Scandinavian Working Papers in Economics

Ratio Working Papers,
The Ratio Institute

No 128: Institutional Ownership and the Returns on Investment

Per-Olof Bjuggren (), Johan Eklund () and Daniel Wiberg ()
Additional contact information
Per-Olof Bjuggren: Jönköping International Business School, Postal: Department of Economics , P.O. Box 1026, SE-551 11 Jönköping, SWEDEN
Johan Eklund: Ratio, Postal: The Ratio Institute, P.O. Box 3203, SE-103 64 Stockholm, Sweden
Daniel Wiberg: Jönköping International Business School, Postal: Department of Economics , P.O. Box 1026, SE-551 11 Jönköping, SWEDEN

Abstract: By examining a large number of Swedish listed firms, we analyse how institutional and foreign owners affect investment performance. To measure investment performance Mueller and Reardon’s (1993) marginal q is used, although derived directly from Tobin’s average q. Marginal q measures the ratio of the return on investment to the cost of capital. Our findings show that both domestic and foreign institutional owners positively influence firm performance. Furthermore a non-linear relation between institutional ownership concentration and performance is found. This is consistent with positive incentive effects and negative entrenchment effects. During the last decades the ownership structure of Swedish firms has undergone dramatic changes: institutional and foreign investors have been increasing their stakes, whereas Swedish households have decreased in importance. Controlling owners, often founding families, remain in control by resorting to an extensive use of dual-class shares. The practice of dual-class shares which separates cash-flow rights and control rights is also found to be an important determinant of firm performance that eradicates the positive influence of institutional ownership.

Keywords: Corporate governance; institutions; ownership; performance; Tobin’s q; marginal q

JEL-codes: C23; G30; L25

24 pages, November 25, 2008

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