Institutional Investment Horizons and the Cost of Equity Capital

67 Pages Posted: 17 Feb 2014

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: February 16, 2014

Abstract

We examine the influence of institutional investors’ investment horizons on a firm’s cost of equity. We argue that the cost of equity will decrease in the presence of institutional investors with longer-term investment horizons due to improved monitoring and information quality. Our empirical results demonstrate that the cost of equity declines in the presence of institutional investors with long-term investment horizons, all else remaining equal. Our results indicate also that the monitoring role of long-term institutional investors is more pronounced for firms with higher agency problems (poorly governed firms). Overall, our evidence suggests that when considering the influence of institutional investors, it is critical to account for institutional heterogeneity, which gives rise to new directions for future research.

Keywords: Cost of equity, Institutional investment horizons, Corporate governance

JEL Classification: G32

Suggested Citation

Attig, Najah and Cleary, Sean and El Ghoul, Sadok and Guedhami, Omrane, Institutional Investment Horizons and the Cost of Equity Capital (February 16, 2014). Available at SSRN: https://ssrn.com/abstract=2396938 or http://dx.doi.org/10.2139/ssrn.2396938

Najah Attig

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

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

Sean Cleary

Smith School of Business ( email )

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

Sadok El Ghoul (Contact Author)

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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