International Journal of Law and Management

Does institutional ownership engagement matter for greater financial performance? Evidence from a
developing market
Brahmadev Panda, N.M. Leepsa,
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Brahmadev Panda, N.M. Leepsa, "Does institutional ownership engagement matter for greater financial performance?
Evidence from a developing market", International Journal of Law and Management, https://doi.org/10.1108/
IJLMA-09-2017-0228
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 Does institutional ownership engagement matter for greater
financial performance? Evidence from a developing market

Abstract

Purpose: Previous empirical evidence scrutinizing the impact of the institutional ownership on the firm
performance has produced inconclusive results and mostly concentrated in developed market. Hence, the
primary aim of this paper is to assess the impact of the ownership engagement by pressure-resistant,
pressure-sensitive and foreign institutions on the corporate financial performance in a developing market
like India post US financial crisis.
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Design/methodology/approach: This study considers a panel data set of 361 Indian listed firms from
NSE 500 index for a period of 09 years from FY 2008-09 to FY 2015-16. The panel data regression
(Pooled OLS, FE and RE) and Simultaneous Equation Modelling (SEM) are employed by considering the
institutional ownership engagement as both exogenous and endogenous variable.

Findings: The test results show that institutional ownership engagement by the pressure-resistant and
foreign institution have a robust and positive effect, while ownership engagement by the pressure
sensitive institution has an adverse impact on the financial performance of the Indian listed firms.

Research implications: The findings will boost the monitoring activities of the institutional owners in
the developing markets. The investment from pressure-resistant and foreign institutions needs to be
augmented in Indian firms to improvise their governance functions and performance.

Originality/Value: This research will enrich the governance literature of the developing economies as the
studies on institutional ownership engagement are limited in the developing world. Further, this study
adds value by capturing two emerging institutional ownership category such as the pressure-resistant and
pressure-sensitive, which are still untouched in the Indian context. Next, the consideration of the
institutional ownership as both exogenous and endogenous is also novel to the Indian literature.

Keywords: Institutional ownership, Pressure resistant, Pressure sensitive, Financial performance,

Panel data

Paper Type: Research paper

 Does institutional ownership engagement matter for greater
financial performance? Evidence from a developing market

1. Introduction
The debate on the monitoring role of the institutional equity owners in the public listed firms has
been continuing since the dramatic surge in the institutional investment in the public companies.
The increasing trend of institutional investment has enhanced the importance of the institutional
owners in the corporate governance. The prevalence of the diffused ownership structure and
separation of control from owners in the listed companies led to increase in agency problems and
reduction in firm performance (Jensen and Meckling, 1976). While, it is witnessed that
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institutional ownership engagement has been instrumental in diminishing the agency conflict and
improving the firm performance (Shleifer and Vishny, 1986). As institutional investors have both
the motivation and intention to monitor the managers to safeguard their interest (Gillan and
Starks, 2003). They can act directly by pressuring the board of directors or indirectly by stock
market trading (Gompers and Metrick, 2001; Gillian and Starks, 2003) to discipline the
management, which signifies their engagement in the corporate decision-making process.

Earlier studies on the institutional ownership engagement in the firms are polarized with two
different views. The first view opined that institutional owners are active monitors (Shleifer and
Vishny, 1986), while the second view discoursed that they act passively (Bathala et al., 1994;
David and Kochhar, 1996). These conflicting views have questioned on the kind of engagement
by the institutional owners prevail in the firms. Similarly, studies like McConnel and Serveas
(1990), Han and Suck (1998), Del Guercio and Hawkins (1999) and Gompers and Metrick
(2001) found a positive influence of institutional ownership on the corporate performance,
whereas authors like John and Klein (1994), Gillan and Starks (1995), Karpoff et al. (1996) and
Duggal and Millar (1999), and Faccio and Lasfer (2000) found no significant impact. These
inconclusive inferences cannot be reliable for policy implications, which question on the
significance of the institutional ownership engagement on the firm performance.

Hence, this paper is motivated to investigate a further research on the impact of the institutional
ownership engagement on the corporate performance. We found that most of the studies on the
role of institutional ownership activism is extensively explored in the developed markets (Chen
et al., 2007; Ferreira and Matos, 2008; Ferreira et al., 2010; Aggarwal et al., 2011), whereas
few studies have concentrated on the emerging markets. This raises a question on the
institutional ownership engagement in the developing markets. Therefore, we try to explore the
role of the institutional owners in a developing economy as the institutional framework,
corporate governance, economic and financial market conditions of the developing markets are
different from the developed market (Ngwu et al., 2016). Hence, this study focuses on a
developing market like India, which has become one of the leading Asian economies in the
 globe. India has witnessed a tremendous economic growth and an increasing trend of
institutionalization in its capital market since its liberalization and left other Asian economies
behind. This motivated us to test our hypotheses in the Indian context and can be developed as an
Asian model.

Next, we focus on the institutional ownership typology, as extant literatures have considered the
institutional owners as monolithic group and homogeneous in nature. Hence, this study moves
beyond the traditional thought and considers two emerging categories of institutional investors
namely pressure-sensitive and pressure-resistant by following the prior works (Brickley et al.,
1988; David et al., 1998; Almazan et al., 2005; Chen et al., 2007; Cornett et al., 2007; Elyasiani
and Jia, 2010). Pressure resistant institutions behave independently and actively participate in the
governance of the firms (Brickley et al., 1988), while Pressure-sensitive investors act as passive
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monitors and have a business relationship with the investee firms. Both of these investors are
having a different kind of influence on the firm performance. Most of the studies on the
ownership engagement by the pressure resistant and pressure sensitive is concentrated in the
Anglo-American countries, hence the question how these ownership engagement matters in a
developing market like India post financial crisis.

Our subsequent focus is on the ownership engagement by the foreign institutional investors (FII),
as they have been playing a significant role in Indian equity market since the opening up of
Indian economy and financial sector reforms happened (Douma et al., 2006). While Khanna and
Palepu (2000) and Baek et al. (2004) opined that the engagement of FIIs in the management is
required to reduce the exploitation by the insider controlling owners in developing economies,
which enhances the firm performance. Further, we found most of the Indian studies focused on
the impact of FIIs on capital market performance, whereas very few studies were done on the
influence of FIIs on corporate performance. Hence the question is how FIIs affect the
performance of Indian firms post financial crisis. The issues raised in this study are pursued
extensively to get the plausible answers.

The next focus of the paper is on the USA (Unites States of America) financial crisis, which
became a global financial crisis as the US economy slowed down drastically and adversely
affected the economies, corporate performance and stock markets of the globe (Erkens et al.,
2012) and India was not an exception (Mohan, 2009). The linkage and impact of the US crisis on
the Indian economy was felt through three different channels such as trade channel, financial
channel and confidence channel (Subbarao, 2009). First, the trade linkage between India and US
diminished due to the weak demand from the US market after the crisis, which affected the
Indian corporate performance. Secondly, the crisis lessened the Indian companies’ access to the
overseas fund, slashing domestic liquidity and stock price collapse. Thirdly, the crisis hampered
the confidence of the investors and consumers in India, which reduced the spending. Hence we
have considered the US financial crisis as a significant event and tried to explore the impact of
the institutional ownership engagement on the financial performance of Indian listed firms after
the US crisis.
 The rest of the paper unfolds as follows. Section 2 reviews the literature evidence on the
impact of institutional ownership engagement on firm performance and focusses on the
hypothesis development. Section 3 details the sample selection and the variable descriptions.
Section 4 specifies the research methodology adopted and the model propositions. Section 5
presents the empirical findings and discussions. The final section draws the conclusion and
implications of this paper.

2. Literature review and hypothesis development

2.1. Theoretical background

The theoretical foundation of the prominence of the equity ownership engagement and their
relationship with the firm performance is substantiated by the Agency theory, which expressed
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that the institutional ownership involvement reduces the agency cost and enhances the firm
performance (Jensen and Meckling, 1976). Further, the influence of the institutional ownership
activism on the firm performance is based on two arguments such as performance improvement
and performance reduction (Yuan et al., 2008). Performance improvement argument explains the
institutional owners actively participate in the firms to improve the corporate governance to get
the maximum return on their investment. These investors look for better performing companies
to invest their fund and possess the ability to monitor the managers at lower transaction cost
(Elysiani and Jia, 2010). On the other hand, performance reduction argument delineates that the
short termism of the institutional owners may hamper the long-term growth perspective of the
firm (David and Kochhar, 1996).

The increased institutional equity investment led the governance researchers to focus on the
monitoring role of the institutional owners. The monitoring role of the institutional owners in the
governance literature is being narrated by three viewpoints. First is the “active monitoring” view
which delineates that institutional owners are the active monitors, and utilizes their better
managerial skills to reduce the agency conflict, minimize information asymmetries and improves
the firm performance (Shleifer and Vishny, 1986). Secondly “passive monitoring” view portrays
that institutional investors do not participate actively in the management’s decisions and not
interested in improving the firms’ governance and performance, rather they invest their money to
attain short-term capital gain through their informational efficiency (David and Kochhar, 1996).
Third, the “exploitation” view explains that institutional investors try to exploit the minor
shareholders by overlooking the management fraud as long as they derive their benefit out of it,
which impairs the firm performance.

2.2. Institutional ownership and firm performance

The role of the institutional investors as equity owners in the firms’ decision-making process to
improve the firms’ performance has been a debate in the financial economics research. Earlier
studies like Shleifer and Vishny (1986), Huddart (1993), Maug (1998), Ahmad and Jusoh (2014)
have opined that institutional owners have both the motivation and incentive to monitor the
 firms’ management to minimize the agency conflict. Similarly, the empirical evidence
(McConnel and Serveas, 1990; Gompers and Metrick, 2001) has reported that large institutional
players enhance the firm performance through their effective decision-making abilities. While,
another group of literature such as John and Klein (1994), Gillan and Starks (1995), Karpoff et
al. (1996) and Del Guercio and Hawkins (1999) has observed that institutional activism has a
negligible impact on the performance of the companies. The literature on the institutional
ownership engagement and its impact on the firm performance have produced inconclusive
results, which cannot be taken as granted for policy implications.

2.3. Pressure-Resistant and Pressure-Sensitive ownership engagement

The literary works on pressure-resistant and pressure-sensitive institutional investors began with
the work of Brickley et al. (1988), Pound (1988), and Kochhar and David (1996). They found
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that the pressure-sensitive institutional investors are having a negative relationship with the firm
performance due to their business association with the investee firms’ management. Brickley et
al. (1988) considered banks, insurance companies and non-bank trusts as pressure-sensitive,
while pension funds, mutual funds, endowment funds were taken as pressure-resistant. Further
from their study on US firms inferred that pressure-resistant institutional investors are more
actively involved in monitoring the management than the pressure-sensitive institutions.

Pound (1988) explained that the behaviors of the pressure-resistant investors are following the
active monitoring hypothesis, while pressure-sensitive institutional owners follow the conflict of
interest hypothesis. Pressure resistant institutional investors have the ability to monitor the firm’s
management due to their greater accessibility to the firm resources and expertize. Usually, this
class of investors has an investment relationship with the investee firms, where they pursue
better policy in alignment to their interest. Therefore, pressure-resistant investors are regarded as
the able players to pressurize the management to change their decision as compared to the
pressure-sensitive investors. Almazan et al. (2005) and Chen et al. (2007) have opined that the
cost of monitoring for the pressure-resistant investors is arguably low and they have the
willingness for an effective engagement in the firms’ governance to protect their investment.

Cornett et al. (2007) inspected the influence of the institutional investors on the S&P 100 US
companies’ operating performance from 1993 to 2000 and found the positive effect of the
pressure resistant institutional investors on the performance, as these investors are better
monitors. Ferreira and Matos (2008) made an international study by taking 27 countries from the
year 2000 to 2005, where they found that foreign and pressure-insensitive institutional investors
enhanced the value of the firm and operating performance. While the domestic and pressure
sensitive institutions had negative effect.

Elyasiani and Jia (2010) from their study on the US firms from 1992 to 2004 found a positive
association between the institutional ownership and corporate performance. They inferred that
pressure resistant institutional investors with more than 5% share holdings had a greater
 influence on the management decisions and corporate performance. Aggarwal et al., (2015) from
their Chinese experience opined that pressure-resistant investors are better players in preventing
the corporate scandals. Though extant literature predicted a positive relationship between the
pressure resistant investors and firm performance but certain studies (Romano, 1993; Wahal,
1996; Faccio and Lasfer, 2000) also reported conflicting evidence.

Wahal (1996) found that pension funds, as pressure-resistant investors did not improve the long-
term stock price performance of the investee firms, which signified them as ineffective monitors.
Similarly, Faccio and Lasfer (2000) found that pension fund investors are not effective monitors
in the UK. Hutchinson et al. (2015) observed that pressure-resistant investors with substantial
control are better monitors and enhance the firm value and short-term firm performance of the
firms. More recently, Lin and Fu (2017) from their study on China conferred that institutional
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owners have a positive effect on the firm performance but suggested that pressure insensitive
institutions had a greater impact on the firm performance than pressure-sensitive institutional
investors.

2.4. Foreign institutional ownership engagement

FIIs have become one of the largest institutional investors in the emerging countries, where they
have engaged actively in the corporate governance and have a positive influence on the firm
performance (Khanna and Palepu, 2000; Douma et al., 2006). Wilmore (1986) inferred that
foreign firms had higher labor productivity and better capital adequacy than the domestic firms
in Brazil. Similarly, Doms and Jensen (1998) made a study in the United States, where they
confirmed that foreign manufacturing firms had better operating capabilities with higher
technology and were more productive than the domestic firms. The study of Oulton (1998) in
UK witnessed that the productivity of both the manufacturing and non-manufacturing firms
increased with the increase in the foreign ownership. Boardman et al. (1997) found that foreign
subsidiaries in Canada were more profitable than domestic counterparts.

Konings (2001) made a study on three developing markets: Bulgaria, Poland and Romania,
where he obtained that foreign investment has no positive effect on the firm productivity of
Bulgaria and Romania except Poland. Lins (2003) from their research in 18 emerging markets
found that foreign investors are the better monitors than the domestic investors, as they have a
lack of huge investment and political freedom. The study of Greenaway et al. (2014) indicated
that U-shaped relationship exists between the foreign ownership and performance. On the other
hand, another group of studies (Barbosa and Louri, 2005; Huang and Shiu, 2009; Zemplinerová,
2010) has inferred that foreign investment negatively affected the performance and productivity
of the firm.

2.5. Indian evidence

The dramatic upsurge of the institutional investment in Indian capital market is witnessed post
the liberalization policy in the 1991 and most prolifically the foreign institutional players have
 played a significant role in shaping the Indian financial market (Samal, 1997). Hence, most of
the studies on institutional owners in India are concentrated on the impact of FII on the equity
market movements. Mukherjee et al. (2002) documented a strong effect of FII on the stock
return. It was detected that FIIs look for huge capital gains through obtaining the shares at lower
prices and selling at higher prices (Gordon and Gupta, 2003). Suresh Babu and Prabheesh (2008)
observed that FIIs and stock return are interdependent and both influence each other.

Some of the Indian studies have focused on the behaviour of the mutual funds in the Indian stock
market due to its increasing trend of investments in the capital market. Ananth and Swaminathan
(2011) observed that mutual fund investments are highly volatile in the Indian market and the
increase in the mutual fund investment leads to increase in the BSE Sensex. Bose (2012)
analyzed the mutual fund net investment flows and FIIs on the stock market return in India post
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crisis period. His result discovered that FIIs had a positive influence while mutual fund
investments had no significant effect on the stock return in Indian capital market. Mukhopadhyay
and Chakraborty (2017) tested the influence of FII on the financial performance of the Indian
listed firms, where they have denoted that FIIs have a significant positive effect.

2.6. Hypothesis development

Previous literature produced no concrete results on the impact of the institutional ownership
engagement on the firm performance, which cannot be generalized for policy implications.
Further, we confirmed that most of the previous Indian studies focused on the impact of the
foreign institutional investors and mutual funds, while no studies concentrated on the recent
institutional investors’ types such as pressure-resistant and pressure-sensitive institutional
investors. While both of these two types of institutions have occupied an emerging space in the
current literature and found to be playing a momentous role in the corporates of the developed
markets. Another area of concern is the USA financial crisis, which had the worst effect on both
the corporate performance and the institutional investment worldwide (Erkens et al., 2012).
Maximum studies in India have pondered the effect of the crisis on the stock market performance
whereas meager attention is paid on the impact of the crisis on the institutional equity investment
scenario and corporate financial performance. Hence based on these research gaps, we have
framed three research hypotheses, which are cited below:

‫ܪ‬ଵ : There is a positive impact of the pressure-resistant institutional ownership engagement on

the financial performance of the Indian listed firms after financial crisis.

‫ܪ‬ଶ : There is a positive impact of pressure-sensitive institutional ownership engagement on the

financial performance of the Indian listed firms after financial crisis.

‫ܪ‬ଷ : There is a positive impact of foreign institutional ownership engagement on the financial
performance of the Indian listed firms after financial crisis.
 3. Data
3.1. Data

We examine the above the hypotheses by utilizing the data from the listed firms from the
National Stock Exchange (NSE) of India for a period of eight years from FY 2008-09 to FY
20015-16. Our study period is selected after the US financial crisis 2007-08 to test the impact of
the crisis on the behaviour of the institutional equity investment and its impact on the financial
performance of the Indian listed firms. We have considered listed firms from NSE, as it has
become the 12th largest stock exchange of the globe and NIFTY-500 firms represents 95% of the
total free float market capitalization of the entire stock listed on NSE.1 This study covers a
sample of 361 listed firms derived from the population of NIFTY-500 firms. We have dropped
several companies from the sample size due to the unavailability of the financial and institutional
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ownership data. After slashing the observations with missing values, we have 2888 firm-year
observations in this study. The data on institutional stock ownership, financial performance
measures and firm-specific variables are collected from PROWESS database from CMIE (Centre
for Monitoring Indian Economy). PROWESS is an Indian database, which furnishes the financial
statement information as well as financial market data of the Indian companies.

3.2. Financial performance measures

The dependent variable of this study is the financial performance of the companies, for which we
have employed three proxies. The first measure of the financial performance is the return on
assets (ROA), which is an accounting based measure widely used in many previous literature
(Cornett et al., 2007; Elyasiani and Jia, 2010; Lin and Fu, 2017). ROA depicts the earning
efficiency of the firms over their assets. Secondly, we have utilized net profit margin (NPM) as
the second proxy for the financial performance (Rechner and Dalton, 1991: Sridharan and
Marsinko, 1997). NPM is an accounting measure, which evaluates the return potential of the
firms over their sales revenue. The next proxy applied for the financial performance is the return
on equity (ROE), which measures the efficiency of the firms over the shareholders’ investment
(Baliga et al., 1996; Dehaene et al., 2001).

3.3. Institutional ownership engagement measures

Institutional ownership engagement refers to the monitoring role of the institutional owners
through their equity holdings in the listed firms and considered as the independent variables to
test our hypotheses. We distinguish the institutional ownership into three broad homogeneous
groups according to their business connections and geographical basis such as pressure-resistant,
pressure-sensitive and foreign institutions. The equity holdings of these three types of institutions
represent the institutional ownership engagement variables in this study. We have taken into
account the sum of equity investment percentage held by the mutual funds, venture capital and

1
https://www.nseindia.com/products/content/equities/indices/nifty_500.htm
 private equity under pressure-resistant institutional investor’s category by following the previous
literature like Cornett et al. (2007), Ferreira and Matos (2008). These types of investors are
believed to be as independent and have investment relationship with the investee firms. They
actively monitor the investee firms’ decision-making process and emphasize on the shareholders’
value maximization.

Next, we consider the sum of the percentage of an equity investment made by the insurance
companies, banks and non-bank trusts as the pressure-sensitive institutional owners (Cornett et
al., 2007; Chen et al., 2007). These groups of investors are assumed having a potential business
relationship with their investee firms, hence regarded as non-independent investors. Further, this
type of investor is considered as passive investors, as they accept the management decision to
protect their business relationship. The last category is the foreign institutional investors (FII),
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which is the total percentage of the equity investment made by the foreign institutions. FIIs are
more actively involved in the monitoring of the investee firms than the domestic investors and
demand changes in the management decision making process to improve the firm performance
(Ferreira and Matos, 2008; Gillan and Starks, 2003).

3.4. Control variables

Following the prior empirical evidence, we apply certain control variables such as firm size (SZ),
leverage (LEV), market risk (MR), capital expenditure (CE) and cash flow (CF) to accommodate
the economic and industry effects, which illuminate the firm’s financial performance.

Firm size (SZ): It is measured as the natural logarithm of the total assets. There is a negative
association exists between the firm size and profitability, as the large firms suffer from the more
bureaucratic problem (Xu and Wang, 1999) and heavy agency cost (Sun and Tong, 2003), which
diminishes the performance. On the other hand, large firms enjoy the benefits of large scale of
production, which reduce the cost of production and improve the profitability. Hence, Firm size
has a mixed association with the firm performance.

Leverage (LEV): It is quantified as the fraction of total debt to total assets. Pecking order theory
postulates that leverage (Lev) adversely affects the firm performance, as more debt increases the
bankruptcy cost and financial distress of the firms. While, Anderson and Reeb (2003) argued that
debt disciplines the managerial behaviour and reduces the agency cost, which augments the firm
performance.

Market risk (MR): It denotes the risk inherent of the firm, gauged by the stock price volatility. It
is based on the moral hazard hypothesis, which argues that investors of the riskier firms face
more moral hazards. Demsetz and Villonga (2001) argued that fluctuations in the market risk
instigate ownership variations and a higher risk implies a better outlook for the firm’s
profitability.
 Capital expenditure (CE): We define the capital expenditure, as the capital investment made in
the non-current assets scaled by the total assets. It is believed that capital expenditure positively
affects the firm performance. Because higher capital expenditure indicates the readiness and
abilities of the firms in undertaking the long-term and lucrative projects, which results in a better
firm performance (Seifert et al., 2005).

Cash flow (CF): We describe the cash flow as the net profit after tax combined with depreciation
and amortization. We have taken the natural logarithm form to normalize the cash flow. Higher
cash flow shows the higher debt paying capacity and better liquidity position, which affects the
firm performance positively (Kaplan and Zingales, 1997).

4. Methodology
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This study deals with both the cross-sectional (number of companies) and time series (number of
years) data, so panel data econometric models are utilized to find the impact of institutional
ownership engagement on the firm’s financial performance. The utilization of the panel data
models has been popular in the recent literature due to its capacity of capturing both the
individual effect and time effect of the data and controlling of the heterogeneity issue (Hitt et al.,
1998). Therefore, panel data techniques are regarded as a better model than the cross-sectional
and time-series models. Hence, we used panel data techniques like OLS, fixed-effect (FE),
random-effect (RE) and simultaneous equation modelling (SEM) to test our hypotheses.

We segregated our empirical results into two stages. In the first stage, we have considered
institutional ownership as an exogenous variable in our study by following the prior studies like
Morck et al., (1988) and McConnell and Servaes (1990). Hence, we used the panel data OLS, FE
and RE models to examine the impact of the institutional ownership activism on the financial
performance. Then we followed three tests such as F-test (Baltagi, 1995), Breusch and Pagan
Lagrange Multiplier test (1980) and Hausman test (1978) to choose the best-fit regression. F-test
determines the best model between the OLS and FE regression model, Lagrange Multiplier test
(LM) decides the better model between OLS and RE regression and Hausman test finalizes
between the FE regression and RE regression results.

In the second stage, we have deemed the institutional ownership variables as endogenous
variables. The earlier works like Demsetz and Lehn (1985), Cho (1998), and Demsetz and
Villalonga (2001) reported the existence of the endogeneity issue while explaining the
relationship between the ownership structure and firm performance. This indicates an existence
of bi-directional relationship between ownership structure and firm performance. Hence, we
employed simultaneous equation modelling (SEM) with two stage least square (2SLS) and
generalized method of moments (GMM) estimation techniques to resolve the endogeneity issue
in our study. Further, we applied the Durbin, Wu-Hausman and GMM C-statistics to check the
endogeneity issue of the institutional ownership variables. Then, we made an instrument test to
 test the strength of the instrumental variables. Next, we used Sargan test and Hansen test to
check the overall validity of the instruments and the model.

We have formed the below regression models to test our hypotheses such as the impact of the
ownership engagement by the pressure-resistant, pressure-sensitive and foreign institutions on
the financial performance of the Indian listed firms post to the US financial crisis. Three
categories of institutional owners such as pressure-resistant, pressure-sensitive and foreign
institutions are considered in this study and their respective equity holdings in the listed firms
represent their ownership engagement, which are taken as independent variables in the below
model to find out their kind of influence on the financial performance measures. We have used
ROA, NPM and ROE as the measures of financial performance as the dependent variables.
Hence, we have run three regression models by considering each dependent variable separately
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each time. All the below model results will guide us whether to accept or reject our hypotheses.

ROA௜௧ = α + β1PRES௜௧ + β2PSEN௜௧ + β3FII௜௧ + β4SZ௜௧ + β5LEV௜௧ +β6MR ௜௧ + β7CE௜௧

+ β8CF௜௧ + ε௜௧ ................................................................................................................. (1)

NPM௜௧ = α + β1PRES௜௧ + β2PSEN௜௧ + β3FII௜௧ + β4SZ௜௧ + β5LEV௜௧ +β6MR ௜௧ + β7CE௜௧

+ β8CF௜௧ + ε௜௧ ................................................................................................................. (2)

ROE௜௧ = α + β1PRES௜௧ + β2PSEN௜௧ + β3FII௜௧ + β4SZ௜௧ + β5LEV௜௧ +β6MR ௜௧ + β7CE௜௧

+ β8CF௜௧ + ε௜௧ ................................................................................................................. (3)

Where, i denotes listed companies, t denotes time period. ROA denotes return on assets, NPM
denotes net profit margin, ROE denotes return on equity, PRES denotes pressure-resistant
institutional owners, PSEN denotes pressure-sensitive institutional owners, FII denotes foreign
institutional investors, SZ denotes firm size, LEV denotes financial leverage, MR denotes market
risk, CE denotes capital expenditure, and CF denotes free cash flow.

Table 1. Summary of variables

5. Empirical findings and discussions

5.1. Descriptive statistics

Table-2 presents the summary statistics of the dependent variables (ROA, NPM and ROE),
independent variables (PSER, PSEN and FII) and control variables (SZ, LEV, MR, CE and CF).
Table-3 and 4 depicts average institutional ownership holdings and average financial
performance measures respectively. Figure-I and II displays the graphs of average institutional
investment and average financial measures respectively. The average equity investment by the
pressure-resistant (PRES), pressure-sensitive (PSEN) and foreign institutional investors (FII) are
 5.19%, 5.17% and 12.79% respectively, which vividly indicates that FIIs are dominating the
investment space of the Indian firms. It was found that the investment from the PSER investors
and FIIs in India is higher than China, while the investment from the PSEN investors is lesser in
comparison to China (Lin and Fu, 2017). However, the investment from PRES and PSEN
investors in the US is much better than the India (Cornett et al., 2007).

Table 2. Summary statistics

Table 3. Average institutional ownership holdings year-wise

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Figure I. Institutional equity investment scenario

Table 4. Average financial performance measures year-wise

Figure II. Corporate financial performance scenario

The highest investment from the PSER, PSEN and FII are 35.42%, 38.36% and 79.65%
respectively, which further signifies that FIIs also contribute maximum capital to the Indian
business houses. Figure-I demonstrates that the participation of the FIIs have consistently gone
up since 2009, which expresses that in spite of the crisis India have enjoyed the good foreign
investment flow and the crisis has an insignificant effect. But the investment from PSER and
PSEN has shown a declining trend since FY 2008-09 until 2014. They slowly picked up
subsequently but their investment in comparison to the FIIs remained low in the last eight years.
The average values of the ROA, NPM and ROE are 6.66%, 2.43% and 10.93% respectively,
which displays that regardless of the US financial crisis Indian firms have performed positively.
However, the figure-II displays that the performance measures have shown a declining trend
since the FY 2009, which indicates that the crisis has affected the Indian corporate financial
performance. The summary statistics of the institutional investment and performance measures
witness that crisis has a significant effect on the Indian market.

Table 5. Pearson correlation matrix and VIF

Table 6. Breusch-Pagan test for heteroscedasticity

Table-5 exhibits the Pearson correlation coefficients (r) of all variables along with the variance
inflation factors (VIF) of the explanatory variables used in the model. The correlation
 coefficients (r) measure the strength and direction of the linear relationship between the two
variables. We found that no variables are having high correlation i.e. no coefficient is more than
the threshold limit of 0.8 (Kennedy, 1985), which indicates that there is no collinearity problem
exists in the model. Subsequently, it is evinced that the model has no multicollinearity problem
as the VIF values of the independent and control variables are well under the recommended
value of 10. Table-6 presents the Breusch-Pagan (BP) test, where the heteroscedasticity problem
is found as the p-value is very much significant, which rejects the null hypothesis of constant
variance.

We noticed that the pressure resistant institutional owners (PRES) are having a significant
positive correlation with the ROA and ROE, while pressure sensitive institutional owners
(PSEN) are having a significant negative association with all the performance measures. Foreign
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institutional owners (FII) have shown a positive and significant relation with the NPM and ROE.
This implies that with the increase in the equity investment from both the PSER and FII magnify
the firm performance, whereas equity investment from PSEN declines the firm performance.
Among control variables, we observed that firm size (SZ), leverage (LEV) and market risk (MR)
are displaying negative relationship with the performance measures, while the cash flow (CF) is
having positive and significant association with the financial performance. In the meantime,
capital expenditure depicts a mixed association with the performance measures.

5.2. Panel regression results

We summarize and compile the panel regression results of the three models in the table-9. We
have formed three models with three different performance measures such as ROA, NPM and
ROE and each model produces three-regression results such as OLS, FE and RE. Subsequently,
we present three optimal tests such as F-test, LM test and Hausman test (table-8) to get the
optimum regression result among OLS, FE and RE. We found that the F-test is significant at 1%
level of significance in all the models, which signifies that fixed-effect (FE) is better than OLS.
Then the LM tests for the three models are found to be significant, which indicates that random-
effect (RE) regression is preferred over the pooled OLS. Further, the Hausman tests for all the
models are significant, which implies that FE is better than RE. Hence it was inferred that all the
three models are supported with the FE regression. Additionally, we have applied the “cluster ()”
function along with the panel regressions in STATA to filter the heteroscedasticity and
autocorrelation problem (Torres-Reyna, 2007). The f-statistics and chi2 statistics (table-8) of
the all the regression models are significant at 1% level of significance, which implies that all
our regression models are overall statistically significant.

Table 7. Optimal tests

The empirical findings of all the three model results presented in the table-8. We found from the
three models that the PSER institutional investors have a positive and significant effect on the
corporate financial performance measures. This signifies that PSER institutions involve
 themselves in the corporate decision making of the firms to improvise the financial performance,
which is very much identical to the literature of the developed markets like Cornett et al. (2007),
Ferreira and Matos (2008), Elyasiani and Jia (2010). Next, we found that PSEN institutional
owners have a significant negative impact, which implies that the investment from these
investors adversely affect the financial performance and they are mostly inactive. The test results
of PSEN is following the earlier studies like Pound (1988), Kochhar and David (1996) and Lin
and Fu (2017). Subsequently, our results reveal that FII has a positive and significant effect on
the corporate performance, which indicates that FIIs are very much active in the corporate
governance of the Indian firms. In a developing economy like India, most of the owners are
insiders and they act to maximise their own benefits. This can be pruned by the presence and
active monitoring activities from the outside owners like FIIs. The results have shown exactly
the same phenomenon in the Indian context, which is very much similar to the earlier studies like
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Khanna and Palepu (2000) and Baek et al. (2004).

Table 8. Panel regression results

Further, we perceived from model-1 results that firm size (SZ), leverage (LEV) and capital
expenditure (CE) have a significant negative effect on the ROA, whereas market risk (MR) and
cash flow (CF) have a positive impact on ROA. The results of the model-2 showed that firm size,
leverage, market risk and capital expenditure have a significant and negative impact on NPM,
while cash flow has a positive impact on NPM. From the model-3 results, we found that firm
size, leverage and capital expenditure have a significant and negative effect on the ROE, while
cash flow and market risk have a positive impact on ROE. It can be inferred from all the models
that increase in the size of the firm and leverage hampers the performance, while an increase in
cash flow enhances the performance.

5.3. SEM estimation results

We present six panel data SEM models explaining the relationship between the institutional
ownership and firm performance in the table-9. We have regarded the institutional ownership as
an endogenous variable, for which we adopted 2SLS and GMM estimations to address the
endogeneity issue and robustness. First, we tested the endogeneity issue of the institutional
variables such as pressure resistant (PSER), pressure sensitive (PSEN) and foreign investors
(FII) through the Durbin and Hausman test, where we found that the PSER and PSEN as
endogenous variables as the test statistics were significant at 1% level of significance. This
validates the use of the 2SLS and GMM in our study. We utilized stock yield, total institutional
equity investment and domestic institutional equity investment as three potential instruments for
the endogenous variables in the SEM models.

Table 9. SEM estimation results

 Subsequently, two specification tests such as weak instrument test (relevance condition) and
over-identification test (exclusion condition) are used to assess the strength of the instrumental
variables. We found that the estimated value of Cragg-Donald F statistic (46.445) is bigger than
the critical value (13.43), which discards the null hypothesis of weak instruments and indicates
that the selected instruments are robust and valid. Further, we conducted the Sargan test and
Hansen’s test for over-identifying restrictions to test the validation of the instrument set and
correct specification of the models. We attained that the p-values of both the Sargan test and
Hansen’s test are insignificant, which accepts the null hypothesis that implies the selected
instruments are exogenous and all the models are correctly specified.

The empirical results (table-9) of both the 2SLS and GMM show that the pressure resistant
institutional (PSER) ownership is positively related to all the financial performance measures
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(ROA, NPM and ROE) at a 1% level of significance, which suggests that the ownership
engagement of PSER institutes enhance the firm performance. It can be inferred that PSER
institutions are actively monitoring the management of the Indian firms to boost their return on
investment. Our derived test results of PSER investors are very much parallel to the previous
studies like Brickley et al. (1988), Cornett et al. (2007), Elyasiani and Jia (2010) and Lin and Fu
(2017). We can conclude that test findings of PSER institutional investors support the ‘active
monitoring’ hypothesis (Pound, 1988).

The test results for the pressure sensitive institutional ownership (PSEN) show that it has a
significant and negative relationship with all the financial measures (ROA, NPM and ROE),
which indicates that increase in investment from the PSEN institutions has an adverse effect on
the financial performance of the Indian firms. In other words, we can state that the PSEN
investors are passive monitors and reluctant in pressurizing the management for any change to
save their profitable business relationship, which follows the ‘passive monitoring’ and ‘conflict
of interest’ hypotheses (Pound, 1988). Further, the negative results for the PSEN investors follow
the previous studies like Chen et al. (2007), Ferreira and Matos (2008) and Lin and Fu (2017).
It’s noteworthy to mention that results of the PSER and PSEN from the 2SLS and GMM
estimation are matching to our previous panel regression results.

Among the control variables, we noticed that leverage (LEV) and market risk (MR) are
significantly negative with all the financial measures in all the models. Whereas, cash flow (CF)
has a significant and positive relationship with the financial measures. Firm size (SZ) has shown
a positive association with the NPM but a negative influence on the ROA and ROE. Capital
expenditure has no impact on the ROA and NPM, while it has negative effect on the ROE. It can
be inferred that out of all the control variables cash flow enhances financial performance, while
leverage and market risk reduce the firm performance. These findings are also similar to our
previous panel regression results, which show the robustness of our test results.
 6. Conclusion and implications
This study found that both the institutional investment and firm performance declined post the
financial crisis, which indicates that financial crisis hampered the Indian economy. Further, the
results imply that pressure-resistant and foreign institutional ownership engagement have a
greater role in the governance and influence the management of the Indian firms to make
profitable decisions, which accepts our first and third hypotheses. In the Indian context, the
pressure resistant owners are the mutual funds, venture capital and private equity firms, which
are independent, less regulated and having experienced investment managers. It makes them as
active monitor and engages them in doing lucrative projects. Similarly, in lower investor
protection countries, foreign institutional engagement are more pro-active in comparison to the
domestic institutions, which is evidenced in this study. While, the enagement by the pressure-
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sensitive institutions are found to be having a lesser role and adverse effect on the financial
performance, which rejects our second hypothesis. The pressure sensitive owners include the
banks, insurance companies and non-bank trusts, which are highly regulated in India, lack
efficient fund managers and have business tie-ups with the investee firm. It makes them less
competent monitors and their engagement in the decision making is very low in India, which
leads to no improvement in the investee firms’ financial performance.

The findings from this study have numerous implications for the policy makers, practitioners and
equity investors in many ways and can be a guiding factor for other Asian countries. First, more
favourable policies and sound governance system are required to attract more equity investment
from the institutional investors, as the institutional investment in India is not at par with the
developed economies like USA, UK and Europe. More specifically Indian firms should raise
more funds from pressure-resistant and foreign institutions, as their engagement enhance the
financial performance. Secondly, the ownership engagement from the PSER and FIIs should be
encouraged more for effective decision making process in India to formulate better investment
schemes. Because their engagement will diminish the hegemony of the controlling owners and
their exploitation of the minor owners in India. Thirdly, we found that FIIs are the larger
institutional investors than the PSER and PSEN in India. Hence, Indian firms need to limit their
dependency on the foreign equity investment. Since, at the time of crisis FIIs heavily pull their
money from the market, which adversely affects the financial markets and firm value. Fourthly,
the pension fund investment in India is at the very nascent stage, which needs to be uplifted to
match the global standards.

In spite of many implications, our study also suffers from certain limitations. First, we only
focussed on the listed firms; hence private firms can be taken for further research to execute
more in-depth analysis. Second, our study considers the post crisis period; further comparative
study can be done by taking both the prior and post crisis period, which will furnish more vivid
picture of the financial crisis effect. Notwithstanding of these limitations, this research will
enrich the idea of the researchers on the functioning of the institutional investors in a large
 developing economy like India to the policy makers and can be generalized as an Asian model.
Further, India’s consistent economic growth and strong institutional environment in spite of the
US financial crisis has grabbed the attention of the globe. Hence, this research on the India will
be a valuable addition to the global governance literature.
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 Appendix-1: List of tables
Table 1. Summary of variables
Variables Measurements Type Supporting literature
ROA Earnings before interest and tax/Total assets Dependent Elyasiani and Jia (2010), Lin and
Fu (2017)
NPM Net profit/Total revenue Dependent Cornett et al. (2007), Ferreira and
Matos (2008)
ROE Profit after tax/book value of equity Dependent Baliga et al. (1996), Dehaene et al.
(2001)
PRES Sum of the percentage equity investment by the Independent Cornett et al. (2007), Ferreira and
mutual funds, venture capital and private equity Matos (2008)
PSEN Sum of the percentage equity investment by the Independent Cornett et al. (2007), Chen et al.
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insurance companies, banks and non-bank trusts (2007)

FII Percentage of equity investment by the foreign Independent Mukhopadhyay and
institutional investors Chakraborty (2017)
SZ Natural Logarithm of Total assets Control Lin and Fu (2017)
LEV Total debt/Total assets Control Elyasiani and Jia (2010)
MR covariance between the security’s returns and the Control Anderson and Reeb (2003)
benchmark returns
CE Capital expenditure in non-current assets/total Control Seifert et al. (2005)
assets
CF Net profit after tax + Depreciation and Control Cho (1998)
amortization

Table 2. Summary statistics

Variable Mean Std. Dev Min Max Observation
Financial performance measures
ROA 6.66 7.28 -35.07 39.72 2888
NPM 9.92 13.12 -92.14 82.38 2888
ROE 10.93 12.71 -130.05 170.46 2888
Institutional ownership variables
PRES 5.19 5.15 0.00 35.42 2888
PSEN 5.17 6.20 0.00 38.36 2888
FII 12.79 11.39 0.00 79.65 2888
Control Variables
SZ 10.91 1.75 7.04 16.93 2888
LEV 0.41 0.24 0.01 1.78 2888
MR 1.06 0.41 0.18 2.90 2888
CE 0.40 0.28 0.01 1.59 2888
CF 8.29 1.60 1.65 14.09 2888
 Note: This table presents the mean, standard deviation, minimum and maximum values of the variables. The
variables are explained in the table-2. PRES, PSEN, FII, SZ, LEV, MR, CE and CF represent Pressure resistant
investors, pressure sensitive investors, financial institutional investors, firm size, leverage, market risk, capital
expenditure and cash flow.

Table 3. Average institutional ownership holdings year-wise

IOM/FY 2009 2010 2011 2012 2013 2014 2015 2016
PRES 5.35 5.86 5.20 5.09 4.64 4.28 5.25 5.85
PSEN 5.72 5.74 5.52 5.49 5.19 4.86 4.43 4.63
FII 9.85 11.28 12.62 12.69 13.60 14.26 14.30 13.78
Note: This table displays the average values of the different institutional ownership (percentage) year wise. IOM and
FY represent the institutional ownership measures, financial year respectively.

Table 4. Average financial performance measures year-wise

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FPM/FY 2009 2010 2011 2012 2013 2014 2015 2016

ROA 7.05 7.68 7.37 6.59 6.13 6.10 6.01 6.31
NPM 10.22 11.35 11.47 9.98 9.31 9.26 9.14 8.60
ROE 17.10 17.92 17.96 16.59 15.56 15.94 15.36 15.30
Note: This table displays the average values of the financial performance measures year-wise. FPM and FY
represent financial performance measures and financial year respectively.

Table 5. Pearson correlation matrix and VIF

Variables ROA NPM ROE PRES PSEN FII SZ LEV MR CE CF VIF
ROA 1.000
NPM 0.501 1.000
ROE 0.649 0.432 1.000
PRES 0.122 0.028 0.098 1.000 1.07
PSEN -0.143 -0.151 -0.103 0.013 1.000 1.25
FII 0.030 0.152 0.034 0.051 -0.028 1.000 1.18
SZ -0.306 -0.001 -0.209 -0.167 0.402 0.302 1.000 1.69
LEV -0.167 -0.237 -0.097 0.005 -0.073 -0.049 -0.074 1.000 1.06
MR -0.443 -0.129 -0.349 -0.151 0.055 -0.012 0.225 0.088 1.000 1.12
CE 0.063 -0.081 -0.034 0.021 -0.048 -0.155 -0.235 0.167 -0.074 1.000 1.10
CF 0.110 0.124 0.111 -0.027 0.162 0.210 0.348 0.046 -0.068 -0.032 1.000 1.20
Note: This table displays the correlation coefficients of all the variables. All coefficients in bold are significant at p
value < .05, VIF indicates the Variance inflation factor, which tests the multicollinearity between the explanatory
variables.

Table 6. Breusch-Pagan test for heteroscedasticity

Variables: PRES PSEN FII SZ LEV MR CE CF
H0: Constant variance
Chi-square value: 589.49 P value 0.000
Note: This table displays the heteroscedasticity test for the explanatory variables.
 Table 7. Optimal tests
Models F-test LM-test Hausman test
Model-1 12.70*** 2935.59*** 165.80***
Model-2 13.90*** 2393.45*** 758.17***
Model-3 7.25*** 1625.70*** 112.21***
Note: ***, ** and * refers to 1%, 5% and 10% level of significance respectively.

Table 8. Panel regression results

Model-1 Model-2 Model-3
DV ROA NPM ROE
Variables OLS FE RE OLS FE RE OLS FE RE
Intercept 21.236 18.900 17.454 10.234 26.008 13.890 29.869 44.597 25.672
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(21.75)*** (7.05)*** (11.38)*** (5.21)*** (5.12)*** (4.51)*** (16.15)*** (7.47)*** (8.98)*

PRES 0.032 0.075 0.073 0.042 0.178 0.132 0.054 0.113 0.089
(1.45) (2.73)*** (2.88)*** (0.92) (3.41)*** (2.75)*** (1.27) (1.84)* (1.71)
PSEN -0.471 -0.153 -0.109 -0.381 -0.176 -0.215 -0.067 -0.381 -0.182
(-2.31)** (-4.65)*** (-4.02)*** (-9.27)*** (-2.82)*** (-4.09)*** (-1.73)* (-5.18)*** (-3.34)*
FII 0.043 0.094 0.072 0.118 0.179 0.149 0.049 0.192 0.11
(4.04)*** (5.89)*** (5.23)*** (5.42)*** (5.90)*** (5.62)*** (2.43)*** (5.38)*** (3.94)*
SZ -1.287 -1.868 -1.533 -0.081 -2.284 -0.962 -1.652 -4.674 -2.107
(-15.37)*** (-7.10)*** (-10.80)*** (-0.48) (-4.58)*** (-3.36)*** (-10.41)*** (-7.98)*** (-8.06)*
LEV -5.026 -5.025 -4.873 -12.661 -7.444 -9.19 -4.283 -1.641 -3.318
(-10.63)*** (-8.96)*** (-10.70)*** (-13.32)*** (-7.000)*** (-9.97)*** (-4.78)*** (-1.31)*** (-3.29)*
MR -6.012 1.519 -1.031 -2.733 -0.157 -0.994 -8.705 1.952 -3.327
(-20.54)*** (3.55)*** (-2.76)*** (-4.65)*** (-0.19) (-1.39) (-15.70)*** (2.05)** (-4.40)*
CE 0.190 -2.933 -0.788 -1.701 -6.543 -4.573 -3.779 -2.153 -2.964
(0.45) (-2.98) (-1.14) (-2.01)** (-3.51)*** (-3.33)*** (-4.75)*** (-0.98) (-2.26)*
CF 0.893 1.082 1.041 1.162 1.494 1.415 1.341 1.901 1.622
(11.56)*** (9.96)*** (10.87)*** (7.48)*** (7.25)*** (7.71)*** (9.15)*** (7.85)*** (8.32)*

R-squared 0.310 0.100 0.282 0.13 0.07 0.13 0.182 0.06 0.22
F-Stat/Wald
chi2 test 158.32*** 35.00*** 397.01*** 54.38*** 24.39*** 239.41*** 80.23*** 19.39*** 217.70*

Note: This table reports the panel regression results of 03 models with three different dependent variables (ROA,
NPM and ROE). OLS, FE and RE represent the pooled ordinary least square, fixed-effect and random-effect
regression results respectively. DV denotes a dependent variable. The results present the co-efficient values, t-
statistics (OLS and FE) and z-statistics (RE) in the parenthesis for each variable. F- test statistics is for the OLS and
FE regressions and chi2 test used for RE regressions. ***, ** and * refers to 1%, 5% and 10% level of significance
respectively.
 Table 9. SEM estimation results
Models Model-1 Model-2 Model-3 Model-4 Model-5 Model-6
DV ROA NPM ROE ROA NPM ROE
Variables 2SLS 2SLS 2SLS GMM GMM GMM
Intercept 12.811 -9.524 22.323 13.281 -9.76 22.417
(6.37)*** (-2.30)** (6.24)*** (6.67)*** (-2.30)** (6.68)***
PRES 0.425 0.956 0.413 0.407 0.967 0.406
(4.97)*** (5.42)*** (2.71)*** (4.86)*** (5.34)*** (2.94)***
PSEN -0.381 -1.158 -0.351 -0.365 -1.164 -0.342
(-5.02)*** (-7.41)*** (-2.60)*** (-5.04)*** (-7.53)*** (-2.75)***
SZ -0.557 1.648 -0.998 -0.605 1.671 -1.005
(-3.35)*** (4.81)*** (-3.37)*** (-3.52)*** (4.65)*** (-3.42)***
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LEV -5.542 -13.873 -4.734 -5.436 -13.908 -4.759

(-10.59)*** (-12.86)*** (-5.09)*** (-10.35)*** (-11.49)*** (-5.04)***
MR -5.648 -1.916 -8.384 -5.633 -1.949 -8.384
(-17.13)*** (-2.82)** (-14.29)*** (-19.01)*** (-2.68)** (-15.07)***
CE 0.607 -0.791 -3.462 -0.576 -0.758 -3.415
(1.29) (-0.82) (-4.13)*** (-1.33) (-0.71) (-4.80)**
CF 0.937 1.276 1.386 0.943 1.273 1.38
(11.25)*** (7.43)*** (9.36)*** (11.04)*** (7.49)*** (9.51)***

Wald chi2 test 1079.73*** 307.90*** 614.85*** 1114.17*** 321.88*** 519.01***

Crag-Donald F-statistic 46.445 46.445 46.445 46.445 46.445 46.445
Critical value 13.43 13.43 13.43 13.43 13.43 13.43
Durbin test 41.393*** 56.297*** 23.762***
Hausman test 20.925*** 28.608*** 11.938***
Sargan test 2.498 0.143 0.505
p-value 0.114 0.705 0.477
GMM C Stat 35.979*** 37.649*** 17.185***
Hansen's test 2.201 0.095 0.122
p-value 0.138 0.757 0.726
Note: This table reports the simultaneous equation modelling (SEM) with two stage least square (2SLS) and
generalized method of moments (GMM) results. DV denotes a dependent variable. The results first present the co-
efficient values and then z-statistics of all the variables in the parenthesis. ***, ** and * refers to 1%, 5% and 10%
level of significance respectively.
 Appendix-B: List of figures
Figure I. Institutional equity investments
16.00
14.00
12.00
10.00
PRES
8.00
PSES
6.00
FII
4.00
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2.00
0.00
2009 2010 2011 2012 2013 2014 2015 2016

Note: The above figure exhibits the movements of the average equity investment (percentage) made by the
institutional owners from FY 2009 to FY 2016.

Figure II. Corporate financial performance

20.00
18.00
16.00
14.00
12.00
ROA
10.00
NPM
8.00
ROE
6.00
4.00
2.00
0.00
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016

Note: The above figure depicts the movements of the corporate financial measures such as ROA, NPM and ROE
from FY 2009 to FY 2016.
 Appendix-B: List of figures
Figure I. Institutional equity investments
16.00
14.00
12.00
10.00
PRES
8.00
PSES
6.00
FII
4.00
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2.00
0.00
2009 2010 2011 2012 2013 2014 2015 2016

Note: The above figure exhibits the movements of the average equity investment (percentage) made by the
institutional owners from FY 2009 to FY 2016.

Figure II. Corporate financial performance

20.00
18.00
16.00
14.00
12.00
ROA
10.00
NPM
8.00
ROE
6.00
4.00
2.00
0.00
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016

Note: The above figure depicts the movements of the corporate financial measures such as ROA, NPM and ROE
from FY 2009 to FY 2016.
 Appendix-1: List of tables
Table 1. Summary of variables
Variables Measurements Type Supporting literature
ROA Earnings before interest and tax/Total assets Dependent Elyasiani and Jia (2010), Lin and
Fu (2017)
NPM Net profit/Total revenue Dependent Cornett et al. (2007), Ferreira and
Matos (2008)
ROE Profit after tax/book value of equity Dependent Baliga et al. (1996), Dehaene et al.
(2001)
PRES Sum of the percentage equity investment by the Independent Cornett et al. (2007), Ferreira and
mutual funds, venture capital and private equity Matos (2008)
PSEN Sum of the percentage equity investment by the Independent Cornett et al. (2007), Chen et al.
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insurance companies, banks and non-bank trusts (2007)

FII Percentage of equity investment by the foreign Independent Mukhopadhyay and
institutional investors Chakraborty (2017)
SZ Natural Logarithm of Total assets Control Lin and Fu (2017)
LEV Total debt/Total assets Control Elyasiani and Jia (2010)
MR covariance between the security’s returns and the Control Anderson and Reeb (2003)
benchmark returns
CE Capital expenditure in non-current assets/total Control Seifert et al. (2005)
assets
CF Net profit after tax + Depreciation and Control Cho (1998)
amortization

Table 2. Summary statistics

Variable Mean Std. Dev Min Max Observation
Financial performance measures
ROA 6.66 7.28 -35.07 39.72 2888
NPM 9.92 13.12 -92.14 82.38 2888
ROE 10.93 12.71 -130.05 170.46 2888
Institutional ownership variables
PRES 5.19 5.15 0.00 35.42 2888
PSEN 5.17 6.20 0.00 38.36 2888
FII 12.79 11.39 0.00 79.65 2888
Control Variables
SZ 10.91 1.75 7.04 16.93 2888
LEV 0.41 0.24 0.01 1.78 2888
MR 1.06 0.41 0.18 2.90 2888
CE 0.40 0.28 0.01 1.59 2888
CF 8.29 1.60 1.65 14.09 2888
 Note: This table presents the mean, standard deviation, minimum and maximum values of the variables. The
variables are explained in the table-2. PRES, PSEN, FII, SZ, LEV, MR, CE and CF represent Pressure resistant
investors, pressure sensitive investors, financial institutional investors, firm size, leverage, market risk, capital
expenditure and cash flow.

Table 3. Average institutional ownership holdings year-wise

IOM/FY 2009 2010 2011 2012 2013 2014 2015 2016
PRES 5.35 5.86 5.20 5.09 4.64 4.28 5.25 5.85
PSEN 5.72 5.74 5.52 5.49 5.19 4.86 4.43 4.63
FII 9.85 11.28 12.62 12.69 13.60 14.26 14.30 13.78
Note: This table displays the average values of the different institutional ownership (percentage) year wise. IOM and
FY represent the institutional ownership measures, financial year respectively.

Table 4. Average financial performance measures year-wise

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FPM/FY 2009 2010 2011 2012 2013 2014 2015 2016

ROA 7.05 7.68 7.37 6.59 6.13 6.10 6.01 6.31
NPM 10.22 11.35 11.47 9.98 9.31 9.26 9.14 8.60
ROE 17.10 17.92 17.96 16.59 15.56 15.94 15.36 15.30
Note: This table displays the average values of the financial performance measures year-wise. FPM and FY
represent financial performance measures and financial year respectively.

Table 5. Pearson correlation matrix and VIF

Variables ROA NPM ROE PRES PSEN FII SZ LEV MR CE CF VIF
ROA 1.000
NPM 0.501 1.000
ROE 0.649 0.432 1.000
PRES 0.122 0.028 0.098 1.000 1.07
PSEN -0.143 -0.151 -0.103 0.013 1.000 1.25
FII 0.030 0.152 0.034 0.051 -0.028 1.000 1.18
SZ -0.306 -0.001 -0.209 -0.167 0.402 0.302 1.000 1.69
LEV -0.167 -0.237 -0.097 0.005 -0.073 -0.049 -0.074 1.000 1.06
MR -0.443 -0.129 -0.349 -0.151 0.055 -0.012 0.225 0.088 1.000 1.12
CE 0.063 -0.081 -0.034 0.021 -0.048 -0.155 -0.235 0.167 -0.074 1.000 1.10
CF 0.110 0.124 0.111 -0.027 0.162 0.210 0.348 0.046 -0.068 -0.032 1.000 1.20
Note: This table displays the correlation coefficients of all the variables. All coefficients in bold are significant at p
value < .05, VIF indicates the Variance inflation factor, which tests the multicollinearity between the explanatory
variables.

Table 6. Breusch-Pagan test for heteroscedasticity

Variables: PRES PSEN FII SZ LEV MR CE CF
H0: Constant variance
Chi-square value: 589.49 P value 0.000
Note: This table displays the heteroscedasticity test for the explanatory variables.
 Table 7. Optimal tests
Models F-test LM-test Hausman test
Model-1 12.70*** 2935.59*** 165.80***
Model-2 13.90*** 2393.45*** 758.17***
Model-3 7.25*** 1625.70*** 112.21***
Note: ***, ** and * refers to 1%, 5% and 10% level of significance respectively.

Table 8. Panel regression results

Model-1 Model-2 Model-3
DV ROA NPM ROE
Variables OLS FE RE OLS FE RE OLS FE RE
Intercept 21.236 18.900 17.454 10.234 26.008 13.890 29.869 44.597 25.672
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(21.75)*** (7.05)*** (11.38)*** (5.21)*** (5.12)*** (4.51)*** (16.15)*** (7.47)*** (8.98)*

PRES 0.032 0.075 0.073 0.042 0.178 0.132 0.054 0.113 0.089
(1.45) (2.73)*** (2.88)*** (0.92) (3.41)*** (2.75)*** (1.27) (1.84)* (1.71)
PSEN -0.471 -0.153 -0.109 -0.381 -0.176 -0.215 -0.067 -0.381 -0.182
(-2.31)** (-4.65)*** (-4.02)*** (-9.27)*** (-2.82)*** (-4.09)*** (-1.73)* (-5.18)*** (-3.34)*
FII 0.043 0.094 0.072 0.118 0.179 0.149 0.049 0.192 0.11
(4.04)*** (5.89)*** (5.23)*** (5.42)*** (5.90)*** (5.62)*** (2.43)*** (5.38)*** (3.94)*
SZ -1.287 -1.868 -1.533 -0.081 -2.284 -0.962 -1.652 -4.674 -2.107
(-15.37)*** (-7.10)*** (-10.80)*** (-0.48) (-4.58)*** (-3.36)*** (-10.41)*** (-7.98)*** (-8.06)*
LEV -5.026 -5.025 -4.873 -12.661 -7.444 -9.19 -4.283 -1.641 -3.318
(-10.63)*** (-8.96)*** (-10.70)*** (-13.32)*** (-7.000)*** (-9.97)*** (-4.78)*** (-1.31)*** (-3.29)*
MR -6.012 1.519 -1.031 -2.733 -0.157 -0.994 -8.705 1.952 -3.327
(-20.54)*** (3.55)*** (-2.76)*** (-4.65)*** (-0.19) (-1.39) (-15.70)*** (2.05)** (-4.40)*
CE 0.190 -2.933 -0.788 -1.701 -6.543 -4.573 -3.779 -2.153 -2.964
(0.45) (-2.98) (-1.14) (-2.01)** (-3.51)*** (-3.33)*** (-4.75)*** (-0.98) (-2.26)*
CF 0.893 1.082 1.041 1.162 1.494 1.415 1.341 1.901 1.622
(11.56)*** (9.96)*** (10.87)*** (7.48)*** (7.25)*** (7.71)*** (9.15)*** (7.85)*** (8.32)*

R-squared 0.310 0.100 0.282 0.13 0.07 0.13 0.182 0.06 0.22
F-Stat/Wald
chi2 test 158.32*** 35.00*** 397.01*** 54.38*** 24.39*** 239.41*** 80.23*** 19.39*** 217.70*

Note: This table reports the panel regression results of 03 models with three different dependent variables (ROA,
NPM and ROE). OLS, FE and RE represent the pooled ordinary least square, fixed-effect and random-effect
regression results respectively. DV denotes a dependent variable. The results present the co-efficient values, t-
statistics (OLS and FE) and z-statistics (RE) in the parenthesis for each variable. F- test statistics is for the OLS and
FE regressions and chi2 test used for RE regressions. ***, ** and * refers to 1%, 5% and 10% level of significance
respectively.
 Table 9. SEM estimation results
Models Model-1 Model-2 Model-3 Model-4 Model-5 Model-6
DV ROA NPM ROE ROA NPM ROE
Variables 2SLS 2SLS 2SLS GMM GMM GMM
Intercept 12.811 -9.524 22.323 13.281 -9.76 22.417
(6.37)*** (-2.30)** (6.24)*** (6.67)*** (-2.30)** (6.68)***
PRES 0.425 0.956 0.413 0.407 0.967 0.406
(4.97)*** (5.42)*** (2.71)*** (4.86)*** (5.34)*** (2.94)***
PSEN -0.381 -1.158 -0.351 -0.365 -1.164 -0.342
(-5.02)*** (-7.41)*** (-2.60)*** (-5.04)*** (-7.53)*** (-2.75)***
SZ -0.557 1.648 -0.998 -0.605 1.671 -1.005
(-3.35)*** (4.81)*** (-3.37)*** (-3.52)*** (4.65)*** (-3.42)***
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LEV -5.542 -13.873 -4.734 -5.436 -13.908 -4.759

(-10.59)*** (-12.86)*** (-5.09)*** (-10.35)*** (-11.49)*** (-5.04)***
MR -5.648 -1.916 -8.384 -5.633 -1.949 -8.384
(-17.13)*** (-2.82)** (-14.29)*** (-19.01)*** (-2.68)** (-15.07)***
CE 0.607 -0.791 -3.462 -0.576 -0.758 -3.415
(1.29) (-0.82) (-4.13)*** (-1.33) (-0.71) (-4.80)**
CF 0.937 1.276 1.386 0.943 1.273 1.38
(11.25)*** (7.43)*** (9.36)*** (11.04)*** (7.49)*** (9.51)***

Wald chi2 test 1079.73*** 307.90*** 614.85*** 1114.17*** 321.88*** 519.01***

Crag-Donald F-statistic 46.445 46.445 46.445 46.445 46.445 46.445
Critical value 13.43 13.43 13.43 13.43 13.43 13.43
Durbin test 41.393*** 56.297*** 23.762***
Hausman test 20.925*** 28.608*** 11.938***
Sargan test 2.498 0.143 0.505
p-value 0.114 0.705 0.477
GMM C Stat 35.979*** 37.649*** 17.185***
Hansen's test 2.201 0.095 0.122
p-value 0.138 0.757 0.726
Note: This table reports the simultaneous equation modelling (SEM) with two stage least square (2SLS) and
generalized method of moments (GMM) results. DV denotes a dependent variable. The results first present the co-
efficient values and then z-statistics of all the variables in the parenthesis. ***, ** and * refers to 1%, 5% and 10%
level of significance respectively.