Resource slack and institutional ownership: A DuPont analysis in an emerging market

This study examines resource slack (asset turnover, profit margin, leverage deviations from industry norms) on institutional ownership in Brazilian firms from 2010 to 2023. We document that, on average, institutional investors are drawn to firms with lower resource slack, especially in asset turnover, for operational stability and comparability. Similar preferences are observed when examining institutions that prioritize stronger relationships with firms, as evidenced by institutional stockholdings exceeding 5 % (‘ relevant’ ), long-term (‘ dedicated’ ), and voting shares (‘ voting’ ). Moreover, while mutual funds prefer firms with lower resource slack, indicating conservative strategies focused on predictability, hedge funds target firms based on value orientations, viewing resource slack as a signal of potential performance gains. Our results are subjected to a comprehensive battery of endogeneity tests, including the use of instrumental variables and selection bias tests. In addition, we document the effect of a regulatory change on institutional ownership. The findings contribute to research on shareholder governance by highlighting the heterogeneity among institutional investors based on their incentives. • Institutional investors, on average, are drawn to firms with lower resource slack. • Investors more engaged with firms are also drawn to lower resource slack. • Mutual funds prefer low-slack firms for predictability and stability. • Hedge funds tolerate slack, seeking potential value opportunities. • Regulatory reform raised ownership and reshaped investor incentives in Brazil.