Institutional Investors, Financial Health, and Equity Valuation

The major aim of this paper is to investigate the relation between institutional Investors, financial health, and the market valuation weights on earnings and book value of equity. Our inquiry is motivated by two lines of research in the literature. The first line of research suggests that institutional investors play a positive role in corporate governance and that they prefer to invest in financially healthy firms. The second line of research suggests that the market valuation weights on earnings and book value of equity are a function of firm's financial health.Since institutional investors prefer to invest in financially healthy firms and their presence likely dynamically improves firm's financial health through their positive influence on corporate governance, we predict that the market valuation weights on earnings and book value of equity are related to the level of institutional ownership.Our study sample included 1052 firm- years listed companies in the Tehran security exchange (TSE) during 2002 to 2010. The results of the study reveal that the valuation weight on earnings (book value) increases (decreases) with the level of institutional ownership for profit firms, while that on book value increases with the level of institutional ownership for loss firms.