The Effects of Institutional Investor Objectives on Firm Valuation and Governance

70 Pages Posted: 26 Jun 2015 Last revised: 22 Nov 2016

See all articles by Paul Borochin

Paul Borochin

University of Miami - Department of Finance

Jie Yang

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: November 21, 2016

Abstract

We find that ownership by different types of institutional investors has varying implications for future firm misvaluation and governance characteristics. Dedicated institutional investors decrease future firm misvaluation, in both direction and magnitude, relative to fundamentals. In contrast, transient institutional investors have the opposite effect. Using SEC Regulation FD as an exogenous shock to information dissemination, we find evidence consistent with dedicated institutions having an information advantage. Similarly, dedicated investors are associated with better future governance characteristics, while transient investors are not. The valuation effects are primarily driven by institutional portfolio concentration while the governance effects are driven by portfolio turnover. These results imply a more nuanced relationship between institutional ownership and firm value and corporate governance.

Keywords: Institutional investors, investor type, dedicated, transient, misvaluation, corporate governance, blockholding, portfolio turnover, information dissemination, SEC Regulation FD

JEL Classification: G30, G32, G14, G23

Suggested Citation

Borochin, Paul and Yang, Jie, The Effects of Institutional Investor Objectives on Firm Valuation and Governance (November 21, 2016). Journal of Financial Economics (JFE), Forthcoming; Georgetown McDonough School of Business Research Paper No. 2622610. Available at SSRN: https://ssrn.com/abstract=2622610 or http://dx.doi.org/10.2139/ssrn.2622610

Paul Borochin (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Jie Yang

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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