Institutional ownership and cost of equity of Chinese firms

PurposeThe 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).Design/methodology/approachBy 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.FindingsWe 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.Originality/valueThis 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.