Long-term Institutional Investors Research Articles

Do long-term institutional investors constrain managerial disclosure opportunism? Evidence from insurance ownership

Do long-term institutional investors constrain managerial disclosure opportunism? Evidence from insurance ownership

The power of oversight: institutional investors as moderators of the earnings quality-information asymmetry nexus in Europe

Purpose While there is some evidence of a relationship between earnings quality and information asymmetry, there is limited evidence on the moderating role of institutional investors in this relationship. To fill this gap, this study aims to examine how institutional ownership affects the relationship between earnings quality and information asymmetry, with a focus on the impact of different investment horizons. Design/methodology/approach This study uses a sample of listed European firms from 2000 to 2022. Earnings quality is measured using the McNichols (2002) modification of the Dechow and Dichev (2002) model. The analysis examines the moderating effect of institutional ownership on the relationship between earnings quality and information asymmetry. Findings This study finds that the relationship between earnings quality and information asymmetry is more pronounced in firms with a higher percentage of institutional ownership. This study finds that the monitoring role of long-term institutional investors is more effective than that of short-term institutional investors. This study also finds that the influence of institutional investors is more significant in firms with incentives to engage in earnings management. Practical implications The findings provide evidence suggesting that institutional investors are an important class of investors in terms of exercising an effective monitoring role to mitigate information asymmetry and demand higher earnings quality from their investee firms. These findings are informative for many financial reporting participants, including investors, analysts, regulators and managers. Originality/value This study extends the existing research examining the relationship between earnings quality and information asymmetry (e.g. Affleck-Graves et al., 2002; Ascioglu et al., 2012; Bhattacharya et al., 2013; Jayaraman, 2008; Liu and Elayan, 2015) by examining the moderating effect of institutional ownership on this relationship. It further contributes to the literature by distinguishing between long- and short-term institutional investors and their respective monitoring roles. In addition, this study broadens the geographical scope of the research by using cross-country data from European firms, providing evidence that country-specific factors do not uniformly affect the relationship between earnings quality and information asymmetry.

The relationship between heterogeneous institutional investors and operational performance: Evidence from mergers and acquisitions

This study investigates the relationship between institutional investors and the inventory performance of companies engaged in mergers and acquisitions (M&As). Specifically, we examine the role of institutional ownership in the selection of target firms and their post-M&A performance. Additionally, we analyze how the effects of institutional investors vary based on their investment horizons and strategies. Our regression analysis reveals that acquiring firms with a large proportion of short-term institutional investors are more inclined to target firms with low inventory levels. This tendency stems from the preference of short-term institutional investors for better current operational performance, which drives decision-makers to merge with leaner firms. In contrast, acquiring firms with long-term institutional investors are more focused on performance improvement, even if the target firms have large inventories at the time of the M&A.

Future- or Past-Focused CEOs: Who Meets the Interests of Long-Term Institutional Investors?

Future- or Past-Focused CEOs: Who Meets the Interests of Long-Term Institutional Investors?

Tax aggressiveness under concentrated ownership: The importance of long-term institutional investors

Using a sample of 1,707 firm-year observations for the period 2010–2019 based on the Warsaw Stock Exchange, we reveal the positive relation between corporate tax aggressiveness and long-term institutional ownership. Controlling for a “normal level” of tax avoidance within the industry and firm size we provide evidence that tax aggressiveness increases with the increase of shareholdings of independent long-term institutional investors, domestic long-term institutional investors, and long-term institutional investors holding relatively large stakes. This relation holds for firms prone to severe agency problems, such as family firms. Our results thus suggest that ownership structure affects corporate tax avoidance, in line with the agency perspective of corporate tax aggressiveness.

Heterogeneity of foreign investors and Knightian uncertainty: Evidence from the Chinese capital market

Foreign investors are playing an increasingly important role in China's capital market, and the impact of northbound funds on Knightian uncertainty has attracted much academic attention. Based on the characteristics of northbound funds' trading behavior and investors' shareholding stability, this study divides them into long-term investors and short-term opportunists. It also examines the effect of long- and short-term foreign investors on individual stock Knightian uncertainty. The study finds that higher stability of northbound fund shareholding lowers the Knightian uncertainty of individual stocks, and long-term foreign institutional investors contribute to market stability. Furthermore, long-term investments in northbound funds can reduce Knightian uncertainty by improving the information environment, influencing the trading behavior of institutional investors, boosting investor confidence, and helping investors form consistent expectations. In conclusion, short-term foreign investors aggravate market volatility, whereas long-term foreign institutional investors help stabilize the market.

A Conceptual Study on Implications of Green Finance in India

Abstract: The financial industry can help reduce the risk of climate change and lessen the effects of unfavourable climate occurrences, which is a significant contribution to the battle against climate change. Maintaining financial stability and spreading climate-related risks can be aided by long-term institutional investors. Other financial tools, such as green stock indexes, green bonds, and voluntary de-carbonization programmes, can assist reallocate investment to "green" industries. Hedging products, such as catastrophe bonds and indexed insurance, help insure against increasing natural disaster risk. For the foreseeable future, climate change is expected to remain the central political and economic issue of this century. Globally, governments, corporations, investors, and private citizens are starting to act on climate change, particularly with regard to decarbonisation strategies. It would take exceptional amounts of new capital investment—green financing, in particular—to support the kinds of initiatives that reduce greenhouse gas emissions and help businesses adjust to the effects of climate change in order to transition to a low-carbon or green economy. For this reason, it's critical to comprehend what green finance is and why it matters. In order to handle the complex risks that climate change poses, central banks and other regulators are modifying their frameworks and procedures from an oversight standpoint. Among the strategies for enhancing climate risk disclosure and categorization requirements are those that will assist investors and financial institutions in evaluating their exposure to climate risk, as well as regulators in assessing systemic hazards. Supporting the development of climate-related stress tests and broader promotion of green finance, the IMF is collaborating with standard-setting organisations such as the Network of Central Banks and Supervisors for Greening the Financial System. The researcher concludes that it is important to pursue this investigation in light of the aforementioned facts

The internationalization of capital market and corporate innovation capabilities: A quasi-natural experiment on the inclusion of China's A-shares in the MSCI index

The capital market serves to link capital with the real economy. This study examines the long-term effects of capital market internationalization from the perspective of real economy corporate innovation capabilities. To do so, a quasi-natural experiment is conducted in which China's A-shares are included in the MSCI index to construct a time-varying PSM-DID model and study the impact of capital market internationalization on corporate innovation inputs and outputs. The results show that bringing China's A-shares in the MSCI index significantly improves corporate innovation capability through signaling and supervisory effects. Specifically, the internationalization of the capital market reduces corporate financing costs, increases corporate risk-taking, improves long-term institutional investors' shareholding, and alleviates managerial myopia. Furthermore, these effects were found to be more significant for both high-management shareholding enterprises and low-industry competition enterprises. The research conclusions support the proposition to further unleash corporate innovation, and as such, they have important implications for promoting the internationalization of the capital market.

ESG Disclosure, Institutional Investor Preferences and Firm Value

Based on stakeholder theory and signal and reputation theory etc,this paper evaluates the quality level of ESG disclosure of listed companies using Wind ESG score, and introduces the variable of institutional investors' shareholding ratio, selects 2780 listed companies from 2018-2022 as samples, analyses whether institutional investors have ESG investment preferences, and investigates the value of the quality level of ESG disclosure on the value of listed companies' impact mechanism, and further heterogeneity analysis on this basis. The empirical results show that, firstly, improving the quality of ESG information disclosure by listed enterprises in China is conducive to significantly increasing their enterprise value; secondly, institutional investors have ESG investment preferences and attach more importance to the ability of listed enterprises to develop in the long term; thirdly, the proportion of institutional investor shareholding plays a partly intermediary role in the process of the impact of ESG information disclosure quality on the value of the enterprise, i.e., listed enterprises with high-quality ESG disclosure level can attract the attention of institutional investors to the enterprise value. Third, the proportion of institutional investors' shareholding plays a partial mediating role in the process of ESG disclosure quality level affecting enterprise value, i.e., listed firms with high-quality ESG information disclosure can attract institutional investors to increase their shareholding, thus enhancing their enterprise value. Fourthly, the extent to which the quality level of ESG disclosure affects the value of listed firms varies according to the attributes of the firms: there is a significant difference between large-scale and small-scale, highly marketised and low-marketised listed firms; and there is no difference shown between state-owned and non-state-owned, light-pollution and heavy-pollution listed firms, and all of the above conclusions are robust. Accordingly, this paper puts forward recommendations to strengthen the construction of the domestic ESG disclosure and governance system, encourage listed enterprises to practice the concept of ESG responsibility, and develop medium- and long-term institutional investors, aiming to promote listed enterprises to achieve sustainable development, and thus promote the construction of the domestic ESG disclosure system.

Ownership structure and climate-related corporate reporting

ABSTRACT We investigate the impacts of various types of corporate ownership structures (i.e. institutional, government, and managerial ownership) on climate-related corporate reporting as reflected in the levels of voluntary carbon disclosure. Using a sample of S&P 500 companies from 2015 to 2020 across both environmentally sensitive and non-environmentally sensitive industries, we find that diverse ownership structures have distinct impacts and preferences in corporate carbon disclosure. Specifically, government ownership is likely to promote transparency of carbon information. In contrast, the ownership held by institutional investors (total, short-term, and long-term), managers (i.e. CEOs, directors), and block-holders are negatively associated with the proactive greenhouse gas disclosure. We also find evidence that climate governance quality plays a positive moderating role in the relationship between two ownership types (i.e. long-term institutional investors and block-holder) and a firm’s climate-related corporate reporting. Our findings offer some practical insights for managers, regulators, and policymakers to focus on the configuration of corporate ownership in the context of improving green practices.

Country-level heterogeneity in foreign institutional investment horizons and firm value

Extant literature on the influence of short- or long-term foreign institutional investors on corporate valuation and strategic decisions implicitly assumes their monitoring role to be homogeneous across all portfolio countries. This paper examines the valuation impact of country-level heterogeneity in foreign institutional investment horizons using a large sample from 32 countries. Our findings show that foreign institutional investors with longer country-level investment horizons enhance firm value, especially in countries with less effective investor protection and firms with higher information asymmetry and susceptibility to agency problems. The results also indicate that the country-specific informational scales attained through longer horizons within a portfolio country enable foreign institutional investors to bridge the information gap between themselves and local institutions. Overall, this study underscores the importance of recognizing the differential monitoring role played by foreign institutional investors across different countries within their portfolios.

Institutional Investors, CSR Report Readability and the Moderating Role of ESG Performance

This study examines the impact of institutional investors on the readability of corporate social responsibility (CSR) reports in the Chinese polluting industry. All available CSR reports in the listed polluting industries in China from 2010 to 2019 are analyzed to develop a readability score for each company. To differentiate the heterogenous motivation of institutional investors, we classify institutional investors into long-term and short-term investors based on their holding purpose and trading frequency. The results show that long-term institutional investors with long-term horizons have strong motivation to engage in the CSR reports disclosure. However, short-term institutional investors pursue near-term interests and they may have weak incentives to participate in the corporate governance and improve CSR report readability. Furthermore, we also find that the positive relationship between long-term institutional investors and CSR readability is stronger in polluting firms with higher environmental, social, and governance (ESG) performance. The significant role of institutional investors in promoting CSR reporting highlights the importance for polluting firms to acknowledge the needs of large and influential investors.

Monitor or manipulator? The effect of institutional ownership on market manipulation

Employing a sample of suspected stock manipulation cases based on intraday data, we find that higher institutional ownership is associated with a lower frequency of market manipulation, supporting the monitoring effect of institutional investors. This effect persists even when we instrument index reconstitutions as an exogenous determinant of institutional ownership. Further, our findings indicate that this effect is driven by reduced information asymmetries resulting from the oversight of institutional investors. Moreover, the empirical evidence suggests that the monitoring effects are more pronounced for long-term institutional investors and concentrated institutional investors.

Foreign institutional investment horizon and investment efficiency in emerging markets

This paper examines whether foreign institutional investors’ investment horizon affects investment efficiency across 17 emerging markets. We find that long-term foreign institutional investors are associated with an enhancement in investment efficiency, particularly in firms susceptible to overinvestment and agency problems.

Institutional investor horizon and stock price synchronicity: Do product market competition and analyst coverage matter?

This paper provides new insights into the relation between institutional investment horizon and stock price synchronicity and investigates whether this relationship depends on the intensity of product market competition and analyst coverage. Based on a sample of French listed companies, we find that long-term (short-term) institutional investors are associated with lower (higher) stock price synchronicity. The results also show that the negative effect of long-term institutional investors is more accentuated for firms in less competitive markets and with high analyst coverage. An additional analysis shows that the synchronicity reduction effect does not vary during the financial crisis. Overall, these findings suggest that unlike their short-term counterparts, long term investors reduce asymmetric information and help disseminate firm-specific information into stock prices.

ESG Performance, Institutional Investors and Corporate Risk-taking: Empirical Evidence from China

Corporate ESG practices have attracted much attention as an important starting point to achieve China’s dual carbon goal, and how the ESG performance by Chinese listed firms affects their risk-taking is a question worth exploring. Basing our analysis on the data of China’s A-share listed companies from 2009 to 2021, we find that good ESG performance by listed companies significantly reduces their risk-taking, with institutional investors' shareholding as the mediating mechanism. Further research indicates that long-term institutional investors’ shareholding strengthens the risk inhibitory effect of good ESG performance, while short-term institutional investors’ shareholding weakens this effect. Good ESG performance only significantly reduces the risk-taking of firms at high risk levels and significantly inhibits excessive rather than insufficient risk-taking. When economic policy is unstable, ESG has a stronger inhibitory effect on risk-taking. This paper illustrates the importance of ESG engagement for long-term stable corporate development, which is of significant practical implications for regulatory policy making and listed companies’ strategic decisions in developing countries.

Institutional investment horizon and corporate technological diversification

PurposeAlthough investigating the factors influencing technological diversification is essential to understanding research and development (R&D) strategies, studies from the perspective of corporate ownership structure are limited. This study examines the effect of heterogeneous institutional investors on technological diversification strategies.Design/methodology/approachThe sample consists of 33,124 firm-year observations of USA manufacturing firms from 1981 to 2008. Data were extracted from US Patent Data, Thomson Reuters' 13f and the Compustat database. A panel regression analysis was used to test the hypothesis. Moreover, the two-stage least squares (2SLS) approach using instrumental variables (IVs) and generalized method of moments (GMM) were also applied to address the endogeneity issue.FindingsThe empirical findings indicate that short-term (long-term) institutional investors positively (negatively) affect technological diversification. That is, short-term institutional ownership hampers R&D diversification, suggesting that firms are forced to make myopic investments to meet short-term goals instead of diversifying corporate R&D projects. Meanwhile, long-term institutional ownership enhances technological diversification to achieve long-term value.Research limitations/implicationsBy differentiating between institutional investment horizons, the authors produce empirical evidence that institutional investors with short-term and long-term perspectives have different views on technological diversification. This study is based on data between 1981 and 2008, due primarily to patent data availability and data on institutional investors. However, this limitation does not diminish the importance of the empirical findings, as the study's focus is on discovering antecedent evidence of corporate technological diversification rather than addressing recent trends in firm decisions.Practical implicationsIn finding that long-term institutional investors are likely to encourage technological diversification at firms, the paper carries an important practical implication that can help inform decision-making by policymakers and investors.Originality/valueThis research contributes to a more comprehensive understanding of institutional investors' role in technological diversification strategies. Additionally, by challenging the assumption that all institutional owners share the same perspective, this study is the first to confirm the existence of heterogeneous effects of institutional investors on technological diversification strategies.

Foreign institutional investment horizon and earnings management: Evidence from around the world

This paper investigates whether and how the investment horizon relates to foreign institutional monitoring in constraining the self-interested managerial use of earnings management for a sample of firms from 29 countries. We find that equity ownership by long-term foreign institutional investors, irrespective of the strength of institutional controls in their home countries, is associated with lesser earnings management. Accounting for the significance of information asymmetry in earnings management and the ability of long-term foreign institutional investors to mitigate the information disadvantage associated with cross-border equity investments, we find that the constraining effect is stronger in firms with weaker information environments. Finally, using multiple proxies for the country- and firm-level agency, we find that monitoring by long-term, rather than short-term, foreign institutional investors is significantly effective in limiting earnings management in environments of severe agency conflicts. Overall, our findings draw attention to the heterogeneity in the monitoring role played by foreign institutional investors in influencing the financial reporting quality.

Institutional ownership heterogeneity and ESG performance: Evidence from China

This paper examines whether institutional investors affect the environment, social, and governance (ESG) performance of Chinese-listed companies. We show that institutional ownership is significantly and positively related to corporate ESG performance. We further classify institutional investors into four different types, based on investment horizons and business relationships, and find that the positive relationship between institutional ownership and ESG performance is mainly driven by long-term pressure-insensitive institutional investors and short-term pressure-sensitive institutional investors. Further evidence suggests that such an association is especially evident among firms in regions with high levels of economic development and marketization.

Investor heterogeneity and negative skewness in stock returns: Evidence from institutional investors

We examine the relation between the probability of future stock price crash and investors’ investment horizons. Using negative skewness as a proxy for firm-specific crash risk, we document a positive association between institutional ownership and stock price crash risk. The relation is, however, driven by short-term institutional investors, while the presence of long-term institutional investors has a negative effect on stock price crash risk. In addition, we find that the presence of short-term institutional investors induces corporate risk-taking behavior. Our results are robust to alternative model specifications, endogeneity concerns, and different measures of crash risk and proxies of investors’ horizons.