Do Financial Institutions Affect Firm Value? An Empirical Analysis in Indian Market

In this study I use a large sample of quarterly changes in equity holding by institutional investors and find strong evidence that the functions of institutional investors which were missing in India (Khanna and Palepu, 2000) are taking shape as external controllers of corporate governance. I provide a robust proof that foreign financial institutions (FIIs) have a positive influence on firm performance. For the first time I disintegrate domestic institutions into different categories and find that mutual funds’ influence on firm performance is divergent as compared to banks, financial institutions (FIs) and insurance companies. While the effect of mutual fund holdings on firm performance was inconclusive; equity holding by banks, FIs and insurance companies showed a negative impact. Empirical proof from this study also adds to the existing literature on the monitoring role of institutional investors in India. It is evident that FIIs are better monitors of corporate actions. The other groups of institutions are either poor monitors or do not monitor as changes in their shareholding does not have an influence on firm performance.