The purpose of this paper is to investigate the role of institutional investors in the cost of equity for Chinese firms, especially state-owned enterprises (SOEs).
By using data from Chinese firms with a unique state ownership structure, we provide empirical evidence on whether institutional investors can help reduce the cost of equity for SOEs and non-SOEs, respectively, and if so, identify the underlying channels.
We find that an increase in the shareholdings of institutions, especially independent institutions, can lead to a reduction in the cost of equity. This effect is particularly prominent in SOEs compared to non-SOEs. Moreover, institutional investors promote corporate social responsibility activities and innovation activities of invested firms, thereby reducing the cost of equity.
This paper contributes to a comprehensive understanding of the effects of institutional shareholdings with heterogeneity on the cost of equity and their influential mechanisms in the process of mixed ownership reform.
