Institutional Investors’ Horizons and Corporate Employment Decisions

75 Pages Posted: 15 May 2015 Last revised: 5 May 2020

See all articles by Mohamed Ghaly

Mohamed Ghaly

Lancaster University - Department of Accounting and Finance

Viet Anh Dang

Alliance Manchester Business School

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School

Date Written: May 2020

Abstract

Monitoring by long-term investors should reduce agency conflicts in firms’ labor investment choices. Consistent with this argument, we find that abnormal net hiring, measured as the absolute deviation from optimal net hiring predicted by economic fundamentals, decreases in the presence of institutional investors with longer investment horizons. Firms dominated by long-term shareholders reduce both over-investment (over-hiring and under-firing) and under-investment (under-hiring) in employees. The monitoring role of long-term investors is stronger for firms facing higher labor adjustment costs both in absolute terms and relative to capital adjustment costs, and those for which human capital is regarded as more important. The effect is also more pronounced for firms that have stronger incentives and/or more opportunities to deviate from expected net hiring. We address endogeneity concerns by exploiting exogenous changes to long-term institutional ownership resulting from annual reconstitutions of the Russell indexes.

Keywords: Institutional ownership, Investment horizon, Employment, Investment efficiency, Corporate governance, Monitoring

JEL Classification: G23, G32, G34, M51

Suggested Citation

Ghaly, Mohamed and Dang, Viet Anh and Stathopoulos, Konstantinos, Institutional Investors’ Horizons and Corporate Employment Decisions (May 2020). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2606272 or http://dx.doi.org/10.2139/ssrn.2606272

Mohamed Ghaly (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Bailrigg
Lancaster, LA1 4YX
United Kingdom
+44 (0)1524 594526 (Phone)

Viet Anh Dang

Alliance Manchester Business School ( email )

AMBS Crawford House
Booth Street West
Manchester, Greater Manchester M15 6PB
United Kingdom
+44(0)16127 50438 (Phone)

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School ( email )

AMBS Building
Booth Street West
Manchester, M15 6PB
United Kingdom
+44 161 275 6863 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.research.manchester.ac.uk/portal/K.Stathopoulos.html

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