Common institutional ownership and cost of equity: evidence from publicly listed companies in China

Abstract

Using data from 2682 publicly listed companies in China between 2012 and 2022, the study employs panel data regression to investigate the impact of common institutional ownership (CIO) on the cost of equity (COE). The findings indicate that CIO significantly reduces COE, with this reduction attributed to two main factors: the exit threat of common institutional investors (CIIs) and the synergistic governance effect. The results remain robust across alternative measures of COE using the PEG and MPEG models proposed by Easton (2004), as well as endogeneity tests utilizing Two Stage Least Squares. Moreover, the study identifies several factors that influence the strength of the CIO-COE relationship, including industry competitiveness, corporate governance quality, and financing constraints. The findings highlight the importance of leveraging the advantages of CIO in corporate supervision and governance, while also emphasizing the need for effective regulation to prevent collusive behavior and promote market efficiency.

Keywords

• Common institutional ownership (CIO)
• cost of equity (COE)
• common institutional investors (CIIs)
• industry competition
• corporate governance
• financial constraint