Institutional investment horizons and firm valuation around the world
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Institutional investment horizons and firm valuation around the world Simon Do¨ring1, Wolfgang Drobetz1, Sadok El Ghoul2, Omrane Guedhami3 and Henning Schro¨der1 1
Faculty of Business Administration, University of Hamburg, Moorweidenstrasse 18, 20148 Hamburg, Germany; 2 Campus Saint-Jean, University of Alberta, 8406, Rue Marie-AnneGaboury (91 Street), Edmonton, AB T6C 4G9, Canada; 3 Moore School of Business, University of South Carolina, 1014 Greene Street, Columbia, SC 29208, USA Correspondence: O Guedhami, Moore School of Business, University of South Carolina, 1014 Greene Street, Columbia, SC 29208, USA e-mail: [email protected]
Abstract Using a comprehensive dataset of firms from 34 countries, we study the effect of institutional investors’ investment horizons on firm valuation around the world. We find a positive relation between institutional ownership and firm value that is driven by short-horizon institutional investors. Accounting for the interaction between investors’ investment horizon and nationality, we show that foreign short-horizon institutions, which are more likely to discipline managers through the threat of exit rather than engaging in monitoring made costly by the liability of foreignness, are the investor group with the strongest effect on firm value. Reinforcing the threat of exit channel, we find that the value-enhancing effect of short-horizon investors is stronger in the presence of multiple short-horizon investors, who are more likely to engage in competitive trading. The positive valuation effect of short-horizon investors is stronger when stock liquidity is high, which makes the exit threat more credible, and in firms prone to free cash flow agency problems. Overall, our results are consistent with short-horizon institutional investors, especially foreign institutional owners, affecting firm value by disciplining managers through a credible threat of exit. Journal of International Business Studies (2020). https://doi.org/10.1057/s41267-020-00351-9 Keywords: institutional investors; investment horizon; foreign investors; international corporate governance; firm value
Received: 16 April 2019 Revised: 31 May 2020 Accepted: 3 June 2020
INTRODUCTION One result of financial globalization is that ownership of listed firms by institutional investors has increased steadily in recent years, creating a need to better understand their role in corporate governance. More than 50% of the equity of U.S. firms was held by institutions such as mutual funds, pension funds, insurance companies, and hedge funds by the end of 2015. As shown in Figure 1, institutional ownership outside the U.S. (as a fraction of total market capitalization in each country) was considerably lower, but nonetheless exceeded 15% in many countries in that year. At the same time, ownership has always been highly international, with roughly 70% of these institutional holdings outside the U.S. being controlled by foreign institutions (many of them of U.S. origin) since the early 2000s.1 A growing literature discusses th
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