Institutional Investment Horizons, Corporate Governance, and Credit Ratings: International Evidence
69 Pages Posted: 8 Jul 2020 Last revised: 7 Mar 2023
Date Written: June 15, 2020
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: Suggested Citation