Institutional Investment Horizons, Corporate Governance, and Credit Ratings: International Evidence

69 Pages Posted: 8 Jul 2020 Last revised: 9 Jan 2021

See all articles by Hamdi Driss

Hamdi Driss

Saint Mary's University

Wolfgang Drobetz

University of Hamburg

Sadok El Ghoul

University of Alberta - Campus Saint-Jean

Omrane Guedhami

University of South Carolina - Moore School of Business

Date Written: June 15, 2020

Abstract

Using a comprehensive set of firms from 57 countries over the 2000–2016 period, we examine the relation between institutional investor horizons and firm-level credit ratings. Controlling for firm- and country-specific factors, as well as for firm fixed effects, we find that larger long-term (short-term) institutional ownership is associated with higher (lower) credit ratings. This finding is robust to sample composition, alternative estimation methods, and endogeneity concerns. Long-term institutional ownership affects ratings more during times of higher expropriation risk, for firms with weaker internal governance, and for those in countries with lower-quality institutional environments. Additional analysis shows that long-term investors can facilitate access to debt markets for firms facing severe agency problems. These findings suggest that, unlike their short-term counterparts, long-term investors can improve a firm’s credit risk profile through effective monitoring.

Keywords: Institutional ownership; investment horizons; corporate governance; credit ratings

JEL Classification: G24, G32, G34

Suggested Citation

Driss, Hamdi and Drobetz, Wolfgang and El Ghoul, Sadok and Guedhami, Omrane, Institutional Investment Horizons, Corporate Governance, and Credit Ratings: International Evidence (June 15, 2020). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3627498 or http://dx.doi.org/10.2139/ssrn.3627498

Hamdi Driss

Saint Mary's University ( email )

923 Robie St.
Saint Mary's University - FISMS
Halifax, Nova Scotia B3H 3C3
Canada

HOME PAGE: http://Hamdi.Driss@smu.ca

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

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