Institutional Investor Monitoring Motivation and the Marginal Value of Cash

60 Pages Posted: 30 Oct 2017 Last revised: 15 Jul 2019

See all articles by Charles W.R. Ward

Charles W.R. Ward

University of Reading

Chao Yin

University of Reading - ICMA Centre

Yeqin Zeng

Durham University Business School, Finance and Economics

Date Written: October 27, 2017

Abstract

This paper examines whether the motivation of institutional investors in monitoring a firm is positively related to the relative importance of the firm’s stock in their portfolios. We find that greater motivated monitoring institutional ownership is associated with a higher marginal value of corporate cash holdings, which cannot be explained by other corporate governance measures and institution types. Further, we find that the economic effect of institutional monitoring on the marginal value of cash falls with decreasing institutions’ monitoring motivation. Based on these findings, we construct a monitoring motivation-weighted institutional ownership measure and document a positive relation between it and the marginal value of cash. Our results are robust after controlling for the endogeneity of institutional ownership, three cash regimes, firm size, and changes in US public firms over time.

Keywords: Institutional Investors; Marginal Value of Cash; Monitoring Motivation; Index Switch

JEL Classification: G23; G30; G32

Suggested Citation

Ward, Charles W.R. and Yin, Chao and Zeng, Yeqin, Institutional Investor Monitoring Motivation and the Marginal Value of Cash (October 27, 2017). Journal of Corporate Finance, Vol. 48, 2018. Available at SSRN: https://ssrn.com/abstract=3061155 or http://dx.doi.org/10.2139/ssrn.3061155

Charles W.R. Ward

University of Reading ( email )

ICMA Centre,
Henley Business School
Reading, RG6 6AB
United Kingdom
T: +44 (0)118 378 8239 (Phone)

HOME PAGE: http://www.icmacentre.ac.uk/about_us/academic_staff/professor_charles_ward,

Chao Yin

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Yeqin Zeng (Contact Author)

Durham University Business School, Finance and Economics ( email )

Office 162 Durham University Business School
Mill Hill Lane
Durham, DH1 3LB
United Kingdom

HOME PAGE: http://https://sites.google.com/site/yeqinzenghomepage/

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