Institutional investors and cost of capital: The moderating effect of ownership structure

Abstract

Guiding institutional investors to actively participate in corporate governance is a hot issue to improve the internal governance of China’s listed companies. This study seeks to provide a comprehensive understanding of the mechanism that underlies the governance effects of the heterogeneity of institutional investors on the cost of capital, and the influence of ownership structure on the relationship between them. Using an unbalanced panel data on A-share listed companies of Shanghai and Shenzhen in China’s capital market during the 2014–2019 period, this study reveals how institutional investors with longer holding period and higher shareholding ratio are negatively associated with the cost of capital in China’s capital market. Furthermore, this study successfully confirms the moderating effect of ownership structure in the relationship between institutional investors and the cost of capital. China’s state-owned enterprises are more likely to introduce improvements at the corporate governance level, and ownership concentration weakens the negative influence of institutional investors on the cost of capital. The research contributes to a deeper understanding of the impacts of institutional investor’s heterogeneity and ownership structure on the cost of capital in China. In the process, the study yields useful implications for the theory and practice of corporate governance.

Institutional investors, political connections and stock recommendations from sell-side analysts: the case of Malaysia

“…In this study we re-examine this issue by focussing on another analyst outcome, namely stock recommendation, rather than analyst following. Additionally, in China, Huo et al. (2021) show that institutional investors' governance roles are undermined in firms with greater ownership concentrations since they have lower influence in decision-making.…”

The Impact of Institutional Investors on Firm Performance: Evidence from China

“…The performance of the company is also linked with the financial stability and liquidity of the enterprise. Institutional investors are generally the financial institution that holds a large number of deposits of small individual, they include banks and other financial institutions [10]. At the time of any liquidity issues and solvency issues, that may arise when the company's current liabilities become more than the current assets or when the company needs additional capital in the form of debt.…”

“…The institutional investors want to earn high profits in the form of returns from their share that can be achieved when the corporate governance decides for the benefits and growth of the company. Apart from that, it was also found that the institutional investors play a dominant role in the stock market that allows them to turn this capitalist form of the system into a system wherein the financial institutions have the privilege in terms of both productions as well as in the financial investment [10]. The institutional investors present in the market ensure that the proper flow of funds in the market.…”

The impact of insurance institutional investors on corporate value from selection and creation perspective

“…Institutional investors are a significant source of capital with significant financial strength and investment potential [4], and a large body of research examines whether institutional investor stockholding can increase the value of the company owned. The available literature on institutional investors' role can be divided into three groups.…”

“…Therefore, the literature on the impact of institutional investors' holdings on firm value lacks consensus. Furthermore, despite several studies investigating the heterogeneity of institutional investors and discovering that securities investment funds, QFIIs, and social security funds differ in their enthusiasm for participating in corporate governance, value selection, or value creation roles, there is limited research on the heterogeneity of institutional investors [4,[23][24][25][26][27].…”