Role of institutional investors in reviving loss-making firms: evidence from India

Abstract

PurposeThe present study aims to verify whether there is a positive (negative) role being played by the institutional investors on the loss-making companies' performance.Design/methodology/approachThe authors employ panel data regression and two-step system generalised method of moments (SYS-GMM) to test the above objective.FindingsThe empirical results clearly show that no positive relation is found between institutional investors and loss-making companies' performance.Research limitations/implicationsThe findings of the study might have significant implications for firms to improve the firms' operational performance [return on assets (ROA)]. Also, the firm's financial performance [return on equity (ROE)] could be improved by increasing profitability which will reflect in the share prices of the firms whereby the performance can build the investors' confidence over the firm. Market performance (Tobin's Q) could be increased by providing more attractive offers and discounts to customers to capture the business opportunities available in the market.Practical implicationsThe overall findings might have for reaching implications in the manufacturing sector with regard to allowing (disallowing) institutional investors.Social implicationsThe results of the study may help both companies and institutional investors.Originality/valueThis is the maiden attempt to study whether loss-making companies could be positively (negatively) impacted by the arrival of sophisticated institutional investors [foreign institutional investors (FIIs) and domestic institutional investors (DIIs)]. Further, this study is largely different from previous studies in terms of using new variables which are related to firm characteristics and valuation multiples. Further, seeing if the institutional investors tend to enhance the firm performance is curious.