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

Posted: 11 Feb 2013

See all articles by Jeffrey L. Callen

Jeffrey L. Callen

University of Toronto - Rotman School of Management

Xiaohua Fang

Florida Atlantic University

Date Written: April 10, 2011

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

Suggested Citation

Callen, Jeffrey L. and Fang, Xiaohua, Institutional Investor Stability and Crash Risk: Monitoring versus Short-Termism? (April 10, 2011). Journal of Banking and Finance, Forthcoming, Rotman School of Management Working Paper No. 2214625, Available at SSRN: https://ssrn.com/abstract=2214625

Jeffrey L. Callen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-5641 (Phone)
416-971-3048 (Fax)

Xiaohua Fang (Contact Author)

Florida Atlantic University ( email )

United States

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