The Impact of Institutional Ownership on Corporate Operating Performance

Abstract

This paper examines the relationship between institutional investor involvement in and the operating performance of large firms. We confirm a significant relationship between a firm’s operating cash flow returns and both the percent of institutional stock ownership and the number of institutional stockholders. However, the positive relationship between the number of institution al investors holding stock and operating cash flow returns is found only for pressure-insensitive institutional investors (those with no business relationship with the firm). The number of pressure-sensitive institutional investors (those with an existing or potential business relationship with the firm) has no impact on performance. These results suggest that institutional investors that need to protect actual or promote potential business relationships with firms in which they invest are compromised as monitors of the firm, and lend credence to calls for greater independence of board members from firms.