Institutional ownership stability and product quality failures

Abstract

Purpose

This study examines the effect of stable institutional investors on firms' product quality failures. Furthermore, the authors investigate the channels through which institutional ownership stability enhances product quality management.

Design/methodology/approach

This study uses probit, ordered probit and negative binomial regression frameworks to investigate the research questions. In addition, the authors utilize the three-stage least-squares to address the endogeneity issues.

Findings

Using a sample of product recall incidents from 2012 to 2021, the authors find that firms with more stable institutional ownership have a lower probability, frequency and severity of recall incidents and adopt a proactive product recall strategy. Institutional investors with significant and persistent holdings improve quality management by reducing overinvestment and the use of option-linked and relative performance executive compensations. Furthermore, the influence of stable institutional owners on product quality failures is more pronounced in firms with low managerial ability and specialist CEOs. Lastly, the empirical evidence demonstrates that stable holdings by active investors have a more substantial impact on reducing product recalls than passive and other stable institutional holdings.

Originality/value

This study is the first to examine the impact of institutional ownership stability on firms' product recalls. The authors contribute to the literature on the benefits of stable institutional ownership on firm outcomes and the determinants of product quality failures.