Role of Institutional Shareholders’ Activism in Enhancing Firm Performance: The Case of Pakistan

Abstract

Globalization and financial breakdown of many corporate conglomerates in the developed world engrossed the attention of researchers and policy makers towards the need and importance of an effective corporate governance system for resolving the agency conflict between the stakeholders and managers, and hence a firms’ success. Among corporate governance mechanisms, how ownership is structured between all the shareholders of a firm is considered to be of much importance. The purpose of this article is two-fold: first, to analyze the impact of institutional ownership on firm performance and, second, to throw some light on the two scenarios of institutional ownership prevailing in Pakistan’s capital market. In the first scenario, financial institutions have a board representation (active financial institutions), while in the second scenario, financial institutions do not have board representation (passive financial institutions). Using the data of 200 non-financial Pakistani firms listed at the Karachi Stock Exchange (KSE) from 2005 to 2011, the results revealed that institutional ownership significantly impacts a firms’ performance. It is also found that the firm performance can be enhanced through effective monitoring by active financial institutions that have long-term stakes in firms through board nomination.