Institutional Investor Stability and Crash Risk: Monitoring versus Short-Termism?

Abstract

This study tests two opposing views of institutional investors — monitoring versus short-termism. We present evidence that institutional investor stability is negatively associated with one-year-ahead stock price crash risk, consistent with the monitoring theory of institutional investors but not the short-termism theory. Our findings are shown to be robust to alternative empirical specifications, estimation methods and endogeneity concerns. In addition, we find that institutional ownership by public pension funds (bank trusts, investment companies, and independent investment advisors) is significantly negatively (positively) associated with future crash risk, consistent with findings that pension funds more actively monitor management than other types of institutions.

Keywords: institutional investor stability, crash risk, monitoring, short-termism

JEL Classification: G20, G32, G34