Institutional investors, monitoring and corporate finance policies

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).

Political connections, institutional monitoring and the cost of debt: evidence from Malaysian firms

“…Further, in reference to the cost of debt, there is a limited understanding on the monitoring role of institutional investors in PCFs, particularly institutional domiciles. While prior studies have found that firm outcomes do differ according to institutional investors' investment horizon (Attig et al, 2013;Cleary and Wang, 2017;Heng and Zhang, 2013) and business relationship (Abdul Wahab et al, 2008;Brickley et al, 1988), not much is known on the effect of institutional domiciles.…”

Large institutional investors and the pressure to manage earnings surrounding seasoned equity offerings

“…On the other hand, Agrawal and Mandelker (1990), Bathala et al (1994), Seetharaman et al (2001), An and Zhang (2013) and Cleary and Wang (2017) support the claim that institutional investors play an important role in monitoring the activities of management and in reducing agency problems engendered by separating corporate ownership and control.…”

“…Based on the above-mentioned developments, one might well notice that the large institutional investors' focus on short-term objectives leads to the strengthening of myopic behavior and managerial opportunism (Cleary and Wang, 2017). Indeed, managers are incited to meet such shareholders' expectations even if this requires resorting to pursue certain earnings management practices.…”

“…They generally use the financial statements to plan and evaluate their investments, which make them capable of actively monitoring the financial-information quality, and also to discipline managers who report poor-quality accounting figures (Velury and Jenkis, 2006). Cleary and Wang (2017) argue that an increase in the presence of long-term investors contributes to more effective monitoring and information quality. Noteworthy, the active-monitoring hypothesis proponents believe that institutional investors have a greater incentive to actively monitor their investments due to the great amount of wealth they have invested in the firms considered as long-term pursuing investors (Brickley et al, 1988;Chen et al, 2007;Ramalingegowda and Yu, 2012;Hashim and Devi, 2012).…”

“…They can actively monitor management to influence financial policies effectively, but institutions with different characteristics have different incentive levels to expend costly efforts to monitor. 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 (Cleary and Wang, 2017).…”