Institutional Investors and Corporate Investment
Stockholm School of Economics; Swedish House of Finance; Centre for Studies in Economics and Finance (CSEF)
November 20, 2009
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
Date posted: November 29, 2009