In today’s interconnected financial markets, how can institutional investors contribute to greater market stability and reduce risks for shareholders? One critical yet underexplored factor is common institutional ownership, where the same institutional investors hold shares in multiple firms.

Prof. Qiang Wu, Professor and Associate Head (Research), School of Accounting and Finance (AF) at The Hong Kong Polytechnic University (PolyU) has investigated the role of common institutional ownership in mitigating stock price crash risk and identified several mechanisms through which it influences corporate governance.

Prof. Wu’s research reveals that common institutional ownership plays a pivotal role in reducing stock price crash risk. A negative and significant relationship exists between common institutional ownership and stock price crash risk. This effect is robust across various robustness checks and is shown to be causal through identification tests, including difference-in-differences analyses on financial institution mergers.

The study highlights that the monitoring role of common institutional owners is a key factor in reducing crash risk. Common owners’ ability to monitor is enabled by their lower information processing costs and greater incentives to oversee management due to governance externalities.

In addition, Prof. Wu’s research also finds that common institutional owners reduce crash risk by constraining bad news hoarding. Furthermore, firms with higher crash risks are more likely to experience CEO turnover, as common owners take active measures to enforce accountability.

Keywords: Common institutional ownership, stock price crash risk, corporate governance

Research Paper: Chen, S., Ma, H., Wu, Q., & Zhang, H. (2024). Common institutional ownership and stock price crash risk. Contemporary Accounting Research, 41(1), 679–711. https://doi.org/10.1111/1911-3846.12915

👉 Read the original article: [https://onlinelibrary.wiley.com/doi/abs/10.1111/1911-3846.12915]