When Fundamental Investors Relieve Market Pressures on Management: Evidence from France

Abstract

In this paper, using an original database of investors operating on the French stock market, we investigate the real effect of ownership structure. We call fundamental investor an investor who, on average, holds on average his shares for at least two years, is in the top quartile of a firm ownership, and has an active allocation strategy. We show that firms with greater fundamental investor ownership experience lower market reactions to earnings surprises and lower mispricing. Moreover, we show that a long/short portfolio on fundamental ownership generates significant positive shareholder value over time. Our findings are consistent with greater fundamental ownership generating shareholder value by allowing management to focus on the long-term drivers of firm intrinsic value rather than on market sentiment. We finally look at the determinants of the presence of fundamental investors.

Keywords: Fundamental investors, dedicated investors, long-term investors, mispricing, intrinsic value

JEL Classification: G23, G31, G32, G35