Relationship between firm-level investment, idiosyncratic risk and ownership: an emerging market perspective

Purpose We examine the investment-risk sensitivity between firm-level investments and idiosyncratic risk in an emerging market, with a focus on how insider and institutional ownership may moderate this relationship. Design/methodology/approach We analyze data from 167 firms listed on the Colombo Stock Exchange from 2010 to 2018, employing fixed effect panel data regressions to assess the sensitivity of investments to idiosyncratic risk. Findings We observe a negative relationship between firm-level investments and idiosyncratic risk. Contrary to findings related to developed markets, our results support the notion that higher insider ownership by managers reduces the sensitivity of investments to idiosyncratic risk. Moreover, we discover that high institutional ownership mitigates the adverse impact of low insider ownership on optimal investment decisions, highlighting the role of institutional investors in aligning managerial and owner interests, even in an emerging market. Our results are robust to a host of additional tests. Originality/value This research adds to the limited body of knowledge on the relationship between ownership structure and corporate investment behavior in emerging markets, offering insights that contrast with findings from developed markets.