Institutional investors, firm performance, and the prospects for socially responsible investing: Evidence from New Zealand

Abstract

Purpose – The global surge in institutional investors in the past decade or so has aroused interest in the role institutions play, or should play, in regard to the monitoring of the company financial performance. This study explores the nature of the relationship that exists between institutional ownership, corporate governance, and company financial performance.

Methodology/approach – Using Ordinary Least Squares (OLS) regression technique on 391 company-year observations between 2005 and 2010 to examine the nature of the relationship that exists between firm performance (PER) and ownership variables, and test whether this relationship is significant.

Findings – Our evidence provides support for the view that top five institutional shareholders take a longer-term view and are more involved with governance suggesting that the size of shareholdings has an effect when it comes to monitoring managerial decisions.

Research limitations/implications – Due to the small sample size, caution should be exercised when interpreting the results of this study. Also, it is to be noted that this study is based on a small country with an open capital market where there is high proportion of institutional ownership.

Practical implications – The results provide useful insights into the role different types of institutional investors play in terms of enhancing both governance and firm performance. Our analyses suggest that in mitigating principal-agent conflicts, size of ownership has an influence.

Originality/value of chapter – Our study adds to the literature by focusing on the role institutional investors’ play in New Zealand. Our study adds to the theory by showing that ownership type is important for mitigating agency conflicts.

Citation

Reddy, K. and Bather, A. (2013), "Institutional investors, firm performance, and the prospects for socially responsible investing: Evidence from New Zealand", Institutional Investors’ Power to Change Corporate Behavior: International Perspectives (Critical Studies on Corporate Responsibility, Governance and Sustainability, Vol. 5), Emerald Group Publishing Limited, Leeds, pp. 149-175. https://doi.org/10.1108/S2043-9059(2013)0000005015