The Effects of Institutional Investor Objectives on Firm Valuation and Governance

72 Pages Posted: 28 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: 2016-11

Abstract

We find that ownership by different types of institutional investor has different implications for future firm misvaluation and governance characteristics. Dedicated institutional investors decrease future firm misvaluation relative to fundamentals, as well as the magnitude of this misvaluation. 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. 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, G38

Suggested Citation

Borochin, Paul and Yang, Jie, The Effects of Institutional Investor Objectives on Firm Valuation and Governance (2016-11). FEDS Working Paper No. 2016-088. Available at SSRN: https://ssrn.com/abstract=2875203 or http://dx.doi.org/10.17016/FEDS.2016.088

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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