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The emergence of institutional holding has led to remarkable changes in the ownership
structure and governance of firms which makes it important to look at the role of institutional
investors as owners of firms. The corporate governing functions of institutional owners can
reduce agency problems and improve firm performance (Shleifer and Vishny, 1986).
Institutional investors can affect the management activities directly as owners of firms or
indirectly through trading in securities of such firms (Gillan and Starks, 2003; and Ahmad and
Jusoh, 2014). Therefore, institutional investors can play a key role in monitoring the
management of firms and their investments or disinvestments in firms can act as an important
source of information to other shareholders (Gillan and Starks, 2003; and Demiralp et al., 2011).
Thus, it becomes imperative to examine the role of institutional ownership in affecting the
financial performance of firms.
There has been a remarkable increase in the institutional ownership of listed firms in India
after the opening of the Indian economy in 1991. Prior to 1991, only some brokerage houses
and a few public sector mutual funds had shareholdings in listed firms which could be
categorized as an institutional holding. This scenario underwent a sea change with the entry
of Foreign Institutional Investors (FIIs), private sector mutual funds and insurance companies
in the Indian capital markets in the mid-1990s. Now, an Indian listed firm may have, at any given
point of time, a substantial institutional equity holding by FIIs, commercial banks, DFIs, public
and private sector mutual funds, and insurance companies.
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