Institutional Investors’ Horizons and Corporate Employment Decisions
66 Pages Posted: 15 May 2015 Last revised: 6 Sep 2017
Date Written: September 2017
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 labor. The monitoring role of long-term investors is more pronounced for firms facing higher labor adjustment costs. We address endogeneity concerns by exploiting exogenous changes to long-term institutional ownership resulting from the annual reconstitution of the Russell indexes.
Keywords: Institutional ownership, Investment horizon, Long-term investors, Labor investment efficiency, Employment decisions, Corporate governance, Monitoring
JEL Classification: G23, G32, G34, M51
Suggested Citation: Suggested Citation