The role of institutional ownership structures on corporate performance

• Published date: 01 February 2022
• Author: Muzzammil Hussain,Fareeha Abid,Syeda Ambreen,Ahmad Usman,Atteeq ur Rahman
• Date: 01 February 2022
• DOI: http://doi.org/10.1002/pa.2296

ACADEMIC PAPER

The role of institutional ownership structures on corporate

performance

Muzzammil Hussain

1,2

| Fareeha Abid

2

| Syeda Ambreen

2

| Ahmad Usman

3

|

Atteeq ur Rahman

1,2

1

University of International Business and

Economics, Beijing, China

2

University of Gujrat, Gujrat, Pakistan

3

Institute of Administrative Sciences, Punjab

University, Lahore, Pakistan

Correspondence

Muzzammil Hussain, University of

International Business and Economics, Beijing,

China.

Email: hussain_muzzamil@yahoo.com

Institutional investors are the key investors in stock markets. Stock markets are

influenced by these giants. We investigate the comparative institutional ownership

structure in financial and non-financial corporations. Institutional ownership structures

are foreign, domestic, state, and private institutional ownership, which are examined

against the corporate performance of 40 firms listed in Pakistan Stock Exchange from

2006 to 2016. Panel regression is applied to observe the results. Varied impacts for

every category of institutional ownership in financial and non-financial firms are evi-

dent. The findings of the study are robust, and potential investors can use this study

for their future investment plans. Investor institutions can decide their future invest-

ment directions inPakistan.

1|INTRODUCTION

After the first quarter of the 20th century, the concept of modern cor-

poration has been focused on by the researchers of corporate man-

agement. With the inception of the modern corporation concept, the

idea of corporate governance is well connected due to its preference

for transformation from efficiency to effectiveness by minimizing all

administrative costs, and ultimately for the shareholder's wealth. A

vast body of literature is accessible about diverse aspects of corporate

governance with significant importance of ownership structure

(Afza & Nazir, 2015; Ali & Hashmi, 2018; Bhattacharya &

Graham, 2009; Yu, 2013). The distribution of ownership, according to

share capital and voting rights, is regarded as ownership structure.

The conflicts between management and owners are minimized by the

ownership structure. Jensen and Meckling (1976) presented the

agency theory, which defines that the managers work for their bene-

fits, which create conflicts between management and shareholders.

Considerable debate on agency theory and its serious effects have

been a part of finance research, and still it is a hot issue of corporate

studies around the globe (Din & Javid, 2011; Kang & Kim, 2012). For

the last few decades, all the stakeholders of capital markets are in sea-

rch of a monitoring system of firms to lesson agency problems.

Different owners have different influences on firm performance

(Arosa, Iturralde, & Maseda, 2010). Proficiency of monitoring, the vol-

ume of shares held, as well as an incentive to monitor the managers

with minimum cost, is different in institutional investors. Therefore,

institutional ownership is more effective than individual's (Afza &

Nazir, 2012, 2015). Institutional investors have some influence on the

management. They arejust like the kingmakers in the financial market.

They are not active participants in the management, but they havethe

right to influence the managers to monitor through their voting rights

(Gillan & Starks, 2003). They are not directly involved in decisionmak-

ing and policies. They take the rights by purchasing the shares of the

company. If they are dissatisfied with the managerial policies, they use

their voting rightsand create voice in the company'smeeting. Influence

capacity of investorsdepends on their business connections with firms

(Hutchinson et al., 2015). According to Jensen and Meckling (1976)

“Institutional investors may consist of insurance companies, mutual

funds, investment advisor, pension funds, hedge funds, private equity,

and university endowment”. The well-connected institutional investors

do not challenge the management decisions and policies to protect

those relationships with the firms entitled as the pressure-sensitive.

Pistor, Raiser, and Gelfer (2000) argued that institutional investors did

not affect themanagement decisions of holdingcompany.

1.1 |Study background

The development of the corporate governance (CG) system was a

step to expedite the development of this issue. Developed countries

Received: 27 June 2020 Revised: 1 July 2020 Accepted: 16 July 2020

DOI: 10.1002/pa.2296

J Public Affairs. 2022;22:e2296. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons Ltd 1of8

https://doi.org/10.1002/pa.2296