ARTICLE | Asia-Pacific Journal of Financial Studies | Issue 2, Vol.50, 2021

Abstract

We investigate whether the index reconstitutions of the China Securities Index (CSI) are suitable as a quasi-natural experiment to investigate the effect of institutional ownership on corporate policies. Using both actual and predicted index constituents, we document a sharp discontinuity in institutional ownership, especially of domestic mutual funds around the CSI 300 and 500 index thresholds, overcoming a key concern of the approach based on the Russell reconstitution. Using inclusion in the CSI 500 index as an instrument, we find that higher institutional ownership increases the likelihood and amount of dividends, improves firm performance, and improves the information environment surrounding firms. These findings inform us of the salience of domestic institutions in emerging markets.