IMPACTS OF INSTITUTIONAL INVESTORSONA FIRM’S VALUE
Posted: August 26th, 2021
IMPACTS OF INSTITUTIONAL INVESTORSONA FIRM’S VALUE
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Abstract
The net worth of an organization is a vital representation of its financial health and the ability to maintain sustainable operations. In most cases, firm owners have to seek the support of investors while implementing expansion strategies to facilitate the availability of sufficient capital as well as long-term growth. The selection of investor groups who have the most significant impact on firm value is among the primary objectives in such projects. In recent years, there has been a significant increase in the number of shares that institutional shareholders hold in companies. This paper examines the role of institutional investors in improving firm value in the United Kingdom. The key focus of the research is to demonstrate that institutional investors are more helpful in promoting financial health as compared to the other groups. Institutional investors enhance their companies’ value by mitigating agency problem that exists between managers and shareholders. They also monitors the company management, keeping it aware of sustaining the course of organization, which is optimization of shareholders value. The research paper underscores how institutional investors may suffer high costs when monitoring the management and operations of their companies.
Keywords: Institutional investors, firm value, block-holders, social network
Table of Contents
Chapter 2: Literature Review and Hypothesis Development 10
Block-holders impact certification benefits. 11
Governance structure shapes performance. 13
Institutional investors influence the pool of resources. 15
The growing influence of institutional investors. 17
Description of the Variables. 22
Impacts of Institutional Investors on a Firm’s Value
Chapter 1: Introduction
The importance of institutional investors is one of the currently most debated topics. Over the years, the concept has elicited different investigations. Business practitioners and academicians have extensively debated on the influence that corporate governance has on the value of a firm (Sakawa & Watanabel, 2020). Studies have shown that most companies have large amounts of their assets held by institutional investors. Although this gives them much influence, it does not directly imply they will have a substantial impact on the firm’s performance. Goshen and Levit (2019) suggest that institutional investors act as a critical connection between investors and the company. Their role is crucial because it affects the market performance of the company. While appraising the same, economic theory illustrates the differences between individual investors and institutional investors about their influence on financial market behavior. Taking a case of the United Kingdom, Solomon explains that institutional investors contribute the most significant share of funds in a firm’s financial assets, both locally and abroad (Niket, 2015; Bajo and Marinelli, 2015). One of the most crucial institutional investor common in the market is the pension funds, which influences the movement of global money through investment in companies. Also, institutional investors differ based on their risk appetite and speculative approaches as they strive to maximize their returns (Bajo and Marinelli, 2015; Waheed and Malik, 2019). Most of them acquire large volumes of shares, therefore, exhibiting considerable influence on the movement of funds in the market. More so, institutional investor’s roles have been appreciated in many instances because of how they influence better performance in the company. Their active oversight role is expedited through engagement, voting, and embracing dialogue in case of conflicts in the management. However, they are also criticized for becoming less strategic. As stated by the Myopic Institution theory (Bajo and Marinelli, 2015; Waheed and Malik, 2019), which argues that in the long run, institutional investors become short-sighted compared to individual investors. This is attributed to intensified competition for control that may ultimately have a negative influence on the overall financial performance of the company.
Apparently, some studies appear to suggest that organizations that concentrate the control of a company in the hands of minority shareholders have high chances of achieving greater value for shareholders. At the same time, the studies reports that democratic governance is almost negligible or sometimes negative on firm’s value. An examination of developed countries demonstrates that institutional investors hold a significant share in majority companies. Equally, actively engagement of institutional investors in a company operations has the potential to reduce agency costs since it strengthens the monitoring mechanisms of the company operations. Besides, it enhances performance evaluation of the firm management thereby increasing the value of the firm. Yet, there are business practitioners and academics that tend to disagree with these assertions. In their argument, a group of minority holders wielding much power and actively engaged in company operations could be at a disadvantage of the firm. As such, this implies that there is a research gap that needs to expound on the actual influence that institutional investors have on firm value. The study is approached in six major sections starting with Chapter One which presents introduction of the study, background information, and statement of the problem, justification and research objectives. Chapter Two section is about literature review, which presents a discussion of previous studies that examined on the same topic. Chapter Three presents a review of study methods, while a findings and discussions are made on Chapter Four and Five respectively. Finally, Chapter Six conducts a recap of the study before suggesting on the possible areas of further study in relation to the topic.
Background Information
In the recent past, reporting and financial service agencies have started to consider mechanisms for enhancing the role played by institutional investors. Most importantly, these mechanisms have been established due to the recognition that institutional investors hold a large number of shares (Kilincarslan, and Ozdemir, 2018). Following the 2008 financial crisis, several nations, including the United Kingdom, introduced stewardship codes. In the United Kingdom, these stewardship codes were aimed at enhancing institutional investors’ transparency, engagement quality, and monitoring activities.Notably, there has been a growing interest in the block-holders’ role in institutional ownership (Shiraishi et al. 2019). A majority of business practitioners have begun to appreciate the various ways in which the investors can minimize risks and enhance efficiency in financial management tasks. Thus, the institutions can easily pool vast volumes of resources within shorter durations compared to when companies decide to issue shares to individuals.
Bajo et al. have noted that institutional investors own more than 39% of common equity (2020). The findings suggest that firms do not have to struggle with responsibilities such as paying dividends or dealing with individuals in the case of constraints. This research topic is significant since it will generate vital information on the specific roles that block-holders play in improving companies’ financial performance (Kilincarslan, and Ozdemir, 2018). Recent investigations indicate that a large number of UK companies have been facing agency problems due to issues such as poor governance and conflicting interests among shareholders. The adoption of institutional investors implies that conflict issues are reduced. Equally, institutions such as banks have comprehensive policies for promoting accountability in financial management practices. Through this research, companies will obtain critical details about the role played by institutional investors in enhancing their value. Therefore, this research study sought to examine how institutional investors enhance a firm’s value.
Statement of Problem
The research idea is inspired by several recent credible articles whose publication dates are within the past five years. Specifically, these studies have indicated that a large number of organizations struggle with agency problems that relate to stockholder options.
Justification
Many firms in the United Kingdom and other countries continue to experience a massive increase in the number of institutional investors. The challenge affects almost all public listed organizations such that their financial positions portray significant fluctuations. Currently, institutional investors are viewed as a force in the United Kingdom’s stock market. Therefore, they engage in activities aimed at influencing companies’ investment policies and business decisions, either negatively or positively.
Research Objectives
General objectives. The research study was intended to establish the specific roles which institutional investors play in terms of improving the firm value.
Specific objectives. This research study was conducted to determine the existing relationship between institutional ownership and the company’s value. Also, it was aimed at understanding the way other investors influence the financial positions of companies.
Chapter 2: Literature Review and Hypothesis Development
In this chapter, the aim is to conduct a literature review that targets to highlight scholarly contributions on the area of focus. The review utilizes journal articles, books and other open sources relevant to the topic. The chapter further develops the hypothesis in attempt to state possible outcomes of institutional investor on the firm value, which are later tested to confirm the assertion.
Literature Review
There exist varied literature reviews offering conflicting suggestions regarding the way the ownership of the company affects its firm value. Specifically, there are two options, whether to hold ownershipjointly or diffuse itamong many institutional investors. Categorically, a contemporary view has debated in favour of concentrating ownership as a chief measure of enhancing effective governance (Bajo at al. 2020). The reason is that many large institutional investors would have high control incentives over a company’s management operations. Further, the actions of these investors would possibly intervene by remedying value-destructive operational undertakings (Bajo at al., 2020). Therefore, many firms that have demonstrated strong ownership structure have a plurality of block-holders. Notably, these block-holders have regularly exertedeffective and controlled governance vis-a-vis two keymeasures. First, there is channelling of direct intervention inside the precinct of a firm structure through the exercise ofvoting rights (Bajo at al. 2020).This governance control technique has ensured that the recommendation by the shareholders surpasses the management rights of the directors. Moreover, the bringing forth of remedy intervention might also vary in terms of how speedy decision-making processes are channelled towards the success of a firm (Bajo at al. 2020). With perceived governance reforms aimed at imparting a positive effect on a firm’s value, the passive pooling of funds among the shareholders is, therefore, considered to sustain a positive impression on the performance of a company.
Apart from that, Bajo at al. (2020) has stated thatthe second measure consists of the exit or voting with one’s feet. Notably, this scenario happens in case the manager’s shirk, and therefore block-holders respond accordingly by selling out their common shares. Indeed, this shareholder’s action would suddenly depress the value of the common stock (Bajo at al., 2020). With intentions of impartingan effective mechanism of governance in the company, block-holders may threaten to pull out their stocks, thus inducing the managers to stir performance, subsequently maximizing the value of a firm further. Accordingly, Bajo et al. (2020) have posited thatinstitutional investors would, therefore, execute exit as their keytactic of steering the governance of the company on the right path. This can be accomplished effectively by undertaking the sale of common stocks (Bajo at al., 2020). Therefore, it is evident that the actions of institutional investors help in defining the firm’s value for the reason that enhanced price effectivenesshas a direct relationship on the performance of a company and vice versa. Consequently, the grouping of multiple small shareholders who have regularly traded in a similar direction haspositively impacted a firm’s value.
Block-holders impact certification benefits. Bajo et al. have determined that institutional investors or block-holders offer their firms a certification benefit (2020). They noted that these certification benefits generate a more significant market value for companies. Institutional investors’ superior quality to collect information serves as a signaling mechanism for maximizing a firm’s value. The results indicate that compared with other shareholders, institutional investors engage in activities that improve a company’s financial performance (Bajo et al., 2020). Thus, they not only offer readily accessible capital but also help in the promotion of acceptable management policies.
Further, investors are a critical component in measuring the social effect of a firm’s investment, which is an imperative aspect of improving decision making and value communication in an organization. Understanding the effect of a particular investment has on the social environment ensures that the firm’s financial benefits are well balanced with respective social returns. While assessing impact investing and its relation to firm value, So & Capanyola (2016) performed an interview on about 20 top impact investors and the practitioners in the investment field across several organizations such as Root Capital, Bridges Ventures and Acumen. In their study, they established that investors help assess the company investment cycle in different ways, which determines the investment decisions (Goshen and Levit, 2019). They found that investors’ approach to investment assessment of a firm begins with the estimation of investment impact, which involves conducting due diligence on quality and likely social impact of the underway investment project. Secondly, investors perform planning impacts that involve data collection and selection of appropriate metrics that would be utilized to assess the effects of the project. Afterward, the monitoring stage is where investors strive to incorporate the support of the organization management and, finally, evaluate the impact. Across all these stages, the final decision is attained that determines the company’s quality of future investment and development. Bajo and Marinelli (2015) explain that institutional investors or shareholders are critical in monitoring the firm to enhance performance. For instance, shareholders are responsible for determining whether the firm is overvalued or undervalued, which is common in many corporates that intentionally hide their actual value for varied interests. Therefore, according to the study, firms that can strike a balance between their profits and social returns have the potential to attract more investors, thereby increasing their value. Besides, through the four stages of assessment, the investors help certify investment decisions of the company, hence ensuring streamlined investment management that appreciates the benefits of corporate responsibility to the growth and development of a firm.
Besides, institutional investors are critical players in both developing and developed markets. They are the significant sources of capital, determining the investment capacity and, ultimately, the firm’s value. Studies by Ali and Hashmi (2018) demonstrate that institutional investors can influence investment decisions and actively involved in crucial company activities. Hence, the firm’s value can decrease or increase depending on their level of influence on policy formulation and overall governance of the firm. The claim is sustained by Lee (2013), who argues that firms that Thus, the study concludes that it is imperative for the management has to understand the critical role that institutional investors have that ultimately affects the market value of the firm.
Governance structure shapes performance. Organizational performance is much dependent on the governance structure as well as owners’ values. Sakawa and Watanabel (2020) have evaluated the relationship between a company’s performance and institutional ownership. They support the declaration that in the recent past, there has been a significant increase in the percentage of shares that institutional investors own. According to Sakawa and Watanabel, institutional investors enhance their companies’ value through their monitoring and supervisory roles (2020). They highlight that institutional investors engage in monitoring activities due to their financial incentives. Similarly, Cremers and Sepe(2018) have argued that investors play a crucial role in enhancing their firm’s financial performance and value. They suggest that institutional investors have the financial power to influence their companies to engage in profitable projects. In their study, Cremers and Sepe (2018) highlighted that institutional investors influence a company’s investment and business policy. The block-holders introduce effective practices of managing capital and minimizing cases in which managers tend to prioritize personal interests. As a result, therefore, it is possible to address agency problems.
According to the theory of corporate governance, when shareholders or investors are assigned more control rights for the firm, they can ensure that disloyal managers are accountable. Equally, this has the benefit of reducing agency costs that may encounter a company (Goshen and Levit, 2019). Through this, a company can strengthen its management, hence its value. In their conclusion, the authors further predict that have a weak governance structure deteriorates the value of a firm. Several empirical studies support this argument. On the contrary, empirical studies previously done on the same issue established each practice of corporate governance have a different and unique impact on the value of the firm, as well, its performance. Some of the notable governance approaches are dual-class firms, the rights to cash flow as held by the management, and the presence of anti-takeover defenses, among other practices, including state legislation and hedge fund activisms. At the same time, they address these conflicts, Goshen and Levit (2019) hypothesize that corporate governance can either decrease or increase the value of a firm before surveying firms with two types of managers. The first category of managers includes those who can preserve the firm’s value besides sustaining dividend payments to investors. The second category involved managers that can alter the value of the firm by expanding its investment avenues. In their argument, the study reveals that loyal managers tend to increase the value of a firm through structured investment, while those who are disloyal misappropriate firm finances, thereby destroying its value (Bajo and Marinelli, 2015). Hence, adequate allocation of rights to investors or shareholders gives them the mandate to fire a manager, termed as strong governance. However, if the control rights are unable to allow shareholders to implement hire or fire decisions quickly, it is termed weak governance, which ultimately influences firm value. Therefore, the study states that each firm has its way of allocating the control rights to ensure the maximization of firm value.
Conversely, Goshen, and Levit (2019) explain that attributing weak performance with Weak governance is statistically insufficient. There are additional factors that influence the balance between the two aspects. The study identifies such factors as the firm’s market power, particularly in the resource market, the competence of shareholders, and the overall competitiveness of the firm. Hence, the level of influence of institutional investors on firm value is determined by the firm’s corporate governance design. Equally, while explaining why there is an increasing demand for strong governance among institutional investors, Goshen and Levit (2019) observe that dominant shareholder’s impact firm value. For instance, influential shareholders work to improve their portfolio value through increased competitive allocation. However, strong governance can deter management investment decisions; the demand for resources is hugely reduced, thus lowering the competitive pricing of firm resources (Niket, 2015). As such, weak governance firms end up gaining superior returns. Hence, the study concludes that practicing common ownership is detrimental to a firm’s performance due to the monopsony of power instead of monopoly power.
Institutional investors influence the pool of resources. Institutional investors focus on approaches that can maximize the resources of individuals who entrust their funds to them. Their levels of commitment to finding innovative strategies are higher than those of other investors. Shiraishi et al. (2019) have pointed out that institutional investors engage in activities that maximize their companies’ profitability index. They argue that stewardship codes tend to be effective in ensuring that institutional investors monitor their companies’ financial performance and investment decisions. Tahir et al. (2015) examined the relationship between corporate value and institutional ownership. They noted that institutional investors enhance corporate value by reducing the agency problem and monitoring the management’s activities. Moreover, Tahir et al. (2015)asserted that weak governance structures tend to be shared among firms that have a small percentage of institutional investors. Hence, companies have poor financial performance.
In an empirical study conducted by Woidtke (2005), it is established that a positive correlation exists between a firm’s TOBIN Q and the proportion of a private shareholding fund. Equally, Harzell and Starks (2003) study on the same concept confirmed that the institutional investors have a role of overseeing signing the compensation contract of a manager. Thus, this directly implies that they can supervise management behaviors effectively. In this case, it means that institutional investors are in a position to improve corporate governance, as well the firm’s value.
Niket (2015) States that companies that are well-governed guarantees good returns. Given that institutional investors are the most significant shareholders in most companies, they have a keen interest in monitoring the company’s resources. Their influence is attributed to large volumes of shares they hold in a firm, which are acquired through a continued pool of resources from individuals for soul reasons for better returns (Niket, 2015; Goshen and Levit, 2019). They have a good network and research capability that enhances their decision-making process, thus assuring investors of advanced portfolio management and maximum returns. In this case, their influence on corporate governance has been growing over time, mainly because of various factors. The immediate factor is that they have taken the route of equity and debt that enables them to have significant control over firms (Niket, 2015). Consequently, they can increase their influence on firms besides pushing companies for improved policies in corporate governance. Hence, their influence ensures that company managers are monitored, enabling them to influence the quality of share prices (Goshen and Levit, 2019). Besides, a cross-country examination reveals that there is variation in the roles of institutional investors within a firm. This depends on the legal framework that guides investments. For instance, in countries that lack adequate protection of individual investors, the remaining option is undertaking a route of institutional investors, which remains crucial in monitoring the management of companies. However, this does not imply that they are influential (Goshen and Levit, 2019). Their presence remains key to keeping the management checked and accountable, which may be difficult for individual investors. Thus, compared to individual investors, institutional investors’ contribution is highly impactful as it facilitates the adoption and implementation of good governance strategies by ensuring that pooled resources are well managed. This works to the advantage of the value of the firm.
The growing influence of institutional investors. The U.K. market has realized a growing trend of rising shareholding capacity among institutional investors compared to the individual shareholders. Over 40% of shares across most companies are already held by the top 20 institutional investors (Niket 2015). Further, the report reveals that the shareholder’s powers are currently the primary concern for institutional investors across the U.K. (Niket, 2015). It also notes that institutional investors’ significant investment areas are pension funds and unit trusts, which account for 60%. The rest 40% share that individual investors hold 20% and the rest by foreign investors. The strength of numbers implies that institutional investors wield considerable power on U.K. firms (Niket, 2015). Compared with the U.S. market, a review of investment trends from 1991 to 1999 reveals a gradual change in the composition of assets. Such exponential transformation fairly reflects the equity investment value, which grew with an average of 18%. There was a growth of 9% in the case of bonds, while loans improve by 3% (Niket, 2015). The changes can be attributed to the increasing investment level by institutional investors, whose assets value was estimated to have grown to over $ 19580 billion by 1999, three times 1991. Thus, these transformations directly imply that institutional investors have been gradually increasing their influence, which is directly impacting on the value of the firm.
Hypothesis Development
Bajo et al. (2020) postulated that the interconnections of network centrality among multiple institutional block-holders bring about a certification effect on the value of a firm. In this regard, there is anticipated higher market value. Specifically, the presence of institutional investors aids in certifying the value of a company’s securities via the processing of asymmetric information. The superiority ability of institutional investors would help in promoting the gathering and processing of relevant information about trading activities. Therefore, the presence of active investors would facilitate faster deliberations on a firm’s acquisition processes, thus serving as an effective signaling mechanism of certification (Bajo et al. 2020). Hence, the author presumes that the position of each institutional investor would be useful in determining the intensity of the certification signal.
Moreover, several pieces of literature have reviewed that the occupied position insidea network centrality would always signify an influential repute of an institutional investor. According to Bajo et al. (2020), the position of all institutional block-holderswould imply the existence of a powerful proximity of relative influence, prominence, and prestige. As such, a majority of the management actions would coincide with the decisions of the institutional block-holders within a given network centrality. Thus, the attribute of the status quo would be thorough in determining the direct quality of the firm’s performances (Bajo et al., 2020). More so, the presence of institutional investors within a particular network centrality would, therefore, safeguard the firm from the unnecessary oversight by other investors. However, this hypothesis is rarely subjected to testing. Nonetheless, it wasessential to offer indirect evidence for testing as a measure of justifying a possible close association underlying the active institutional investor network centrality and itsfirm value. Thus, hypothesis testing wasdone in the following ways.
First (H1: Monitoring Effect), previous research studies have asserted that many kinds of institutional investors play a significant role in monitoring the performance of a firm (Bajo et al. 2020). With their privileged position in the network centrality, they have been able to command the dissemination of confidential information, thus demonstrating their more exceptionalcontrol abilities. More so, the more central institutional investors inside a network may use such privileges to discipline unscrupulous corporate managers. Also, they may have a precise bearing of contacting andpersuading other investors to trade or vote in the same defined path.
Second (H2: Advisory Effect), there is the hypothesis on the advisory effect, which was sought to explore the way superior information from a network position would impact the management of a firm. Specifically, superior information from an active institutional investor would seek to advance a firm’s investment policy (Bajo et al., 2020). Therefore, a better advisoryhas critically dependedon the availability and adequacy of evidence, which concerns an institutional investors’ ability to obtain private information (Bajo et al. 2020). Notably, there is the possibility that most active institutional investors would facilitatethe prospects of a firm through the creation of newer business opportunities. Indeed, such opportunities would help provide much-treasured advice to the company’s managers. Similarly, Bajo et al. (2020) have posited that the role of institutional investors would provide foreign institutional investors with information advisory concerning international takeover markets.
Third (H3: Information Cost-Effect), there is information cost-effect in the sense that Bajo et al. (2020) have stated that the dissemination of information occurs quickly, especially when a central underwriter inside a network shares with outside investors. In other words, a central institutional investor would oversee the exchange of information with other interlinked investors, thus occasioning a different market trend of stocks. Hence, such sharing of information is anticipated to triggerthe reduction of costs associated with the acquisition of information among central investors.
Fourth (H4: Financing Channel), the research explored whether a network centrality of institutional investors wouldenhance the access of a firm to vast external capital, and further raise a firm’s value. Bajo et al. (2020) have simulated the way the association of active institutional investors would cut down the costs resulting from the issuance of shares equity. These authors haveacknowledged that SEOs with higher pre-offer net buying among institutional investors would always demonstrate more significantinstitutional allocations, oversubscription, and in turn, bring about reduced SEO discounts. Besides, the presence of central investors would encourage other investors to follow suit and therefore buy the offer. In turn, the costs of issuing shares would be further reduced (Bajo et al., 2020). Nonetheless, the existence of a financing advantage attached to an ownership network centrality would, therefore, possiblydamage the way investments relate with the firm’s internal statement of cash-flows.
Chapter 3: Methodology
This study investigates the impacts of institutional investors on a firm’s value of publicly-listed companies in the United Kingdom. The data required was collected for five consecutive years, from 2014 to 2018,from the companies’ financial statements and annual reports. The sample from the entire population consists of 120 observations of approximately 2600 listed companies in the UK.
Data Collection Method
Secondary data published on the companies’ annual reports were collected. In this study, the required financial data was obtained from the London Stock Exchange Group (Londonstockexchange.com. 2020), which is the custodian for UK listed companies’ data. For the review, the financial information excludes companies with negative assets, financial markets, and utility companies. Furthermore, the secondary data collected intends to expound on areas such as financial statements, corporate information, and statement of corporate governance. Additionally, the financial data includes the net income, total assets, net property, plant and equipment, shareholders’equity, debt, and dividend payout of the selected companies. The secondary data under review will cover the period 2014 to 2019 used to indicate the extent to which institutional investors affect the net worth of the selected companies.
Research Design
The study adopted a descriptive research technique to analyze the impacts of institutional investors on a firm’s value. According to Atmowardoyo (2018), descriptive research refers to a data collecting technique used to test a hypothesis or answer the current questions concerning the topic of the study. Ordinary least square (OLS) method is used in the analysis to estimate the unknown parameters as expressed in a linear equation. Hence, this method is the most suitable for this study. The researcher intends to collect detailed financial data concerning UK-listed companies and is used to identifying the variables, hence,hypothetically constructing the linear regression model and solving the unknown parameters in the equation.
Description of the Variables
This study employed three types of variables which are independent, dependent, and control variables as further explained below:
Independent variable.The company’s ownership is used as the independent variable in the study. The independent variables are used to formulate equation (i) and (ii). The number of outstanding shareholders measures the shareholder’s equity of the corporates at the end of a financial year. This is established from the changes in equity and shareholding patterns, as depicted in the companies’ annual reports. The companies’ financial performance is also an independent variable in the review and used to formulate equation (iii) and (iv). Furthermore, the financial performance metrics used returns on assets (ROA) and Return on Equity (ROE). ROA referred to as a financial ratio of the company’s net income compared to the total assets at the end of a fiscal year and adopted as an accounting measure of the firm’s performance in the study. Several researchers have also taken this profitability ratio in measuring the company’s performance (Waheed and Malik, 2019) and is given using the following formula;
Besides, the Return on Equity (ROE) is a profitability ratio that indicates the company’s profitability level at a particular period, and the net ratio income compared to the owner’s equity. According to Baskentli et al., (2019), the ratio indicates the return on the shareholders’ investment compared to the firm’s annual income and is expressed as follows;
Dependent variable.In this study, the dependent variable used is the company’s performance to check the impacts of institutional investors on a firm’s value in equation (i) and (ii). The owners’equity of a company is used as a dependent variable in analyzing the impacts of institutional investors on a firm’s value in equation (iii) and (iv).
Control variable.The control variables in the review include the companies’ size, debt, fixed assets, and dividend payout ratio. The size of the corporations is measured by the total annual assets of UK listed companies, and it directly affects the institution’s shareholders and performance. The leverage is expressed as the debt ratio and indicates the company’s debt levels given as a ratio of total debts in a particular financial year and total assets. Additionally, the value of fixed assets is indicated by a company’s balance sheet. In this study, the value will be the company’s property, plant, and equipment (PPE) expressed as a fraction of the sales revenue. Finally, the dividend payout ratio included in the control variables shows a firm’s dividend ratio as it also has a direct correlation on the institutional investors’ and firm’s value. Durbin-Wu-Hausman (DWH) test will be implemented in this study due to the endogeneity of the shareholder’s equity. Thus, the ratio is expressed as the dividend paid in a particular period divided by net profit after tax.
Model Specification
OLS regression is used to test the hypothesis on the sample financial information of the UK listed companies, and the following models or equations are developed;
Where: = line intercept
= co-efficient of independent and dependent variables
Equations (i), (ii), (iii) and (iv) are estimated using the ordinary least square (OLS) methods. Also, cluster firm level is used to adjust standard errors in order to rectify or correct with-in firm serial correlation and heteroscedasticity.
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