Institutional Investor Horizon and Firm Valuation Around the World
59 Pages Posted:
Date Written: April 30, 2019
Using a comprehensive dataset of firms from 34 countries, we study the effect of institutional investors’ investment horizons on firm valuation around the world. Long-term investors invest in firms domiciled in countries with a more investor-friendly institutional environment, while short-term investors tend to be less concerned about the quality of the financial and legal environment. 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 countries with high market liquidity, in firms with high stock liquidity, and in cash-rich firms that are prone to free cash flow agency problems. Our results are consistent with short-term investors affecting firm value by disciplining managers through a credible threat of exit. Finally, foreign short-term institutions have a stronger effect on firm value, suggesting that they are more independent and are associated with a more credible threat of exit.
Keywords: Institutional investors, investment horizon, institutional environments, corporate governance, foreign investors, firm value
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