Date of Award
Doctor of Philosophy (PhD)
Dr. Thanh Ngo
Dr. Dave Jackson
Dr. Diego Escobari
In the past three decades, the presence of institutional investors has increased 33% in the equity market. The main goal of this dissertation is to study the relationship between institutional ownership and firm performance. I examine how the level institutional investors' involvement in composing their own portfolio, as oppose to replicating their portfolio, impacts their level of monitoring and disciplining their portfolio firms. Specifically, I investigate the relationship between institutional ownership and firms' operating efficiency, earnings management and cost of debt.
In Chapter II, I explore the relationship between institutional ownership and firms' operating efficiency. I use the data envelopment analysis (DEA) to estimate alternative operating efficiency measures. These variables are more comprehensive measures of firms' operating efficiency as opposed to traditional single output measures such as ROA or cash flow-to-sales ratio. Using improved measures to capture institutional investors' monitoring activities on the portfolio firms and portfolio firms' performance, I find convincing evidence for a positive association between concentrated active institutional ownership and portfolio firms' operating efficiency.
In Chapter III, I examine the relationship between institutional ownership and firms' earnings management. I explore the effects of institutional ownership on real activities manipulations and discretionary accrual based earnings management. The use of real activities manipulation strategy relative to other strategies can actually be costlier to shareholders (Zang, 2012). Thus, real earnings management should deserve more attention. Results indicate that firms with concentrated active institutional ownership have significantly lower total real and accrual based earnings management.
In Chapter IV, I investigate the relationship between institutional ownership and firms' credit ratings. I find that firms owned by concentrated active institutional investors have significantly lower credit rating scores than other types of institutional investors. My results are consistent with Wang and Zhang (2009). They also find funds with the capacity and resources to monitor their holdings prefer higher information asymmetry firms. Active institutional investors have an informational advantage over other investors in higher information asymmetry environment. Firms that have high information asymmetry also have lower credit ratings. Overall the results indicate active funds improve firm performance through efficient monitoring.
University of Texas-Pan American