Institutional investors, monitoring and corporate finance policies

W. Sean Cleary and Jun Wang

International Journal of Managerial Finance, 2017, vol. 13, issue 2, 186-212

Abstract: Purpose - The purpose of this paper is to examine the influence of institutional investors’ investment horizons (IIIH) on a wide variety of key corporate policies. Design/methodology/approach - The authors perform regression analysis to a panel data set of quarterly financial statement data for US firms over the 1981-2014 using several measures of IIIH. Findings - The authors argue that an increase in the presence of long-term investors contributes to more effective monitoring and information quality. This results in a reduction in agency costs and informational asymmetry problems for firms that are more heavily influenced by long-term investors, which in turn influences the corporate policies they pursue. Consistent with these arguments, the evidence suggests that firms with a greater long-term institutional investor base maintain lower investment outlays, higher dividend payments, lower levels of cash and higher levels of leverage. All results hold after controlling for potential endogeneity issues. Originality/value - The authors show that a greater presence of long-term institutional investors leads to higher dividends, lower investment outlays, lower cash holdings and higher leverage. The comprehensive nature of the predictions with respect to overall corporate finance policies and the supporting evidence provided represents an important contribution, as previous studies have tended to focus on one specific area of corporate behavior (i.e. such as cash holdings).

Keywords: Agency costs; Dividends; Informational asymmetry problems; Institutional investment horizons; Investment outlays; Leverage and cash holdings (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:ijmf-07-2016-0138

DOI: 10.1108/IJMF-07-2016-0138

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