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In the past two decades institutional investors have become the largest owners in the corporations which are operating in the developed countries such as United States of America and United Kingdom and their market capitalization is rapidly growing in Asia and Latin America (Baker & Jabbouri, 2017). Institutional ownership of Pakistani common stock has increased rapidly over the past period of time. Their presence in the developing countries’ firm ownership structure has increased after the fraudulent financial reporting scandals in corporations of developed countries. Unlike the atomistic investors, institutions have larger size, expertise to collect information and ability to monitor the management (Elyasiani & Jia, 2010). Thus this questions arises, whether, these giants of the market can play any effective role in corporate governance and firms performance mechanism. Agency theory states that institutional ownership is an important component of ownership structure which plays a key role in minimizing agency conflicts. Institutional investors can act as a monitoring device, and they will reduce the need for capital markets as an external monitoring system (Jensen & Meckling, 1976). Therefore, the scholars argued that institutional ownership plays key role in enhancing firm’s performance by taking control of the firm (Admati, Pfleiderer, & Zechner, 1994; Cornett, Marcus, Saunders, & Tehranian, 2007; Lewellen & Lowry, 2019; Maug, 1998). Signaling theory assumes that the firm operations along with ownership structure, capital structure and dividend disbursement policies transmit signals in the market regarding the current and future potential performance of the firm. The presence of institutional ownership in the firm’s ownership structure gives a positive signal in the market. Furthermore, institutional ownership minimizes the need for dividend disbursement as a signal of good performance for the firm (Berkman & McKenzie, 2012; Short, Zhang, & Keasey, 2002).
The presence of institutional ownership is a very effective external corporate governance control mechanism (Al-Sartawi & Sanad, 2019; Chen & Keung, 2018; Gillan & Starks, 2003) that not only monitors the management but also plays a very effective role in the construction of governing body through its power of voting (Aggarwal, Saffi, & Sturgess, 2015; Haider & Fang, 2016). The presence of institutional investors in firm’s ownership structure has ignited the discussion regarding their role in corporate governance and firm performance (Gillan & Starks, 2003; Karpoff, 2001; Rafique, Malik, Waheed, & Khan, 2017). Ownership and control in the presence of institutional shareholding makes complex phenomena, which has been neglected by economic and organizational theories. Although there are a large number of studies which examined the individual effect of institutional ownership and board characteristics on the firm performance but how these two phenomena interact with each other and affect firm performance is largely inconclusive. The present study examines the impact of a particular type of investors i.e. “Investors Institutions” on the firm’s performance and their contingent effect on corporate board characteristics in Pakistan. Thus, the objective of the current study is to explore a topological relationship among institutional ownership, board characteristics, and firms’ performance by using a multi-theoretical framework in Pakistani context. This multi theoretical frame work is developed by the amalgamation of agency theory, institutional theory, organizational economics theory, resource dependence theory, signaling theory and stakeholder theory of firm governance mechanism.