Does institutional ownership influence firm performance? Evidence from China

In recent decades, institutional investors have played an increasingly important role in China's stock markets, following a series of market-liberalizing reforms. This study uses a simultaneous equations model with a generalized method of moments estimator to investigate the effects of institutional ownership on firm performance in a new large sample of Chinese listed firms from 2004 to 2014. The results generally suggest that institutional ownership positively affects firm performance and are robust to accounting for deregulation, contemporaneous market conditions, and different stock market boards. However, not all institutional investors are active monitors and improve firm performance. In particular, the results indicate that pressure-insensitive, foreign and large institutional shareholders have greater positive effects on firm performance than pressure-sensitive, domestic, and small institutional shareholders. The results further suggest that institutional investors enhance shareholder value by attracting more analysts and reducing insider ownership (among other reasons), and these findings are robust to a series of sensitivity analyses.