Abstract

http://ssrn.com/abstract=1514916
 
 

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Institutional Investors and Corporate Investment


Cristina Cella


Stockholm School of Economics; Swedish House of Finance; Centre for Studies in Economics and Finance (CSEF)

November 20, 2009


Abstract:     
This paper investigates whether institutional investors influence firms’ investment policies. By virtue of their significant ownership stakes and investment horizons, long-term institutional investors should closely monitor management and thus reduce agency conflicts in investment choices. Using a panel dataset of 2,511 U.S. manufacturing firms that went public between 1980 and 2003, I find that firms with long-term institutional investors tend to have lower capital expenditure than widely-held firms. Investment is reduced precisely in firms that are more exposed to the danger of over-investment: (a) firms that invest too much after controlling for their growth opportunities, financing constraints and industry affiliation, and (b) firms that have few investment opportunities but large cash flows. Most importantly, a reduction in capital expenditure in these firms leads to higher subsequent firm profitability and stock market performance, confirming that institutional investors’ actions aimed at removing over-investment are value-enhancing.

Number of Pages in PDF File: 53

Keywords: Institutional ownership, firm investment, management monitoring, corporate governance

JEL Classification: B2, G31, G32

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Date posted: November 29, 2009  

Suggested Citation

Cella, Cristina, Institutional Investors and Corporate Investment (November 20, 2009). Available at SSRN: http://ssrn.com/abstract=1514916 or http://dx.doi.org/10.2139/ssrn.1514916

Contact Information

Cristina Cella (Contact Author)
Stockholm School of Economics ( email ) ( email )
Drottninggatan 98
111 60 Stockholm
Sweden
Swedish House of Finance ( email ) ( email )
Drottninggatan 98
111 60 Stockholm
Sweden
Centre for Studies in Economics and Finance (CSEF) ( email )
84084 Fisciano, Salerno
Italy
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