Institutional Investor Horizon and Firm Valuation Around the World
57 Pages Posted: 28 May 2019 Last revised: 29 Nov 2019
Date Written: April 30, 2019
We study the effect of institutional investors’ investment horizon on firm valuation around the world. Using a comprehensive data set of firms from 34 countries, we find that the positive relation between institutional ownership and firm value is driven by short-horizon institutions. This valuation effect of short-horizon institutions is stronger in firms with a low concentration of short-term institutional investors, in countries with high market liquidity, in firms with high stock liquidity, and in cash-rich firms prone to free cash flow agency problems. Moreover, we find that foreign short-term institu-tions, which are more likely to discipline managers through the threat of exit rather than engaging in monitoring made costly by the liability of foreignness, have a stronger effect on firm value than domestic short-term institutions. Collectively, our results are consistent with short-term institutional investors affecting firm value by disciplining managers through a credible threat of exit.
Keywords: Institutional investors, investment horizon, foreign investors, international corporate governance, firm value
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