Institutional Investors and Corporate Investment

Abstract

Using investors’ trading horizons to capture their incentives to collect information and monitor management’s decisions, this paper shows that an increase in the ownership stake held by long-term institutional investors is associated with a subsequent decrease in real investment precisely in firms that invest too much. In support of the monitoring hypothesis, we show that results are driven by the purchases of long-term investors, while quasi-indexers and transient investors have no influence on investment. We address the problem of endogeneity using the inclusion of a firm to the S&P 500 Index as an exogenous shock to institutional holdings. Overall, the evidence indicates that long-term institutional investors influence managers’ decisions and are associated with lower agency conflicts in investment choices.

Keywords: Institutional ownership, investors’ investment horizons, over-investment, under-investment, management monitoring

JEL Classification: G3, G31, G32