Motivated monitoring: The importance of the institutional investment horizon

Abstract

This paper investigates whether institutional investors that hold shares in a firm for a relatively long time affect firm performance. We measure performance by Return on Assets (ROA), Tobin's Q and Earnings Yield and find that long-term ownership has a positive, long-lasting effect on firm performance. We minimize concerns about endogeneity by incorporating random shocks from changes in the constituents of the Russell Index. We further find that the incentive for monitoring firm performance associated with long-term holding is more important than some conventional classifications of investors in improving firm value. Even for investors usually classified as short term, firm performance will be enhanced for those firms in which they hold stocks over longer periods. We also find that a positive link between institutional owners and firm performance does not exist when investors only hold the stock for a short term. Overall, our paper supports the argument that institutional investors' monitoring enhances firm value.