The effect of institutional ownership on firm performance

The goal of this study was to find what effect Institutional Ownership has on firm performance in Germany. A positive relationship between the two was expected due to the influence of institutions through 'active monitoring' and the access to resources as well as managerial skills. The effect was studied by using the percentage of shares held by institutional owners as a measure for institutional ownership. To measure increases or decreases in firm performance, four different dependent variables were used, namely Return on Assets (ROA), Return on Equity (ROE), the Price/Earnings ratio (P/E) and the Cashflow per Share. Multiple control variables were used to control for increases or decreases in performance not attributable to Institutional Ownership. These control variables were, Size, the Price/Book ratio, the Debt/Assets ratio and the Firms Tangible Assets ratio. After finding a high correlation between Size and IO, a second regression was done excluding this variable. The Panel Data Regressions resulted in no significant evidence for the relationship between Institutional Ownership and firm performance.