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The relationship between institutional investors’ holding in public firms and the level of corporate solvency

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  • Yehuda Pivin

    (University of Haifa)

  • Yossi Yagil

    (University of Haifa, Haifa, Israel and Western Galilee College)

Abstract

Institutional investors are considered experienced, professional investors who also have the know-how to monitor and guide the companies in which they invest with regard to financial decisions that impact the firms’ solvency and corporate governance. We investigate whether there is an empirical relationship between the level of institutional investors’ holdings in publicly traded firms and the firms’ solvency. Using 9-years worth of data about 207 healthy and distressed American and Canadian public companies, we demonstrate a significant positive relationship between the firms’ solvency and the level of institutional investors’ holdings in the firms. This relationship is bidirectional. If the firm’s solvency level decreases, the institutional shareholders “vote with their feet” and reduce their ownership in the firm. Thus, changes in the level of institutional investors’ holdings in publicly traded firms provide other stakeholders with a signal about the potential solvency risks of these firms. Our study is the first to our knowledge that investigates empirically the direct relationship between the level of institutional investors’ holdings in a publicly traded firm and its odds of encountering financial distress.

Suggested Citation

  • Yehuda Pivin & Yossi Yagil, 2024. "The relationship between institutional investors’ holding in public firms and the level of corporate solvency," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 28(4), pages 1237-1256, December.
    • Handle: RePEc:kap:jmgtgv:v:28:y:2024:i:4:d:10.1007_s10997-024-09707-x
    DOI: 10.1007/s10997-024-09707-x
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    More about this item

    Keywords

    Solvency; Risk assessment; Institutional investors; Ownership structure; Financial distress; Corporate governance;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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