Institutional Ownership and Investment by Private Companies

Abstract

We examine the impact of institutional shareholders on the investment activity and financing constraints of established private companies. Our sample of institutional owners is derived from company share registers and is comprehensive regarding type of institution and size of equity stake. Institutions give rise to higher levels of investment in intangible assets—but not in tangible assets—and higher levels of external finance. The effects are largest for companies with minority institutional stakes, suggesting that constraint alleviation is a primary motive for ownership in private companies without taking control. Institutions have more impact on external equity financing than debt financing.

Keywords: corporate investment, funding constraints, private companies, private equity, investing institutions

JEL Classification: G24, G23, G32