Institutional Investors and Corporate Investment

53 Pages Posted: 29 Nov 2009

See all articles by Cristina Cella

Cristina Cella

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

Multiple version iconThere are 2 versions of this paper

Date Written: 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.

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

JEL Classification: B2, G31, G32

Suggested Citation

Cella, Cristina, Institutional Investors and Corporate Investment (November 20, 2009). Available at SSRN: or

Cristina Cella (Contact Author)

Stockholm School of Economics ( email )

Drottninggatan 98
111 60 Stockholm

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm

Centre for Studies in Economics and Finance (CSEF) ( email )

84084 Fisciano, Salerno

Sverige Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm

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