Relationship between institutional investors’ ownership and public companies’ performance in Sri Lanka

Abstract

Institutional investors have become important players and stakeholders in the financial industry today. They have also become a major influence in the equity market. They have a substantial global presence in both established and developing markets. The growing amount of corporate equity they hold demonstrates their growing significance in corporate governance. When making decisions in the past, these investors avoided direct involvement and instead used the exit strategy, selling their shares if they didn't like the decisions made by management (Bathalaal, 1994). They are more emboldened to speak up when they disagree with management since they used their right to vote during company meetings, and as a result, they are actively taking part in corporate decision-making. They do this in an effort to persuade senior executives to consider the long-term interests of shareholders (Coffee, 1991). The purpose of the study is to look at the relationship between firm performance and institutional ownership. The annual reports and financial statements of 100 companies from thirteen industries that were listed on the Colombo Stock Exchange in Sri Lanka between 2017 and 2019 were used to compile the desired goals and the relevant data. The institutional investor’s ownership has been investigated as an independent variable, along with company performance (Return on Assets and Return on Equity) and firm size (control variable). This study employed correlation and regression, and the results revealed a significant positive relationship between firm size and performance, whereas ownership by institutional investors has a significant negative association with the company's performance. The study's conclusions suggest that it is wise to support the adoption of corporate governance principles in Sri Lankan public firms in order to motivate institutions to boost their investments and implement efficient monitoring, which might improve company performance.