5th Economics & Finance Conference, Miami

INSTITUTIONAL INVESTORS, MONITORING AND CORPORATE FINANCE POLICIES

SEAN CLEARY

Abstract:

We argue that an increase in the aggregate level of institutional ownership of public companies does not necessarily result in improved monitoring and information disclosure on average. In contrast, an increase in the presence of long-term investors does contribute 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, our 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 of these results hold after controlling for potential endogeneity issues.

Keywords: Institutional investment horizons, agency costs, informational asymmetry problems, investment outlays, dividends, leverage, cash holdings