Investor Horizons and Corporate Cash Holdings
46 Pages Posted: 6 Feb 2012 Last revised: 5 Jul 2012
Date Written: July 4, 2012
We study the effect of investor horizons on corporate cash holdings. We argue that investors with longer horizons monitor more because their net benefit of monitoring is higher. Consequently, the optimal amount of corporate cash holdings increases, so firms hold more cash. We find empirical support for our argument: (1) firms with longer investor horizons hold more cash; (2) when they have excess cash, they invest less and pay out more to shareholders; and (3) they are more likely to invest in projects with long-term payoffs, as evidenced by increased profitability in the long-term. We establish causality using long-term investors who index as an instrument. Our results are not explained by internal corporate governance mechanisms or ownership concentration (blockholders).
Keywords: Investor horizons, Institutional investors, Ownership structure, Investor heterogeneity, Corporate governance, Monitoring, Cash holdings
JEL Classification: G23, G31, G32, G34, G35
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