Does common institutional ownership drive equity market misvaluation? Unraveling new moderation and mediation dynamics

Purpose This study aims to examine how common institutional ownership (CIO) influences equity misvaluation and explores the mediating and moderating mechanisms underlying this relationship. Design/methodology/approach The sample comprises all listed French firms from 2005 to 2021. Following Rhodes–Kropf and Viswanathan (2005), this study decomposes the market-to-book ratio into a misvaluation component and firm growth opportunities to proxy the dependent variable. The main independent variable is CIO, whereas control variables are drawn from established literature. This study also conducts additional and robustness tests to validate the findings. Findings This study finds that CIO is positively associated with equity market misvaluation. Specifically, CIO tends to increase overvaluation while reducing undervaluation, bringing prices closer to intrinsic value. Additional analyses show that this effect intensifies competitive industries and high investor sentiment. Stock price synchronicity also plays a mediating role in this relationship. Practical implications In terms of implications for decision-makers, from the perspective of market behavior and given the high proportion of CIOs in the French stock market, investors should incorporate into their strategy the potential overvaluation of companies with high CIOs and consider this factor when making timing decisions. This work has useful implications for managers, government regulators and other market participants. Originality/value This study provides a timely and original contribution as the first, to the best of authors’ knowledge, to examine the impact of CIO on equity mispricing in the French market, where CIO has grown significantly. While US-focused studies highlight CIO’s effects on stock prices and competition, this study directly assesses firm-level misvaluation. The analysis shows that CIO fosters collusive behavior and conceals firm-specific information, distorting prices through higher stock price synchronicity and information asymmetry, an effect likely amplified in Europe’s more concentrated ownership structures.