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Does Institutional Ownership Promote the Transformation of Underperforming Firms?

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  • Grigori Erenburg

    (Department of Economics, Business, and Math, King’s University College at the University of Western Ontario, London, Ontario, Canada)

  • Janet Kiholm Smith

    (Robert Day School of Economics and Finance, Claremont McKenna College, Claremont, California, USA)

  • Richard Smith

    (Anderson Graduate School of Management, University of California Riverside, Riverside, California, USA)

Abstract

We focus on firms that chronically underperform and evaluate ways that institutional investors can facilitate asset redeployment. Increases in institutional holdings are associated with subsequent acquisition and decreases are associated with subsequent failure. For surviving underperformers, holdings and changes are associated with improved performance, but long-run abnormal returns remain negative and Q remains low. This association between holdings and performance is not causal. Rather, it is explained by “flight to quality” combined with persistence of financial performance, including persistence of abnormal returns for underperformers. The evidence casts doubt on interpretations in previous findings of positive relationships between holdings and performance.

Suggested Citation

  • Grigori Erenburg & Janet Kiholm Smith & Richard Smith, 2015. "Does Institutional Ownership Promote the Transformation of Underperforming Firms?," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 5(04), pages 1-40, December.
    • Handle: RePEc:wsi:qjfxxx:v:05:y:2015:i:04:n:s2010139215500196
    DOI: 10.1142/S2010139215500196
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    2. Hsu, Shufang & Lin, Shih-Wei & Chen, Wei-Peng & Huang, Jhao-Wei, 2021. "CEO duality, information costs, and firm performance," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).

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