Institutional investors and the value of excess cash holdings: empirical evidence from Pakistan

Purpose This study examines the effects of foreign and domestic institutional investors on the value of excess cash holdings in the context of Pakistan where the institutional setting is broadly considered as non-friendly to outside shareholders due to family control. Design/methodology/approach A panel sample of 220 listed firms on the Pakistan Stock Exchange (PSX) was employed over the period 2007-2018. Data on institutional ownership are collected from the Standard & Poor's (S&P) Capital IQ Public Ownership database, while the financial data are collected from Compustat Global. The study uses ordinary least squares (OLS) regression with year and firm fixed effects as the main econometric specification. Moreover, the application of models with alternative measures, high-dimensional fixed effects and two-stage least squares (2SLS) regression are also conducted for robustness. Findings Robust evidence was found that unlike domestic institutional investors, which do not influence the value of excess cash holdings, foreign institutional investors positively affect the contribution of excess cash holdings to firm value. The positive effect on excess cash holdings' value is mainly driven by foreign institutions domiciled in countries with strong governance and high investor protection. Moreover, this effect is stronger in firms that are less likely to have financial constraints. Originality/value This study provides novel evidence on the effect of institutional investors on the value of excess cash holdings in an emerging market like Pakistan. It also adds to the literature by revealing that the effect of different groups of institutional investors on the value of excess cash holdings is not homogenous. The authors employ a panel sample of 220 listed firms on the Pakistan Stock Exchange (PSX) over the period 2007-2018. Data on institutional ownership are collected from the S&P Capital IQ Public Ownership database, while the financial data are collected from Compustat Global. The study uses OLS regression with year and firm fixed effects as the main econometric specification. Moreover, the application of models with alternative measures, high-dimensional fixed effects, and 2SLS regression are also conducted for robustness.