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Institutional ownership and the investment-cash flow sensitivity Evidence from India

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  • Chacko Jacob

    (Indian Institute of Management, Kozhikode)

  • Jijo Lukose P.J.

    (Indian Institute of Management, Kozhikode)

Abstract

Weexaminewhetherinstitutionalinvestorownershipinfluencestheinvestment-cashflowsensitivityinQmodelregressions.Inordertoempiricallytestthisrelationship,weaugmenttheQmodelofinvestmentspecificationbyaddinganinteractiontermbetweencashflowandin-stitutionalinvestorownership.Ifinstitutionalinvestorownershipreducesinvestment-cashflowsensitivity,thenthecoefficientoftheinteractiontermshouldbenegative.Weestimatetheequa-tionusingtheArellano-BonddifferenceGMMmethodtomitigatethebiasduetomeasurementerror in Q modelregressions.Oursample consists of manufacturingfirms listed on theNationalStockExchange(NSE)overtheperiod2001-2016.Theresultsshowthatinstitutionalinvestorownershipreducesinvestmentcashflowsensitivity.Thesereductionsareobservedtobemorepronouncedinfirmswithhigheragencycosts.Weinterpretthisevidenceassuggestingthatinstitutionalinvestorholdingsmitigateagencyissueslikeover-investmentoffreecashflowandtherebyimprove firm governance.

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  • Chacko Jacob & Jijo Lukose P.J., 2019. "Institutional ownership and the investment-cash flow sensitivity Evidence from India," Working papers 329, Indian Institute of Management Kozhikode.
    • Handle: RePEc:iik:wpaper:329
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