Abstract

http://ssrn.com/abstract=1486247
 
 

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Institutional Investor Preferences and Firm Value


Gwinyai Utete


Louisiana State University

December 2008


Abstract:     
This paper demonstrates the existence of different institutional investor preferences for equity characteristics, and makes the link between these preferences and firm value. We show that transient institutional investors (those that trade frequently with a view to maximizing short term gains) possess superior information to other market participants and actively seek out situations in which they can exploit this informational advantage. Their presence, particularly under conditions where firm-level information quality is poor, is associated with both higher returns and higher subsequent firm values. We also find that dedicated (long term) and quasi-indexing (passive with broad holdings) institutional investors are attracted to firms that enable them to engage in monitoring activities. Although there is some evidence to suggest that the arrival of dedicated institutional investors enhances firm transparency, the presence of both dedicated and quasi-indexer investors is of limited importance in determining overall firm value when other features of the firm‟s contracting environment (such as corporate governance provisions, information precision and free cash flows) are fully considered. These results are robust to both a fixed effects and an instrumental variables procedure that mitigates the endogeneity problem. Therefore, the previously documented linear relationship between institutional holdings and Tobin's Q is almost entirely driven by the trading actions of active investors who do not engage in monitoring in the conventional sense.

Number of Pages in PDF File: 71

Keywords: Ownership structure, Institutional investors, Tobin's Q, Firm performance

JEL Classification: G12, G30, G32

working papers series


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Date posted: October 10, 2009 ; Last revised: March 18, 2010

Suggested Citation

Utete, Gwinyai, Institutional Investor Preferences and Firm Value (December 2008). Available at SSRN: http://ssrn.com/abstract=1486247 or http://dx.doi.org/10.2139/ssrn.1486247

Contact Information

Gwinyai Utete (Contact Author)
Louisiana State University ( email )
2163 CEBA
Baton Rouge, LA 70803
United States
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