Does Institutional Ownership Enhance a Firm’s Financial
Performance? A Study from Emerging Economies
ALMUATASIM MUSABAH SAIF AL MUTAIRI, SUZAIDA BTE. BAKAR
College of Graduate Studies,
Universiti Tenaga Nasional,
Jalan Ikram-Uniten 43000 Kajang, Selangor
MALAYSIA
Abstract: - Corporate value is weakened by agency concerns and conflicts of interest between fund
contributors and firm decision-makers. The global expansion of institutional investment emphasized the role of
corporate governance in saving agency costs. Nonetheless, there is limited research on pressure resistance (PR),
pressure sensitivity (PS), and stability of pressure-resistant (SPR) from an institutional ownership perspective
on firm financial performance in emerging economics. This study aims to investigate the relationship between
institutional ownership dimensions with firm financial performance. The study is quantitative and based on
panel data (2018 to 2020) collected through content analysis from annual reports and company websites. The
existing index was adapted for institutional ownership dimensions, and Tobin’s Q ratio was calculated for firm
performance because it considers the market and book value of firm financial information. A purposive
sampling technique was employed to examine the top 50 Malaysian public listed companies based on market
capitalization. The findings revealed that PR and SPR positively impacted firm financial performance whereas
PS indicated no relationship. Ultimately, the industry should proactively emphasize the structure of institutional
ownership due to its potential in firm financial progression.
Keywords: - Institutional ownership, pressure resistance, pressure sensitivity, stability of pressure-resistant,
Tobin’s Q
Received: August 12, 2021. Revised: May 25, 2022. Accepted: June 11, 2022. Published: June 24, 2022.
1 Introduction
Good corporate governance improves firms and
society [1-3]. Company executives increase public
trust by establishing an effective corporate
governance framework. Concurrently, legislative
procedures from corporate governance help society
to avoid threats and challenges. Recent company
controversies highlighted the importance of
corporate governance to society and stakeholders.
Consequently, companies competed against each
other to find the best possible ways to improve
engagement with stakeholders and institutional
investors. Companies pressured each other to
determine the best approaches to enhance
relationships with stakeholders where institutional
investors and institutions that own businesses
increased significantly [4-6].
Institutional investors have gained prominence
in business decision-making. The costs and
benefits of institutional investor and external debt
holder surveillance and its substitutability
contribute to the institutional ownership and firm
performance interrelationship potential [7-9]. The
institutional ownership proportion in a corporation
impacts its financial performance because
institutional investors can monitor firms cost and
revenue structure. Beyond price discovery,
institutional investors also offer allocative
efficiency and managerial responsibility.
Institutional investors organize the cash that
businesses demand to increase and stretch liquidity
to trading markets—this is the lifeblood of capital
markets.
We were motivated to study this topic because
the OECD stated that institutional investors
contributed to financial assets worth more than
USD 53 trillion in 2010 including USD 22 trillion
in shares [10]; this value increases daily. After a
decade, institutional investors have gained more
significance in academia and the industry due to
their firm financial value. Second, foreign
investors constitute approximately 30% of
ownership in various jurisdictions. For example,
the proportion of shares held by Chinese
institutional investors reached 40% in March 2015,
making such investors one of the major strengths
of the stock market [11-13]. Self-interest has
caused an increasing number of institutional
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Almuatasim Musabah Saif Al Mutairi,
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E-ISSN: 2224-3496
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investors to become involved in corporate
governance. Foreign institutional investors
increase the internationally branding of the capital
market. Therefore, examining corporate
governance and institutional investors can enhance
the value of firms as well as society.
Corporate governance, firm financial progress,
and institutional investment have been studied in
developed and developing economies. Past studies
[14] developed the agency theory of corporations
where managers are motivated to maximize
personal profits instead of the stakeholders’
prosperity. Jensen [15] stated that using debt
mitigates the agency problem because enterprises
commit to paying interest and principal payments
regularly. Jensen and Meckling (1976) developed
awareness of risk transfers and asset change
substitutions. High leverage encourages equity
investors to engage in high-risk, low-return
activities and projects with a negative net present
value (NPV). Huddart [16] reported that large
shareholders (institutional investors) are highly
motivated to monitor company management
because active monitoring enhances firm value.
Others [17] and [18] argued that the costs of
active monitoring may outweigh the advantages.
Pressure sensitivity was also shown to be a
deciding factor of whether financial markets are
monitored actively or passively [19]; [20].
Financial institutions such as banks and insurance
companies, are susceptible to pressure on
commercial relationships; thus, they are prone to
collaboration with current leadership. Passive
surveillance of investee enterprises is common
among pressure-sensitive institutions. Meanwhile,
mutual funds and similar organizations are less
sensitive to commercial links and aggressively
scrutinize managerial behavior. Nonetheless, only
a few studies have investigated PR, PS, and SPR
from an institutional ownership perspective on
firm financial performance in emerging
economies. This study investigates the relationship
between institutional ownership dimensions with
firm financial performance.
The structure of the study is as follows. First,
the introduction is described followed by a
literature review. Second, the conceptual
framework and relevant methodology are
highlighted. Third, data analysis is given with a
relevant discussion. Finally, the conclusion is
presented with several practical recommendations
for the industry.
2 Literature Review
Numerous studies have examined the many
elements of corporate governance; the ownership
structure plays an essential role [1, 5, 21, 22].
Institutional investors demonstrate a high
preference for equities of large and universally
accepted companies, companies in countries with
good disclosure rules, and companies near their
home market role [1, 5, 21, 22]. Other research
connects the quality of firm corporate governance
framework to the formation of institutional
ownership. Institutional investors favor businesses
fairness with solid and sound governmental
formation [23-25]
Past studies investigated institutional
investors’ impact on business value and
performance and institutional ownership factors [3,
11, 23, 25]. Only institutions with no potential
business relationship with the companies where
they hold shares positively impacted the firms’
operating cash flow return on assets. In contrast,
institutions with business relationships with the
firms in which they invest revealed a negative
effect. Yuan et al. (2008) and Lin et al. (2009)
investigated the connection between institutional
ownership and firm performance or progress for
publicly traded Chinese corporations. Others [3]
examined the link in a sample of Spanish firms,
and Sakaki et al. [13] investigated institutional
investors' monitoring role among Australian firms.
The outcomes are reliable with independent
institutional investors performing an effective
monitoring function and institutional investors
performing a reduced monitoring role.
The ownership structure describes how one
can allocate ownership according to share capital
and voting rights. The ownership structure reduces
disagreements between management and owners.
Jensen and Meckling (1976) developed the agency
hypothesis where managers work for personal
advantage, thus resulting in conflicts between
management and shareholders. The debate on
agency theory and its significant consequences is a
component of finance study, which is a popular
topic in business studies worldwide [3, 22].
Indeed, capital market players have been seeking a
firm-monitoring mechanism to alleviate agency
difficulties for the past few decades.
Distinct owners differently impact how
companies function [5, 8, 9]. Institutional investors
hold a distinct monitoring expertise level, various
shares, and an incentive to monitor management at
low cost. Hence, institutional ownership
outperforms the individual ownership [3, 11, 23,
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25]. The management is influenced by institutional
investors who are similar to the financial market
kingmakers. These investors are not active
members of the management team but can sway
the managers’ monitoring decisions via their
voting rights [7]. Although the investors are not
actively involved in policymaking or decision-
making, they gain the rights by acquiring company
stock. The investors exercise voting rights and
generate a voice in the corporate meeting when
dissatisfied with managerial policies. Investors’
ability to influence enterprises is determined by
their business ties [11].
Institutional investors’ capacities are confined
to scanning the capabilities of each firm in their
holding and monitoring each investment portfolio
[26]. Thus, banks rely on readily available data on
business performance and current corporate
earnings. Nevertheless, the data disregard long-
term performance and lack long-term innovation
and competitiveness. Thus, in this unpredictable
environment, institutional investors—especially
PS institutions—act as arbitragers: They turn their
portfolios frequently to profit from short-term
profits instead of long-term benefits. Hence,
executives slash research and design costs to raise
short-term profits and keep institutions appeased at
the expense of long-term business performance,
innovation, and competitiveness [4, 9, 11, 21].
Empirical studies that use corporate
governance parameters to explain institutional
ownership refer to business samples from
developed countries [2, 3, 7, 23-25]. Although
institutional investors are crucial for better
economies, few studies have examined how
institutional ownership groups influence firm
financial performance in emerging countries.
Institutional investors are divided into two
groups: PR and PS institutional investors. The PR
describes the percentage of firm shares held by
Qualified Foreign Institutional Investor (QFII),
domestic mutual funds, and social insurance funds.
The PS denotes the percentage of firm shares held
by banks, insurance companies, trusts, and other
types of institutional investors [19]. Studies
present mixed results and findings in PS and PR on
financial performance where emerging economies
have demonstrated inconclusive results. Therefore,
this study developed the following hypotheses:
H1: PR has a significant positive relationship with
Tobin’s Q
H2: PS has a significant positive relationship with
Tobin’s Q
Studies demonstrate that the institutional
holding period or stability significantly influence
business management and investment decisions.
Long-term investors are clearly more involved in
management concerns than short-term investors
due to their long-term focus on firm corporate
governance and development [1, 4-9, 25].
Therefore, this study employed institutional
ownership persistence as an indicator of
institutional ownership stability (SPR) based on
the literature [27]. The SPR refers to the ratio of
the average ownership proportion to the standard
deviation of the ownership proportion over a three-
year period. Although institutional investors are
critical for better economies, there is limited
research showing the impact of PR institutional
ownership stability on firm financial performance
in emerging countries; these studies demonstrate
inconclusive results. Hence, this study formulated
the following hypothesis:
H3: SPR has a significant positive relationship
with Tobin’s Q.
A conceptual framework is the graphical
representation of the authors’ argument about a
proposed relationship among variables. Figure 1 is
the conceptual framework on institutional
ownership and firm financial performance. The
former includes three dimensions: PR, PS, and
SPR. Meanwhile, firm financial performance is
determined by Tobin’s Q. Two control variables
included in the study are firm size and firm age.
The conceptual framework is based on the agency
theory that elaborates institutional ownership and
firm performance relationship.
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Fig. 1: Conceptual Framework on institutional ownership and firm financial performance.
3 Methodology
The study is quantitative and is based on panel
data collected through content analysis from
annual reports and company websites. The
documents are generally the most reliable and
audited information for that particular company.
The panel data was collected over a three-year
period from 2018 to 2020. The existing index was
adapted for institutional ownership dimensions,
and Tobin’s Q ratio was calculated for firm
performance because the ratio considers the
market and book value of firm financial
information. A purposive sampling technique was
employed among the top 50 Malaysian public
listed companies based on the market
capitalization [28-30]. Therefore, the total
observation was 150 for the institution ownership
study. Malaysian firms were considered because
they were listed in the emerging economies and
rated the third-largest in the Asian trading market.
After collecting the panel data, a unit root test and
data diagnostic test were performed followed by
descriptive and correlation tests. The study also
validated the Breusch-Pagan test and Hausman test
in terms of model selection. The Random-effects
multiple generalized a least squares (GLS)
regression model and was suggested to test the
study hypotheses.
Table 1. Methodological details.
Particulars
Explanation
Method
Quantitative
Sampling technique
Purposive sampling
Data type
Secondary and panel data
Data source
Top 50 Malaysian public listed companies
Data year
2018, 2019, and 2020
Data Analysis
Descriptive, correlation, GLS Random effect Multiple Regression
Software
STATA 14.2
Model
Three econometric models developed
Model 1 is based on PR and TQ
Model 2 is based on PS and TQ
Model 3 is based on SPR and TQ
Note:
TQ = Tobin’s Q
PR = PR institutional investors possess a certain % of ordinary shares.
PS = PS institutional investors possess a certain % of ordinary shares.
SPR = pressure-resistant ownership stability
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4 Results and Discussion
Table 2 presents the descriptive statistics for the
dependent, independent, and control variables
from 2018 to 2020 among the top 50 Malaysian
public listed firms. The descriptive analysis
demonstrates that institutional investor and firm
financial progress are the independent and
dependent variables, and institutional investors
include three dimensions: PR, PS, and SPR.
Financial performance is represented by Tobin’s
Q. The PR indicated a mean of 0.263 and a
standard deviation of 0.134 with a minimum of
0.03 and a maximum of 0.63. The PS depicted an
average value of 0.195 and a standard deviation of
0.087 with a minimum of 0.03 and a maximum of
0.46. The SPR suggested an average value of
0.087 and a standard deviation of 0.044 with a
minimum of 0.01 and a maximum of 0.21. The
average value of 11.543 varied from 3 to a
maximum of 34.7 based on the dependent variable.
The two control variables are firm size
(defined by the log value of firms’ total assets) and
firm age (year the firm was founded). The firms’
average age was calculated to be 26 years. Firm
size suggested a mean of 6.219 and a standard
deviation of 0.529 with a minimum of 5.01 and a
maximum of 7.57.
Table 2. Descriptive statistics.
Observation
Mean
Std. Dev.
Min.
Max.
150
0.263
0.134
0.03
0.63
150
0.195
0.087
0.03
0.46
150
0.087
0.044
0.01
0.21
150
11.543
6.068
3.00
34.7
150
6.219
0.529
5.01
7.57
150
25.766
13.911
2.00
59.0
Table 3. Correlation.
PR
PS
SPR
TQ
f_size
f_age
PR
1.0000
PS
0.4639
1.0000
SPR
0.9982
0.4549
1.0000
TQ
0.2353**
0.0565
0.2329**
1.0000
Firm size
-0.1195
-0.0446
-0.1239
0.1563
1.0000
Firm age
-0.0345
-0.2331
-0.0388
0.1724
0.1390
1.0000
** Correlation is significant at the 0.01 level (2-tailed).
The section presents the Pearson correlation
analysis of independent, dependent, and control
variables. Most independent variables are
positively associated based on Pearson correlation
results. The results illustrated in Table 3 show
correlation of the independent variable
(institutional investor) on firm financial
performance.
The findings suggest that PR revealed a
positive relationship with Tobin’s Q (r = 0.2353; p
< 0.01), thus suggesting that PR holds a vigorous
positive outcome on financial performance.
Similarly, PS is positively associated with Tobin’s
Q (r = 0.0565; p < 0.01), thus indicating that PS
holds a strong positive value on Tobin’s Q.
Nevertheless, the relationship is not statistically
significant. Similarly, SPR revealed a positive
association with Tobin’s Q (r = 0.2393; p < 0.01),
thus indicating that SPR has a rigorous positive
outcome on firm financial performance.
Table 4. Model 1
TQ= β0 + β1 pr i + β2firmsizei + β3firmagei + ε
R-sq = 0.2788
Number of obs.
=
150
Number of groups
=
50
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Wald chi2 (3)
=
7.67
Prob > chi2
=
0.0533
TQ
Coef.
Std. Err.
z
P > z
95% Conf.
Interval
PR
8.17642
3.853379
2.12
0.034
.623935
15.7289
f_size
-.2337565
.8851198
0.26
0.792
-1.968559
1.501047
f_age
.0581448
.0352967
1.65
0.099
-.0110355
.127325
_cons
9.346367
5.59887
1.67
0.095
-1.627217
20.31995
sigma_u
4.9296412
sigma_e
3.0705126
rho
.72047991
The study applied the random effect GLS
regression to evaluate the hypotheses of Model 1
for H1 as illustrated in Table 4. The influence of
PR on company financial performance was
measured using Tobin's Q and the regression
estimator for Model 1.
Table 4 depicts the effect of control factors
(firm size and age) on the relationship between PR
and Tobin's Q. The study used Wald’s Chi2 (2) and
Prob > Chi2 tests to assess the quality of fit of
Model 1 (PR and Tobin's Q). Table 4 demonstrates
the Wald Chi2 (1) = 7.67 figures with Prob >
Chi2=0.0533. The result (Prob > Chi2 = 0.0533)
confirms the goodness-of-fit for Model 1. Hence,
the entire model is important in predicting growing
company financial performance (Tobin's Q).
The study concludes that PR holds a
considerable favorable impact on firms’ financial
success. Similarly, Table 4 demonstrates the
volume of change in the dependent variable (Firm
financial performance) induced by independent
variables (PR) in the top 50 Malaysian public
listed companies between 2018 and 2020 depicted
in R-square (0.2788). The R-square (0.2788) score
indicates that PR anticipates approximately 28% of
the associated variance in business financial
performance.
Table 4 includes the random effect GLS
regression model coefficient. Model 1
demonstrated a positive beta of 8.17, a p-value of
0.034 (> 0.05), and Z statistics of 2.12. (PR and
firm financial performance). Furthermore, at the
0.10 significant level (Beta =.0581, z = 1.65, p =
0.09), firm age is strongly associated with
company financial performance (Tobin's Q).
Conversely, at the 0.05 significant level (Beta = -
0.237, z =.26, p = 0.792), company size is
insignificantly and inversely linked to firm
financial performance (Tobin's Q).
Table 4 demonstrates that between 2018 and
2020, a unit increase in the independent variable,
PR, suggested an additive influence on the
dependent variable, firm financial performance
among the top 50 Malaysian public listed
companies. Moreover, the random effect GLS
regression findings in Table 4 imply that the
Pearson correlation (Table 3) produced
comparable results. The findings for PR and
business financial success aligns with [1, 5, 9] but
contradict others [4].
Table 5. Model 2
TQ= β0 + β1 ps i + β2firmsizei + β3firmagei + ε
R-sq = 0.0300
Number of obs
=
150
Number of groups
=
50
Wald chi2 (3)
=
3.95
Prob > chi2
=
0.2671
TQ
Coef.
Std. Err.
z
P > z
[95% Conf.
Interval]
PS
5.645247
6.047967
0.93
0.351
-6.208551
17.49905
f_size
-.2897804
.8952568
0.32
0.746
-2.044451
1.464891
f_age
.0635651
.0356766
1.78
0.075
-.0063598
.1334899
_cons
10.60313
5.676487
1.87
0.062
-.5225818
21.72884
sigma_u
5.1800437
sigma_e
3.0895039
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rho
.73761438
The study used random effect GLS regression
to evaluate the hypotheses of Model 2 for H2 as
illustrated in Table 5. The influence of PS on
company financial performance assessed by
Tobin's Q was investigated using
the regression estimator for Model 1.
The figure demonstrates how control factors,
such as company size and age, affect the PS-Q
Tobin's relationship. The study used the Wald
Chi2 (2) and Prob > Chi2 tests to determine the
quality of fit of Model 2 (PS and Tobin's Q). The
Wald Chi2 (1) = 3.95 values are demonstrated in
Table 5, with Prob > Chi2= 0.267. The
significance of the finding (Prob > Chi2 = 0.267)
indicates that the goodness-of-fit for Model 2 was
not approved, implying that the entire model is
insignificant in predicting growing company
financial performance (Tobin's Q).
The findings indicate that PS holds a
negligible beneficial influence on business
financial performance. Similarly, Table 5
illustrates the volume of change in the dependent
variable (firm financial performance) induced by
independent variables (PS) among the top 50
Malaysian public listed companies between 2018
and 2020 depicted in R-square (0.03). The PS
predicts only 3% of the corresponding variance in
firm financial performance demonstrated by the R-
square (0.03) value.
Table 5 displays that a unit increase in the
independent variable (PS) holds an incremental
impact on the dependent variable (firm financial
performance) among the top 50 Malaysian public
listed companies between 2018 and 2020.
Moreover, the results of the random effect GLS
regression in Table 5 indicate that the Pearson
correlation (Table 3) should produce similar
results. The PS findings align with earlier research
(Cao et al., 2020; Han et al., 2021; Kadoski et al.,
2020) but contradict other findings (Chen et al.,
2020).
Table 6. Model 3
TQ= β0 + β1 spr i + β2firmsizei + β3firmagei + ε
R-sq = 0.366
Number of obs
=
150
Number of groups
=
50
Wald chi2 (3)
=
8.07
Prob > chi2
=
0.0445
TQ
Coef.
Std. Err.
z
P > z
[95% Conf.
Interval]
SPR
25.67777
11.60211
2.21
0.027
2.938057
48.41749
f_size
-.2226674
.8836669
0.25
0.801
-1.954623
1.509288
f_age
.0589048
.0352257
1.67
0.094
-.0101363
.1279458
_cons
9.159312
5.601204
1.64
0.102
-1.818846
20.13747
sigma_u
4.9392957
sigma_e
3.0646102
rho
.72204029
The study used the random effect GLS
regression to examine the hypotheses of Model 3
for H3. Table 6 illustrates the results of the random
effect (GLS) regression for Model 3, which
examined the influence of SPR on Tobin's Q-
measured firm financial performance.
Table 6 demonstrates how control factors
(firm size and age) affect the relationship between
SPR and Tobin's Q. The study used the Wald Chi2
(2) and Prob > Chi2 tests to verify the quality of fit
of Model 3 (SPR and Tobin's Q). Table 6 suggests
that the Wald Chi2 (1) = 8.07 figures with Prob >
Chi2 = 0.0445. The results (Prob > Chi2 = 0.0445)
confirm the goodness-of-fit for Model 3, implying
that the entire model is significant in predicting
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growing company financial performance (Tobin's
Q). The findings indicate that the SPR holds a
strong favorable influence on corporate financial
performance. Similarly, Table 6 illustrates the
volume of change in the dependent variable (firm
financial performance) as induced by the
independent variable (SPR) in the top 50
Malaysian publicly listed businesses between 2018
and 2020. The R-squared value (0.366) indicates
that SPR predicts approximately 37% of the
volatility in business financial performance.
Table 6 includes the random effect GLS
regression model coefficient findings. Notably,
Model 3 revealed a positive beta of 25.67, a p-
value of 0.027 (> 0.05), and Z statistics of 2.21
(SPR and firm financial performance).
Furthermore, firm age in the model is substantially
connected to company financial performance
(Tobin's Q) at a 0.10 significant level (Beta = .05,
z = 1.67, p = 0.094). In contrast, company size is
insignificantly and inversely linked to firm
financial performance (Tobin's Q) (Beta = -0.222,
z = .25, p = 0.801) at the 0.05 significant level.
Table 6 demonstrates that a unit increase in the
independent variable (SPR) produces an
incremental influence on the dependent variable:
firm financial performance among the top 50
Malaysian public listed companies for 2018 to
2020. Furthermore, the random effect GLS
regression findings in Table 6 suggest that the
Pearson correlation (Table 3) produces comparable
results. The SPR findings align with most
literature reports (Cao et al., 2020; Han et al.,
2021; Kadoski et al., 2020) but contradict others
(Chen et al., 2020).
5 Conclusion
Although the analysis implies that ownership
formation influences company progress status,
more research is needed on the relationship
underlying these dynamics. Future studies should
expand the topic to include evaluation of cross-
sectional data over multiple time periods. Longer
data collection periods can demonstrate causality
via delayed data. Studies should also evaluate the
real business relationships between apparent
competitors. This study can help clarify the
misunderstanding and improve the relationship
between potential investors who are under pressure
as well as those who are holding shares. Future
work should clarify investors under pressure and
the companies where they own stock.
Nevertheless, how owners are harmed as monitors
remains a mystery. Future research should include
factors in bank loans and insurance policies held
by businesses. Our results support the theoretical
aspect of agency theory development and the
information asymmetry aspect to help
stockholders, supervisors, and researchers better
understand institutional investors’ behavior and
strategy. These results can harmonize management
preferences with profitability and supervise
management to lower agency costs while
improving resource utilization and overall
effectiveness.
Table 7. Hypothesis Summary
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Hypothesis
Model
z
p-value
Result
H1: pressure resistance (PR) has a significant
positive relationship with Tobin’s Q
1
2.21
0.027
Supported
H2: pressure sensitivity (PS) has a significant
positive relationship with Tobin’s Q
2
0.93
0.351
Not Supported
H3: stability of pressure-resistant (SPR) has a
significant positive relationship with Tobin’s Q
3
2.12
0.034
Supported
WSEAS TRANSACTIONS on ENVIRONMENT and DEVELOPMENT
DOI: 10.37394/232015.2022.18.85
Almuatasim Musabah Saif Al Mutairi,
Suzaida BTE. Bakar
E-ISSN: 2224-3496
906
Volume 18, 2022
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WSEAS TRANSACTIONS on ENVIRONMENT and DEVELOPMENT
DOI: 10.37394/232015.2022.18.85
Almuatasim Musabah Saif Al Mutairi,
Suzaida BTE. Bakar
E-ISSN: 2224-3496
907
Volume 18, 2022