Corporate governance, institutional investor type and firm performance: Evidence from an emerging market

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Abstract

The study analyses the role of institutional investors in improving firm performance. Unlike in developed economies where firm ownership is widely dispersed, firms in emerging economies such as India have substantial promoter shareholdings (often in a majority or close to a majority). Given the promoter control of Indian companies, the role of institutional investors as external monitors is analysed. Following Brickley, Lease, and Smith (1988) and Almazan, Hartzell, and Starks (2005), the study categorises institutional investors as pressure-sensitive and pressure-insensitive institutional investors. Panel data for non-financial firms from India included in National Stock Exchange (NSE) 500 over the period 2008–2017 is studied using fixed-effects models. The study finds that the increased ownership of pressure-insensitive institutional investors is positively associated with firm performance. Also, the increased ownership of pressure-sensitive institutional investors is negatively associated with firm performance. These findings are consistent with the view that pressure-insensitive institutional investors are more effective monitors compared to pressure-sensitive institutional investors. The study offers insights into the role of institutional investors in economies where firms have a substantial promoter shareholding. The study documents that even with a substantial promoter shareholding and control, pressure-insensitive institutional investors aid in enhancing firm value.

Keywords: Corporate Governance, Board of Directors, Institutional Investors, Firm Ownership, Firm Performance

Authors’ individual contribution: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

JEL Classification: G32, G34

Received: 12.08.2021
Accepted: 28.10.2021
Published online: 01.11.2021

How to cite this paper: Vinjamury, R. S. (2021). Corporate governance, institutional investor type and firm performance: Evidence from an emerging market. Corporate Governance and Sustainability Review, 5(4), 20–27. https://doi.org/10.22495/cgsrv5i4p2