Institutional Investment Horizon and Investment-Cash Flow Sensitivity

50 Pages Posted: 11 Nov 2013

See all articles by Najah Attig

Najah Attig

Saint Mary's University - Department of Finance & Management Science

Sean Cleary

Smith School of Business

Sadok El Ghoul

University of Alberta - Campus Saint-Jean

Omrane Guedhami

University of South Carolina - Moore School of Business

Date Written: September 2011

Abstract

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

Attig, Najah and Cleary, Sean and El Ghoul, Sadok and Guedhami, Omrane, Institutional Investment Horizon and Investment-Cash Flow Sensitivity (September 2011). Journal of Banking and Finance, Vol. 36, 2012. Available at SSRN: https://ssrn.com/abstract=2352650 or http://dx.doi.org/10.2139/ssrn.2352650

Najah Attig

Saint Mary's University - Department of Finance & Management Science ( email )

Halifax, Nova Scotia B3H 3C3
Canada
902-491-8679 (Phone)

Sean Cleary (Contact Author)

Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Sadok El Ghoul

University of Alberta - Campus Saint-Jean ( email )

Edmonton, Alberta T6G 2R3
Canada
780-465-8725 (Phone)
780-465-8760 (Fax)

Omrane Guedhami

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

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