International Journal of Economy, Management and Social Sciences, 2(6) June 2013, Pages: 396-401

TI Journals

International Journal of Economy, Management and Social Sciences

ISSN
2306-7276

www.tijournals.com

The Investigation of the Relationship between Institutional

Ownership and Investment Strategies in Firms Listed in
Tehran Stock Exchange (TSE)
Iraj Molaie Golonji 1, Saeid Jabbarzadeh Kangarlouei 2, Morteza Motavassel 3
1

Department of Accounting, Salmas Branch, Islamic Azad University, Salmas, Iran.

Department of Accounting, Urmia Branch, Islamic Azad University, Urmia, Iran.
3
M. A. in Accounting, West Azarbyjan Science and Research Branch, Islamic Azad University, West Azarbyjan, Iran.
2

AR TIC LE INF O

AB STR AC T

Keywords:

The aim of this study is to investigate the relationship between institutional ownership and
investment strategies in firms listed in Tehran Stock Exchange (TSE). Institutional ownership is
considered as independent variable and investment strategies as dependent variable. Investment
strategies are proxies for investment instruments namely cost of capital, liquidity, firms size,
investment in capital assets and financial leverage. Using financial statements of firms listed in
TSE to draw required data for the period between 2000 and 2011, the hypotheses are tested
utilizing multivariable regression model. The results indicate that only firms size as investment
strategy proxy matters in institutional ownership and other investment strategies including cost of
capital, liquidity, investment in capital assets and financial leverage do not matters.

institutional ownership,
investment strategies
Tehran Stock Exchange

2013 Int. j. econ. manag. soc. sci. All rights reserved for TI Journals.

1.

Introduction

The shareholders have certain rights as the owners of the firm including the appointment of the Board of Directors. The Board, as the agent
of the shareholders, has the direct responsibility to monitor the managers and their performance. The separation of ownership and control
sets the basis for conflict, or agency problems, between shareholders, the board, and corporate management [6]. This has led to many
debates on corporate governance attributes as a system to reduce the conflict. Research [6] defines corporate governance as the system of
laws, rules, and factors that control operations at a company. Institution ownership is one of corporate governance mechanisms which grow
approximately one-quarter of U.S. equity markets in 1980, to over a half in 1994 [9]. The researches have been conducted in Iran also
confirms that the amount institutional investors have increased in TSE firms over the time [7].
On the other hand, cost of capital is affected by financial constraint and investment tools. Investors rely on firms management in choosing
investment projects to increase firms value. In spite of the fact that investment opportunities should be considered in investment decisions,
however, empirical researches show that in firms with information asymmetry and agency conflicts, optimal level of investment is deviated
and results in over or under-investment. Over-investment can be accorded when management uses opportunistic approaches. In this
situation, small investors have very low incentives to monitor management behavior; however, institutional ownership has a monitoring role
in firms because this sort of ownership has long term investment and motivation to do so. However, it is expected that institutional
ownership affect firms investment strategies. For example, [4] argues that institutional investors attend to liquidity to be controlled for
monitoring management activity.
Taking the above arguments into consideration, the aim of this study is to investigate the relationship between institutional ownership and
investment strategies in firms listed in TSE.

2.

Literature review

Research [10] studied the effect of institutional ownership on the cost of bank borrowing and find that institutional ownership is negatively
related to the cost of loans. They show that this relationship is stronger for firms with higher degrees of information asymmetry and
institutional investors play an active role in corporate governance by reducing the risk levels of their portfolio companies through
effectively monitoring management. Institutional ownership has the tendency to increase the cost of loans due to the agency cost of debt.
Overall, they find a significant and robust U-shaped relationship between institutional ownership and the cost of loans. Nevertheless,
companies with institutional investors still pay significantly lower borrowing costs than companies without institutional shareholders.
* Corresponding author.
Email address: Jabbarzadeh.s@gmail.com

The Investigation of the Relationship between Institutional Ownership and Investment Strategies in Firms Listed in Tehran Stock 397
Internat ional Jour nal of Economy, Mana ge ment and Social Sciences , 2(6) June 2013

Research [3] investigated the relationship between institutional ownership and accounting transparency. Their results indicate that firms
with higher level of institutional ownership exhibit higher accounting transparencies, larger idiosyncratic risks, and larger earnings response
coefficients.
Research [8] investigated the effect of ownership structure on stock liquidity and stock transaction volume in TSE. They did not find
evidence to support such effect.
Research [1] investigated the impact of institutional ownership and dividend policy on stock returns and volatility results and show that
private institutional ownership has significant and positive effect on stock volatility while it has no effect on returns. He also finds that
private institutional ownership has negative effect on dividend payout ratio. Finally, he shows that private institutional ownership
significantly increases volatility for non-dividend paying stocks only because these stocks are more subject to institutional herding than
dividend paying stocks.
Research [5] investigated the relationship among institutional ownership, capital structure, and R&D investment for 336 listed IT firms
from 2006 to 2009 by using OLS regression model. His empirical evidence shows that there is no significant relationship between
institutional ownership and R&D investment. His finding suggests that institutional investors may not influence management decision
making on R&D investment. He finds that capital structure has a negative relationship with R&D investments. He also indicates that the
result indicates that IT firms may use less debt when investment outcome is uncertain.
Research [2] studied as to the relationship between institutional ownership and cash holdings and find that firms with greater institutional
ownership have more cash holdings. Their further tests show that the effect of both types of institutional ownership on firm cash holdings is
more significant for growth firms that rely more on external financing and suffer more from cash shortages.

3.

Hypotheses development

The main hypothesis: there is a significant relationship between institutional ownership and investment strategies in TSE listed firms.
To test the main hypothesis, this hypothesis is captured by fife sub-hypotheses as followings:
Sub-hypothesis 1: there is a significant relationship between institutional ownership and cost of capital in TSE listed firms.
Sub-hypothesis 2: there is a significant relationship between institutional ownership and investment in capital assets in TSE listed firms.
Sub-hypothesis 3: there is a significant relationship between institutional ownership and leverage in TSE listed firms.
Sub-hypothesis 4: there is a significant relationship between institutional ownership and liquidity in TSE listed firms.
Sub-hypothesis 5: there is a significant relationship between institutional ownership and firms size in TSE listed firms.

4.

Variables definition and measurement

4.1. Independent variable

Institutional ownership is independent variable and includes banks, insurance institutions, investment firms, government and its affiliated
units investment in firms.
4.2. Dependent variables
Cost of capital is calculated through dividing net profit by market value of equity or earnings per share ratio on price per share.
Investment in capital assets is investment in properties, plant and equipments.
Leverage is book debt value divided by total book debts and market capital values.
Liquidity is cash plus short term investments.
Firms size is natural logarithm of total assets.
4.3. Control variables
Firms age is total years that since a firm listed in TSE.
Stock returns: earnings per share.
Operating cash flow is cash flows from operating activity (revenue from continues and principal activities).
Market to book value is market value of equity divided by book value of equity as a proxy for investment opportunities.

5.

Empirical results

5.1. Descriptive statistic

Descriptive statistic of research variables is shown in Table 1.

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Int ernational Journal of Ec onomy, Mana ge me nt and Soci al Sc iences, 2(6) June 2013

Table 1. Descriptive statistic

IN

CACOST

CAPASS

LEV

LIQUID

SIZE

MB

OPCASH

AGE

RETURN

Mean

0.535382

0.093120

1101.910

0.774493

76235.18

5.593619

4.292933

266845.7

14.55226

69.81959

Median

0.520000

0.090000

300.0000

0.690000

11401.00

5.510000

2.290000

39221.00

12.00000

8.930000

Maximum

1.000000

2.640000

24366.00

13.65000

3032832.

7.920000

64.90000

10513630

42.00000

4484.490

Minimum

0.080000

-4.010000

1.000000

0.150000

136.0000

4.090000

-10.29000

-2413332.

0.000000

-642.9300

Std. Dev.

0.192163

0.276845

2351.450

0.689549

274074.8

0.623873

6.971689

1048073.

9.020506

349.9130

Skewness

0.293790

-7.997654

4.732468

11.61331

7.213185

0.750841

4.797948

6.268902

1.028549

9.066987

Kurtosis

2.715771

135.4693

32.75244

196.8975

61.97348

3.981278

31.50812

48.54602

3.171236

97.61758

Observations

641

641

641

641

641

641

641

641

641

641

Notes: IN is institutional ownership, CACOST is cost of capital, CAPASS is investment in capital assets, LEV is leverage, LIQUID is liquidity, SIZE is firms size, MB is equity
market to book value, OPCASH is operating cash flow, AGE is firms age and RETURN is stock return.

According to Table 1, 0.53 of sample firms (641 observations) ownership includes institutional ownership which is more than half.
Standard deviation, kurtosis and skewness as dispersion parameters indicate that most of variables other than institutional ownership which
has 0.19 standard deviation have high dispersion in its distribution.
5.2. Correlation matrix
Correlation matrix of research variables is shown in Table 2.
Table 2. Correlation matrix
AGE

CACOST

CAASS

IN

LEV

LIQUID

MB

OPCASH

RETURN

AGE

1.000000

CACOST

-0.042580

1.000000

CAASS

0.008918

0.042649

1.000000

IN

-0.185244

-0.003095

-0.004251

1.000000

LEV

0.041813

-0.015443

-0.038279

0.020385

1.000000

LIQUID

-0.041035

0.066644

0.430778

-0.095061

-0.047846

1.000000

MB

-0.089182

0.018372

-0.074376

-0.059099

-0.025232

-0.048420

1.000000

OPCASH

-0.049960

0.065870

0.329689

-0.133821

-0.060176

0.900812

-0.011071

1.000000

RETURN

-0.040245

0.069496

0.404434

-0.089698

-0.052547

0.862417

-0.061495

0.807400

1.000000

SIZE

0.010550

0.061394

0.423114

0.071227

-0.105787

0.572155

-0.022458

0.515187

0.470425

SIZE

1.000000

Table 2 demonstrates that the most correlation is between liquidity and operating cash flows which is according to expectations while both
measures use the rather the same data. In addition, the least correlation is between cost of capital and institutional ownership which is not
promising to accept the hypothesis as to the relationship between cost of capital and institutional ownership
5.3. Hypotheses test
Sub-hypothesis 1: there is a significant relationship between institutional ownership and cost of capital in TSE listed firms.
The results of this hypothesis conducting multivariate regression model is shown in Table 3.
Table 3. The results of regression on relationship between institutional ownership and cost of capital
Variable

Coefficient

Std. Error

t-Statistic

Prob.

0.103659

0.042628

2.431704

0.0153

IN

-0.002033

0.058810

-0.034576

0.9724

AGE

-0.001167

0.001245

-0.937038

0.3491

MB

0.000723

0.001588

0.455566

0.6489

OPCASH

6.30E-09

1.79E-08

0.353066

0.7242

RETURN

3.93E-05

5.33E-05

0.738230

0.4606

R-squared

0.006983

Adjusted R-squared

-0.000836

F-statistic
Prob(F-statistic)

0.893129
0.485184

Durbin-Watson stat

1.983203

The results of Table 3 indicate that there is not a significant relationship between institutional ownership and cost of capital in TSE listed
firms so this hypothesis is rejected. Also results of control variables show that there is not a significant relationship between firms age,
market to book value, operating cash flows and stock return with cost of capital. F-statistic indicates that whole model is not significant and
Durbin-Watson stat indicates that there is no autocorrelation problem among models residual considering that its value is between 1.5 and
2.5. Adjusted R-squared manifests that 0.006 of independent variable is explained by dependent and control variables.

The Investigation of the Relationship between Institutional Ownership and Investment Strategies in Firms Listed in Tehran Stock 399
Internat ional Jour nal of Economy, Mana ge ment and Social Sciences , 2(6) June 2013

Sub-hypothesis 2: there is a significant relationship between institutional ownership and investment in capital assets in TSE listed firms.
The results of this hypothesis conducting multivariate regression model is shown in Table 4.
Table 4. The results of regression on relationship between institutional ownership and investment in capital assets
Variable

Coefficient

Std. Error

t-Statistic

Prob.

C
IN
AGE

622.1726
581.6323
8.461063

419.1969
463.4129
11.55423

1.484201
1.255106
0.732291

0.1383
0.2099
0.4643

MB

-3.874231

9.310362

-0.416120

0.6775

OPCASH

0.000108

8.77E-05

1.233016

0.2180

RETURN

0.577826

0.270426

2.136727

0.0330

R-squared

0.664631

Adjusted R-squared

0.661437

F-statistic

208.0879

Durbin-Watson stat

2.157524

Prob(F-statistic)

0.000000

The results of Table 4 indicate that there is not a significant relationship between institutional ownership and investment in capital assets in
TSE listed firms so this hypothesis is rejected. Also results of control variables show that there is not a significant relationship between
firms age, market to book value, operating cash flows with investment in investment in capital assets. However, there is a positive
significant relationship between stock return and investment in investment in capital assets. F-statistic indicates that whole model is
significant and Durbin-Watson stat indicates that there is no autocorrelation problem among models residual considering that its value is
between 1.5 and 2.5. Adjusted R-squared manifests that 0.66 of independent variable is explained by dependent and control variables.
Sub-hypothesis 3: there is a significant relationship between institutional ownership and leverage in TSE listed firms.
The results of this hypothesis conducting multivariate regression model is shown in Table 5.
Table 5. The results of regression on relationship between institutional ownership and leverage
Variable

Coefficient

Std. Error

t-Statistic

Prob.

0.710905

0.106225

6.692474

0.0000

IN

0.069791

0.146548

0.476233

0.6341

AGE

0.003109

0.003103

1.001923

0.3168

MB

-0.002166

0.003957

-0.547356

0.5843

OPCASH

-2.84E-08

4.45E-08

-0.637333

0.5241

RETURN

-3.10E-05

0.000133

-0.233430

0.8155

R-squared

0.006069

Adjusted R-squared

-0.001757

F-statistic

0.775456

Durbin-Watson stat

1.481352

Prob(F-statistic)

0.567607

The results of Table 5 indicate that there is not a significant relationship between institutional ownership and leverage in TSE listed firms
so this hypothesis is rejected. Also results of control variables show that there is not a significant relationship between firms age, market to
book value, operating cash flows and stock return with leverage. F-statistic indicates that whole model is not significant and DurbinWatson stat indicates that there is no autocorrelation problem among models residual considering that its value is between 1.5 and 2.5.
Adjusted R-squared manifests that 0.006 of independent variable is explained by dependent and control variables.
Sub-hypothesis 4: there is a significant relationship between institutional ownership and liquidity in TSE listed firms.
The results of this hypothesis conducting multivariate regression model is shown in Table 6.
Table 6. The results of regression on relationship between institutional ownership and liquidity
Variable

Coefficient

Std. Error

t-Statistic

Prob.

-539.7592

15585.26

-0.034633

0.9724

IN

27010.07

21501.46

1.256197

0.2095

AGE

185.3345

455.3418

0.407023

0.6841

MB

-650.2908

580.5770

-1.120077

0.2631

OPCASH

0.155055

0.006526

23.75779

0.0000

RETURN

301.2508

19.47197

15.47100

0.0000

R-squared

0.864566

Adjusted R-squared

F-statistic

810.7272

Durbin-Watson stat

Prob(F-statistic)

0.000000

0.863500
1.673200

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Int ernational Journal of Ec onomy, Mana ge me nt and Soci al Sc iences, 2(6) June 2013

The results of Table 6 indicate that there is not a significant relationship between institutional ownership and liquidity in TSE listed firms
so this hypothesis is rejected. Also results of control variables show that there is not a significant relationship between firms age, market to
book value with leverage. However, there is a positive significant relationship between stock return and operating cash flows with liquidity.
F-statistic indicates that whole model is significant and Durbin-Watson stat indicates that there is no autocorrelation problem among
models residual considering that its value is between 1.5 and 2.5. Adjusted R-squared manifests that 0.86 of independent variable is
explained by dependent and control variables.
Sub-hypothesis 5: there is a significant relationship between institutional ownership and firms size in TSE listed firms.
The results of this hypothesis conducting multivariate regression model is shown in Table 7.
Table 7. The results of regression on relationship between institutional ownership and firms size
Variable

Coefficient

Std. Error

t-Statistic

Prob.

5.135196

0.102215

50.23937

0.0000

IN

0.489859

0.106492

4.599940

0.0000

AGE

0.010538

0.002673

3.942729

0.0001

MB

0.001361

0.002127

0.639907

0.5225

OPCASH

6.19E-08

2.01E-08

3.076734

0.0022

RETURN

0.000405

6.20E-05

6.535083

0.0000

R-squared

0.746713

Adjusted R-squared

0.744301

F-statistic

309.5497

Durbin-Watson stat

2.034240

Prob(F-statistic)

0.000000

The results of Table 7 indicate that there is a positive significant relationship between institutional ownership and firms size in TSE listed
firms so this hypothesis is accepted. Also results of control variables show that there is not a significant relationship between market to
book value and firms size. However, there is a positive significant relationship between stock return, operating cash flows and firms age
with firms size. F-statistic indicates that whole model is significant and Durbin-Watson stat indicates that there is no autocorrelation
problem among models residual considering that its value is between 1.5 and 2.5. Adjusted R-squared manifests that 0.74 of independent
variable is explained by dependent and control variables.

6.

Discussion and conclusion

The aim of this study is to investigate the relationship between institutional ownership and investment strategies in firms listed in Tehran
Stock Exchange (TSE). Institutional ownership is considered as independent variable and investment strategies as dependent variable.
Investment strategies is proxied by investment instruments namely cost of capital, liquidity, firms size and financial leverage. Using
financial statements of firms listed in TSE to draw required data for the period between 2000 and 2011, the hypotheses are tested utilizing
multivariable regression model. Fife hypotheses are developed to test the relationship between institutional ownership and investment
strategies. In the first hypothesis it is posited that institutional ownership affects cost of capital. However, this hypothesis is not accepted
showing that in TSE firms, institutional ownership does not reduce cost of capital which is not promising. In the second hypothesis, it is
expected that institutional ownership has an impact on investment in capital assets which also rejected. Institutional ownership has a great
monitoring role in firms and should review management investment tasks. Third hypothesis considers the relationship between institutional
ownership and leverage. It is expected that institutional ownership considering its influences and voting right has also great impact in debt
contracts but it is not the case for TSE firms. Fourth hypothesis discusses as to the effect of institutional ownership on firms liquidity.
Firms liquidity is the most critical resources of the firms and the most vulnerable one which should be highly controlled. Taking the fact
that institutional ownership has control tools in the firms, it stipulated that it affects firms liquidity which does not in TSE. The last
hypothesis is about the relationship between institutional ownership and firms size which is accepted showing that bigger firms has more
institutional ownerships than the small ones considering the positive significant relationship between them. These results suggest that while
0.53 of sample firms (641 observations) ownership includes institutional ownership, they could not affect management investment
strategies.

The Investigation of the Relationship between Institutional Ownership and Investment Strategies in Firms Listed in Tehran Stock 401
Internat ional Jour nal of Economy, Mana ge ment and Social Sciences , 2(6) June 2013

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