1. Introduction
Corporate investment decisions are crucial for managers ensuring shareholders’ wealth maximization and enhanced firm value. Efficient resource allocation among value maximizing projects ensures minimal agency costs and the rationale for managers’ high perks and benefits [1,2]. The outcome of firms’ investment decisions influences the firms’ future earning potential, cash-flow sensitivity, long-term growth, corporate value, and sustainability [3–5]. Relaxing the assumption of a frictionless capital market, existing empirical literature elucidates deviations from optimal capital investment, either in the form of over-investment or under-investment. Theoretically, sub-optimal investment primarily tends to fluctuate due to two underlying notions comprising agency issues [6] and information asymmetries [7].
Agency theory postulates that investment efficiency fluctuates due to investors’ and managers’ conflicting risk behaviors, usually termed as moral hazard where managers over-utilize funds (free cash flows) in low value (even negative net present value) projects for the sake of their perks and benefits [
7,
8]. It leads to investment inefficiency, resulting from the over-investment of available free cash flows [
9]. The information asymmetry suggests that managers, facing financial constraints, use their discretionary powers for capital rationing by avoiding growth opportunities, leading to investment inefficiency, resulting from under-investment [
10,
11].
Examining corporate investment efficiency has remained crucial because of its diverse determinants in accounting and finance disciplines. Prior studies portray corporate investment efficiency as a function of risk and return under available growth opportunities and restricted financial arrangements [
12,
13], quality and transparency of financial reporting [
14,
15,
16], and financial development [
4,
10,
17]. Some recent empirical studies examine the complex ownership structures with varying monitoring levels and reduced managerial entrenchment capabilities, which affect corporate investment strategies. The impact of ownership structure on firm investment efficiency has been elaborated in terms of either total institutional equity participation (e.g., see [
1,
3,
16]) or total foreign institutional equity participation (e.g., see [
13,
17,
18,
19]). Moreover, very few studies [
18,
20] segregate institutional investors into two types of pressure-resistant and pressure-sensitive foreign institutional investors. Institutional pressure-resistant investors (e.g., mutual funds, investment brokers and advisors, and pension funds) are “active shareholders” who mostly focus on monitoring firms’ managerial actions by raising their voice against contentious matters, with fewer business ties and regulatory restrictions [
21,
22], whereas institutional pressure-sensitive investors (e.g., banks, insurance companies, trusts, and other institutions) are “passive shareholders” who tend to have close business ties and absorb pressure from their portfolio firms’ management without articulating their sentiments [
21,
23,
24].
It is evident from the prevailing literature that foreign equity participation, resulting from financial openness and integration in domestic firms, has influenced corporate investment strategies, accountability, transparency, and survival profiles [
3,
20,
25,
26]. The presence of foreign institutional ownership has dramatically curtailed corporate philosophy from the traditional capitalism model (concentrated ownership with long-term relations with stakeholders) to the shareholders’ model of scattered and diverted nature of ownership [
27,
28]. Consequently, domestic firms have witnessed a substantial increase in foreign institutional shareholdings due to the liberalization of the equity investment climate. Accordingly, it has raised concerns whether the foreign shareholders’ presence enhances domestic firms’ investment efficiency or if investment efficiency attracts foreign shareholders. These studies, in other words, lack the causal effect of foreign institutional ownership endogeneity that needs to be addressed through omitted variables of the firms’ fixed effects that control unobserved firm heterogeneity [
28]. Besides, it is also essential to address the impact of segregated foreign equity participation (pressure-resistant and pressure-sensitive) on domestic firm investment efficiency because of their varying business ties, monitoring capabilities, and influential role in management, governance, and corporate strategy of a domestic firm.
The aim of this study is to investigate the impact of overall foreign institutional equity participation on corporate investment efficiency. We examined the impact of foreign institutional equity participation by segregating it into its two types of pressure-resistant and pressure-sensitive investors. We also examined the impact of varying levels of foreign institutional equity participation and its types on investment efficiency among three countries Indonesia, Malaysia and Singapore, selected from the Association of Southeast Asian Nations (ASEAN). Hereafter we refer to these three countries as ASEAN-3. Examining emerging ASEAN-3 countries is indispensable for the following reasons. First, these neighboring countries have remained attractive for foreign inflows due to foreign investors’ quick operational setups at lower transaction investment costs, free economic zones, corporate facilitation assurance, and induced agglomeration and cluster benefits [
29]. Second, the liberalization of investment policies, ease of entry requirements, simplified administrative procedures, and less stringent regulatory requirements to attract foreign investors for investing in domestic firms have promoted foreign portfolio equity investments. Third, the World Bank’s economic indicators from 2009 to 2018 indicate, despite the 2007–2008 financial crisis, an upsurge in foreign equity portfolio investments in ASEAN countries, including Indonesia, Malaysia, and Singapore.
Empirical findings reveal that overall foreign institutional ownership and foreign pressure-resistant institutional ownership have a positive and significant impact on corporate investment efficiency, whereas foreign institutional pressure-sensitive ownership has a positive but insignificant impact. The findings also reveal that varying levels of overall institutional foreign equity ownership and its two types have a different effect on corporate investment efficiency.
Our study contributes to the existing literature on corporate investment efficiency by segregating foreign institutional ownership into pressure-resistant and pressure-sensitive foreign institutional investors. It highlights the extent and direction of both types of foreign institutional equity participation on sustainable corporate investment efficiency. It also depicts the impact of varying levels of foreign institutional ownership and its types in determining optimal investment efficiency levels in domestic listed firms of emerging economies.
The rest of the paper has been organized as follows.
Section 2 elaborates the relevant literature and describes the hypothesis of the study.
Section 3 describes the research methodology comprising research design, data description, and econometric modeling.
Section 4 highlights the empirical results of the study.
Section 5 discusses the findings, along with the generalizability of the findings and suggestions for future research.
Section 6 concludes the study.