Importance Of Institutional Ownership

Importance of institutional ownership in firm performance

Institutional ownership or institutional investor is considered as a corporate monitor in many aspects that links to the performance of the company. The institutional investor need to monitor how the managers perform their duties ensuring that they put the company’s best interest rather than their own self interest. This is because, the manager which act as an agent to the company is the one who’s responsible to operate the business ensuring stability in performance of the company. This include examine internal control that exist in the company. For example, to avoid fraud or misrepresenting of the company’s data, the institutional investor needs to monitor the internal control system to be efficient and effective in delivering the best corporate governance practices in the company. Moreover, the institutional investor had invested large sum of money in the company which in return they will gained benefit in term of dividend which depends on the company’s performance during the year. According to Grossman and Hart, 1980, large shareholders may have a greater incentive to monitors managers than members of the board of directors, who may have little or no wealth invested in the firm. These events occurred when the large shareholders have the ability, materials, opportunity and can influence how manager operates the company. The hypothesis have been made by several researcher claimed that corporate monitoring by institutional investor can push the managers to focus on the best interest of the corporate performance rather than opportunistic or self-serving behaviour.

In addition, a function of the size of the shareholdings in the company may also have the ability to influence ...

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...types of mechanisms can be used to alligned manager interest and objective with those of sharehoders and prevent problems related to monitoring and controlling.

1) To alligned manager interests and objectives with the shareholder by carrying out efficient management system. For examples, executive compensation plans, pension scheme, stock option and direct monitoring by boards.

2) Strenghtening of shareholder’s right in term of a greater incentive and ability to monitoring management. These rights will bring a justice and legal protections from unethical managers. For example, the shareholders may bring a punishment toward a managers by loss of employment or reduce in the salaries of the manager.

3) Last method is by using a indirect means of corporate control where takeover specialist must acquire control of a firm in order to displace poorly performing managers.