4.3.2. Institutional Ownership and Firm Performance

We found a significant positive relationship between institutional ownership and firm performance, indexed by Tobin's Q, for each group such as all firms, family firms, and non-family firms. This relationship becomes stronger and significant with ROA and Tobin's Q when institutional ownership interacts with family ownership, implying that institutional shareholders can augment firm performance in family firms. There could be two possible explanations in this respect. First, family firms are likely to require more financial and technical knowledge from outside parties to manage the firms better. In that matter, institutional investors can advise and monitor family firms on various issues to foster performance in the short term (indicated by ROA). Non-family firms can take similar advantages from institutional investors to enhance profits temporarily. However, non-family firms are usually run and managed by managers coming from diverse backgrounds with strong business know-how. Thus, they are less likely to rely on advice from institutional shareholders to promote short-term profits. Instead, they seek consultation from institutional investors on strategic management, which has more impact on firms' long-term performance (Tobin's Q).

Second, institutional investors, such as banks and pension funds, demand more transparency in the board of management in disbursing funds. Unfortunately, family firms may not be perceived well by institutional investors to achieve the same level of transparency as non-family firms have. Thus, institutional investors can provide necessary advice and monitoring to the family firms to foster profits in the short term. As a whole, we found that a significant positive relationship exists between institutional ownership and firm performance, and family firms can enhance financial performance both in the short term and long term by increasing institutional ownership (H2).
