Institutional Ownership and Investment Efficiency: Evidence from Iran

Abstract

Investment efficiency shows how well a company invests its assets. Although institutional shareholders play undeniable roles in companies, it is not clear whether they are able to monitor managers and make investment decisions or not. This study gives answers to stakeholders, addresses concerns about the effect of the owners on investment efficiency, and aims to add to the literature on emerging markets by investigating the relationship in Iran, a different environment from developed ones. Based on monitoring power, the shareholders are divided into two types: active and passive ones. Investment problems are classified into two types: over- and under-investment problems. The sample consists of 101 firms listed on the Tehran Stock Exchange between 2010 and 2016. Some regression models are used. The results illustrated that institutional owners have a positive effect on investment efficiency and decrease both over- and under-investment problems and so, the efficient monitoring school is approved. Additionally, active ones are positively correlated with investment efficiency and decrease both investment inefficiency problems. Institutional ownership is the cause of investment efficiency, not the reverse. Based on findings, in emerging markets like Iran’s market, investors are recommended to give notice to the level of active ownership in firms; ownership structure is a good sign of efficiency.

The moderating effects of corporate governance and investment efficiency on the nexus between financial flexibility and firm performance

“…The findings of their study reveal how a country's legal environment affects investment efficiency. Investment efficiency is a key determinant of firms' growth and future cash flows, high level of investment efficiency indicates how firms use their assets effectively and can be used as an indicator of firms' performance (Chen et al, 2017;Moradi et al, 2022). The findings of Nguyen-Anh et al, (2022) reveal that intangible assets are a key driver of firms' performance.…”

“…It was argued that institutional investors play an effective role in firms' strategic choices, there is no empirical evidence clearly showing how they monitor managers and involve in investment decisions or not. The study of Moradi et al (2022) reveals that institutional owners have a positive impact on investment efficiency and mitigate the problem associated with investment inefficiency, under-investment or over-investment problems. Chao and Huang (2022) explore how financial flexibility leverages firms' capability regarding raising capital at a lower cost, mitigating financial stress and quickly responding to investment opportunitie s, consequently improving organisational operational performance.…”

“…Though, institutional investors play an effective role in firms' strategic choices. The study of Moradi et al (2022) reveals that institutional owners have a positive impact on investment efficiency and mitigate the problem associated with investment inefficiency, under-investment or over-investment problems. Based on a sample selected from the Tehran Stock exchange, Salehi et al, (2022) explored the influence of investment efficiency on firm value with the moderating impact of institutional ownership and board independence.…”

Towards a framework for the protection of citizen rights of capital market shareholders: evidence from Iran

“…Third, foreign portfolio investment is restricted in Iran, while domestic portfolio investment can be subject to significant liquidity risks due to poor market depth and high volatility. Finally, there is a strong reliance on institutional investors, such as pension funds and insurance companies, when it comes to liquidity provisioning in the stock exchanges of Iran (Moradi et al, 2022). Despite its weaknesses, there are some promising trends for capital market development in Iran.…”

“…The Iranian emerging capital market has a number of unique characteristics compared to its counterparts in developed countries (Karimi et al , 2023; Moradi et al , 2022). First, Iran’s capital market is largely underused and underdeveloped.…”