Motivated Monitoring by Institutional Investors and Firm Investment Efficiency

European Financial Management, 2019 Forthcoming

50 Pages Posted: 26 Mar 2018 Last revised: 5 Jun 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: February 24, 2017

Abstract

We find that motivated monitoring by institutional investors mitigates firm investment inefficiency, estimated by Richardson's (2006) approach. This relation is robust when using the annual reconstitution of the Russell indexes as exogenous shocks to institutional ownership during the period 1995--2015 and after classifying institutional ownership by institution type. We also show that closer monitoring mitigates the problem of both over-investing free cash flows and under-investment due to managers' career concerns. Finally, we document that the effectiveness of the monitoring by institutional investors appears to increase monotonically with respect to the firm's relative importance in their portfolios.

Keywords: Institutional Investors; Investment Efficiency; Monitoring Attention; Agency Problem; Index Switch

JEL Classification: G23; G30; G31; M4

Suggested Citation

Ward, Charles W.R. and Yin, Chao and Zeng, Yeqin, Motivated Monitoring by Institutional Investors and Firm Investment Efficiency (February 24, 2017). European Financial Management, 2019 Forthcoming. Available at SSRN: https://ssrn.com/abstract=3149371 or http://dx.doi.org/10.2139/ssrn.3149371

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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