk disclosures. Through a survey and empirical tests, we test these hypotheses and provide systematic evidence suggesting that institutional investors value and demand climate risk disclosures, that climate-specific disclosure costs and benefits affect these demands, and that influence and selection effects explain the equilibrium relations between institutional ownership and disclosure. We establish evidence on the influence and selection effects of the climate risk disclosures by examining the French Article 173, the investor coalition Climate Action 100+, and the UK mandatory carbon disclosure regulation.