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Institutional investment horizon and investment–cash flow sensitivity

Najah Attig, Sean Cleary, Sadok El Ghoul and Omrane Guedhami

Journal of Banking & Finance, 2012, vol. 36, issue 4, 1164-1180

Abstract: This paper examines the relevance of institutional investors’ investment horizon, as reflected in the response of firm investment to internal cash flows. We argue that institutional investors with longer investment horizons have greater incentives and efficiencies to engage in effective monitoring. This improved monitoring mitigates asymmetric information and agency problems, and in turn reduces the wedge between the costs of internal and external funds. As a result, the sensitivity of firms’ investment outlays to internal cash flows decreases in the presence of institutional investors with long-term investment horizons. Using a sample of 8402 US firms over the period 1981–2008, we provide empirical evidence consistent with these arguments.

Keywords: Institutional investors; Investment horizon; Corporate governance (search for similar items in EconPapers)
JEL-codes: G14 G15 (search for similar items in EconPapers)
Date: 2012
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Handle: RePEc:eee:jbfina:v:36:y:2012:i:4:p:1164-1180