Institutional Investor Horizon and Firm Valuation Around the World

Journal of International Business Studies, forthcoming

63 Pages Posted: 28 May 2019 Last revised: 8 Jun 2020

See all articles by Simon Döring

Simon Döring

University of Hamburg

Wolfgang Drobetz

University of Hamburg

Sadok El Ghoul

University of Alberta - Campus Saint-Jean

Omrane Guedhami

University of South Carolina - Moore School of Business

Henning Schröder

University of Hamburg - Hamburg Business School; Hamburg Financial Research Center

Date Written: April 30, 2019

Abstract

Using a comprehensive dataset of firms from 34 countries, we study the effect of institutional investors’ investment horizons on firm valuation around the world. We find a positive relation between institutional ownership and firm value that is driven by short-horizon institutional investors. Accounting for the interaction between investors’ investment horizon and nationality, we show that foreign short-horizon institutions, which are more likely to discipline managers through the threat of exit rather than engaging in monitoring made costly by the liability of foreignness, are the investor group with the strongest effect on firm value. Reinforcing the threat of exit channel, we find that the value-enhancing effect of short-horizon investors is stronger in the presence of multiple short-horizon investors, who are more likely to engage in competitive trading. The positive valuation effect of short-horizon investors is stronger when stock liquidity is high, which makes the exit threat more credible, and in firms prone to free cash flows agency problems. Overall, our results are consistent with short-horizon institutional investors, especially foreign institutional owners, affecting firm value by disciplining managers through credible threats of exit.

Keywords: Institutional investors, investment horizon, foreign investors, international corporate governance, firm value

Suggested Citation

Döring, Simon and Drobetz, Wolfgang and El Ghoul, Sadok and Guedhami, Omrane and Schröder, Henning, Institutional Investor Horizon and Firm Valuation Around the World (April 30, 2019). Journal of International Business Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=3380715 or http://dx.doi.org/10.2139/ssrn.3380715

Simon Döring

University of Hamburg ( email )

Moorweidenstraße 18
Hamburg, 20148
Germany

Wolfgang Drobetz

University of Hamburg ( email )

Moorweidenstrasse 18
Hamburg, 20148
Germany

Sadok El Ghoul (Contact Author)

University of Alberta - Campus Saint-Jean ( email )

Edmonton, Alberta T6G 2R3
Canada
780-465-8725 (Phone)
780-465-8760 (Fax)

Omrane Guedhami

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

Henning Schröder

University of Hamburg - Hamburg Business School ( email )

Moorweidenstr. 18
Hamburg, 20148
Germany

Hamburg Financial Research Center ( email )

c/o University of Hamburg
Moorweidenstr. 18
Hamburg, 20148
Germany

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