The Impact of Mutual Fund Ownership on Corporate Investment: Evidence from a Natural Experiment

Abstract:     
Mutual fund holdings data reveal a significant impact of mutual funds on the capital expenditures ("CapEx'') of their portfolio companies. Following the shock to mutual fund ownership caused by the 2003 scandal, during which 25 fund families experienced significant outflows of capital, firms held by distressed funds decreased capital expenditures on average. CapEx changes mirrored the types of funds: it decreased more (increased) in firms held by funds whose past ownership was associated with increases (significant decreases) in CapEx. Consistent with governance by the threat of exit, firms that drive the effects have higher wealth-performance sensitivity, liquid stock, bigger changes in ownership and the types of funds, larger number of distressed funds, and funds with bigger outflow.

Number of Pages in PDF File: 41

Keywords: mutual funds, corporate investment, capital expenditures, corporate governance

JEL Classification: G30, G31, G32, G34, G39

working papers series