Institutional Investment Horizon and Investment-Cash Flow Sensitivity
50 Pages Posted: 11 Nov 2013 Last revised: 29 Oct 2020
Date Written: September 1, 2011
This paper examines the relevance of institutional investors’ investment horizon, as reflected in the response of firm investment to internal cash flows. We argue that institutional investors with longer investment horizons have greater incentives and efficiencies to engage in effective monitoring. This improved monitoring mitigates asymmetric information and agency problems, and in turn reduces the wedge between the costs of internal and external funds. As a result, the sensitivity of firms’ investment outlays to internal cash flows decreases in the presence of institutional investors with long-term investment horizons. Using a sample of 8,402 U.S. firms over the period 1981-2008, we provide empirical evidence consistent with these arguments.
Keywords: Institutional investors, Investment horizon, Corporate governance
JEL Classification: G14, G15
Suggested Citation: Suggested Citation