Institutional blockholders and the variability of firm performance
International Journal of Managerial Finance
ISSN: 1743-9132
Article publication date: 24 December 2020
Issue publication date: 10 January 2022
Abstract
Purpose
We examine the effect of institutional blockholders on the variability of firm performance.
Design/methodology/approach
We use OLS regression models to estimate the effect of institutional blockholders on within-firm, over-time variability of firm performance.
Findings
We find that firms with more institutional blockholders experience less variable firm performance. In particular, more institutional blockholders are associated with less variability of annual stock returns, ROA and the market-to-book ratio. We further explore several underlying mechanisms through with institutional blockholders reduce firm performance variability. We find that more institutional blockholders are associated with less variable capital expenditures and R&D investments, and less frequent acquisition activities.
Research limitations/implications
A limitation of this paper is that our sample period only covers 1996–2006. Future studies can extend our research to a more recent period (e.g. 2009–2019) to test whether our findings remain valid in other periods.
Practical implications
We document a significant relation between institutional blockholders and firm performance variability in this paper. However, we do not make any judgment as to whether firms should increase their institutional blockholders as it is unclear whether the caused reduction in risk-taking is socially efficient. We argue that the value implication of institutional blockholders depends on the existing blockholder structure and the different levels of risk appetite between the CEO and shareholders. Thus, the decision on the increase or decrease of institutional blockholders should be carefully made based on a firm’s specific characteristics.
Originality/value
This paper is a first study which examines the impact of the presence of institutional blockholders on the variability of firm performance, while most prior studies focus on the stock ownership of institutional blockholders and examine its impact on the level of firm performance.
Keywords
Citation
Huang, P. and Lu, Y. (2022), "Institutional blockholders and the variability of firm performance", International Journal of Managerial Finance, Vol. 18 No. 1, pp. 118-137. https://doi.org/10.1108/IJMF-02-2020-0090
Publisher
:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited