Long-term Institutional Investors Research Articles

Do government policies drive institutional preferences on green investment? Evidence from China.

Through the introduction of green finance policies, governments hope to improve the guiding role of institutional investors in green investment and provide financial support for green enterprises. Using the data in China, the difference-in-difference (DID) analysis explores whether the implementation of policies could change institutional investors’ attitude to environmental factors when making investment decisions. Considering the effect of investment horizons, we find that long-term institutional investors have shown symmetric preferences on green investment, while short-term institutions are more affected by green finance policies. Additionally, the mechanism analysis shows that green finance policies can influence the green investment of institutional investors not only by affecting stock price returns but also by increasing the innovation capabilities of green companies and thus improving corporate performance. Besides, heterogeneity and moderating effect analyses find that green finance policies can achieve better policy effects when financial institutions invest in non-state-owned enterprises, enterprises with higher quality of information disclosure and poor external supervision. The finding would extend the studies of green investment in emerging markets and present new evidence about the policy effect on institutions’ preferences for green investment.

Institutional Investors and Corporate Social Responsibility: Evidence from China

ABSTRACT In this paper, we examine the effect of institutional investors on corporate social responsibility (CSR). We use data on Chinese listed firms from 2010–2018 and find that (1) institutional investors significantly enhance CSR; (2) institutional investors are more inclined to affect CSR engagement through improving firms’ information transparency, internal control, and making more site visits; (3) this positive relationship is more profound for state-owned enterprises, politically connected firms, and firms with low financial constraint; and (4) only long-term institutional investors can drive CSR performance. We use three instrumental variables to address endogenous concerns and the results still hold. Overall, our findings indicate that institutional investors can have a social effect.

The Great De-Mortgaging: the Retreat of Life Insurances From Housing Finance in US-German Historical Perspective

Abstract Recent research in economic history has found that mortgage debt in relation to GDP has taken off in the historical long run (“great mortgaging”), as growing banking assets have been redirected into mortgage credit. This paper maps the parallel long-run investment history of private (life) insurance as the much overlooked second pillar of the financial system. Drawing on in-depth studies of the US and Germany, it finds that a “great de-mortgaging” took place in insurers’ portfolios, with mortgages falling from up to 90 percent in the 19th century to below 5 percent today in favor of fixed-income securities. A parallel shift to secondary mortgage bonds has hardly offset this decline, while direct real estate remained largely a residual investment class. Banks’ great mortgaging is thus partly an institutional substitution effect. The paper sees insurers’ asset shift itself as mainly driven by long-run changes in capital demand and competition with banks and pension funds. It extends these findings to other long-term institutional investors and other OECD countries in the historical long run.

Do long-term institutional investors contribute to financial stability? – Evidence from equity investment in Hong Kong and international markets

This study assesses whether long-term institutional investors help stabilise or destabilise stock markets, taking into account international spillovers arising from these investors’ portfolio rebalancing activities. Based on granular data of individual insurance companies and pension funds and their exposures to global markets, our results show that these investors notably change their fund flow dynamics among international markets in times of financial stress, during which the fund flows to developed economies overall are increasingly correlated with those to all other economies. Meanwhile, these long-term institutional investors, who stabilise declines in global stock markets during normal market conditions, destabilise stock markets in major developed economies during adverse market conditions. In view of such different impacts on stock markets, investors and regulators, as well as policymakers, should be mindful of any potential outcomes of the investment behaviour of these institutional investors during different market conditions.

Corporate Social Responsibility Disclosure (CSRD) and Financial Distressed Risk (FDR): Does Institutional Ownership Matter?

This study aims to investigate the effect of corporate social responsibility disclosure (CSRD) on financial distressed risk (FDR) among firms listed on the Tehran Stock Exchange (TSE). This paper also examines whether there is a negative linkage between institutional ownership as a corporate governance mechanism and corporate bankruptcy. The final research purpose is to analyze if there is a moderating effect of institutional owners on the relationship between CSRD and FDR too. The study sample consists of 200 firms listed on the TSE between 2013 and 2018, and the statistical model is logistic regression. When FDR is assessed under both Article 141 of Iran’s business law and the Altman Z-score model, our results on the main research hypotheses are quite similar. Considering the social and cultural conditions and economic situation of the Iranian market, the results show that firms with a high level of CSR disclosure are not able to make themselves more creditworthy and do not have better access to financing, resulting in more financial insolvency. Our findings confirm institutional shareholders play a vital role in facilitating a firm’s emergence from bankruptcy. The results also demonstrate financial distress risk is less seen among companies with more institutional owners that disclose more CSR information. In other words, since the goals related to CSR are long-term and Iranian institutional investors have a long-term horizon towards the company, the presence of more institutional owners within a firm push managers to provide additional voluntary CSR disclosure so firms can maintain the trust of their shareholders at the highest possible level and prevent financial distress. Our additional analysis indicates there is a positive association between financial leverage and firm failure, whereas the current ratio and ROA are negatively connected with corporate bankruptcy. Finally, when FDR is assessed on the Altman Z-score model, our evidence supports a negative relation between purchase and sale-related party transactions and bankruptcy risk, which is consistent with the efficient transaction hypothesis.

Disloyal managers and proxy voting

We examine how proxy voting responds to increased agency cost with an intention-to-treat analysis. Using staggered adoption of Corporate Opportunities Waiver laws that erode the fiduciary duty when managers (including directors) appropriate business opportunities from focal firms, we find that shareholders are less likely to support contentious incumbent director elections, especially in more established firms and firms with more outside opportunities. Moreover, we show that proxy voting by long-term institutional investors contributes to this effect. Overall, our results suggest that shareholders respond to increased agency cost with increased monitoring.

Multi-dimensional corporate social responsibilities and stock price crash risk: Evidence from China

Worldwide, there has been an ongoing debate about whether corporate social responsibility (CSR) can lead to better financial market performance, or whether corporations can do well by doing good. Working with a sample of all listed companies in China from 2010 to 2017, this study examines the impacts of three dimensions of CSR on stock price crash risk. We find that CSR, especially firms' responsibility to the environment and stakeholders, significantly reduces stock price crash risk, while social contributions such as charitable donations have no significant effect on stock crash risk. Attracting long-term institutional investors is the primary mechanism through which CSR can curb crash risk. Mitigating earnings management is also a channel through which overall CSR and stakeholder responsibility contribute to a lower stock crash risk. Finally, we find that stakeholder responsibility and environmental responsibility can help improve stock market performance.

Shareholder coordination, investment horizon and hedge fund activism

ABSTRACT I examine the role of institutional investors in hedge fund activists’ target selection. I argue that the coordination power and the investment horizon of institutional investors are important factors in explaining target selection. I find that hedge fund activism is higher in firms that institutional investors with long-term horizons invest as well as firms where coordination ability among existing shareholders is less pre-intervention. However, coordination ability increases after the intervention. Furthermore, hedge fund demands and success rates differ with the coordination ability and investment horizon of investors. Firms with investors that have long-term investment horizons and increased coordination ability are more likely to receive demands on board representation, value maximization and corporate governance improvements. Firm performance improvements are the most visible where institutional investors have a long horizon and where coordination among existing institutional investors increases. Overall, the results suggest that coordination ability and investment horizon of existing institutional shareholders are important factors in explaining target selection and strategies explored by hedge fund activists as well as their effects on firm value. The findings support the notion of coordination and collaborative monitoring role of long-term institutional investors with and hedge fund activists.

국내 및 외국인 기관투자자와 한국기업의 배당정책

We examine whether domestic and foreign institutional ownership for Korean firms have any association with the dividend policy. We use dividend payout ratio and dividend yield as the proxy for dividend policy, and various types of institutional ownership by their national origin and investment horizon. We use the method of Yan and Zhang(2009) to calculate investment horizon. We found the following empirical results. First, we found that total institutional ownership has no significant relation with dividend payout ratio and dividend yield. The results for domestic or foreign institutional ownership are not significant, either. Second, when we divide institutional ownership by investment horizon, we found a positive and significant relation between long-term institutional ownership and dividend payout ratio. By contrast, short-term institutional ownership has no significant relation with dividend payout ratio and yield. Third, when we consider both investment horizon and national origin, long-term domestic institutional ownership shows a significantly positive relation with dividend payout ratio. However, short-term foregin institutional ownership has a significantly negative relation with dividend payout ratio. Accordingly we interpret the results as an evidence that long-term domestic institutions play a proper monitoring role, thereby reducing agency costs and increasing dividend payouts. In contrast, short-term foreign institutions pursue short-term capital gain rather than dividend. Overall, the main results are consistent with the hypothesis that long-term institutional ownership would lead to higher dividend payout ratio. Our findings have important implications for Korean firms that they should appeal long-term institutional investors as a major shareholder base, and enhance corporate governance structure.

Integration of Environmental Factors into Portfolio Risk Assessment

The financial sector collectively cannot hedge all climate-related risks, and investors individually are unlikely to affect climate developments significantly. However, the financial sector can help channel savings into green projects and thus facilitate divestment from heavy-carbon-footprint producers. This article provides a novel framework for understanding climate-related adaptation, mitigation, and transition risks and outlines a method for valuing these risks in institutional investor portfolios. The authors’ proposed setup serves as a continuous call to action to long-term institutional investors to obtain accurate information on climate-related risks and develop appropriate frameworks for understanding these risks, regularly valuing them, and properly incorporating them into their investment decisions. <b>TOPICS:</b>ESG investing, tail risks, portfolio management/multi-asset allocation <b>Key Findings</b> ▪ This article provides a novel framework for understanding climate-related adaptation, mitigation, and transition risks. ▪ It outlines a method for valuing climate-related risks in institutional investor portfolios. ▪ It stresses the importance of integrating environmental factors in portfolio risk assessment by obtaining accurate information on climate-related risks and developing appropriate frameworks.

What sustainability assurance services do institutional investors demand and what value do they give them?

PurposeThe purpose of this study is to analyse the role played by institutional investors in a firm’s decision to hire sustainability assurance services and to determine the benefits of sustainability assurance for the functioning of the capital market. This analysis is complemented by examining the quality of the sustainability assurance service that institutional investors demand.Design/methodology/approachThe authors selected a sample of 1,564 multinational firms from 2002 to 2017. Panel data logit and generalised method of moments (GMM) regressions were estimated to consider decisions about hiring sustainability assurance services or not, and the assurance quality indexes constructed by a checklist based on the academic literature, respectively.FindingsInstitutional pressures associated with the environmental and social impacts of a firm’s activities lead to the convergence of institutional investor attitudes towards corporate sustainability, so that, regardless of their investment horizon, they promote the hiring of sustainability assurance services by corporate boards, which favours analyst precision and a reduction in the cost of capital. Long-term (LT) institutional investors exert influence through a selection mechanism, whereas short-term (ST) institutional investors exert influence through their presence on the board. Once the company has decided to provide assurance about its sustainability report, both types of institutional investors promote a higher quality of such service, although this is not well valued by the stock market.Research limitations/implicationsThis paper extends research on the monitoring role of institutional investors into the sustainability assurance context. Researchers may benefit from this paper’s findings when they examine the factors that drive the hiring of sustainability assurance services and their characteristics. This paper also shows that sustainability assurance services are a significant weakness due to the lack of standardisation in comparison with financial auditing, which complicates the assessment of their quality by stock market participants, thereby penalising those companies that provide more complete sustainability assurance reports.Practical implicationsConsidering this paper’s findings, it seems advisable that regulators establish a normative framework to standardise sustainability assurance processes. The results can also be used as an orientation for both companies, to design their sustainability disclosure policies and regulators, to improve the running of the capital market.Social implicationsSustainability assurance services have a positive effect on the running of the capital market and improve external stakeholder decision-making by providing more reliable information, which, in turn, will favour the implementation of more sustainable actions that contribute to the attainment of sustainable development goals.Originality/valueThis is one of the first papers to analyse the effect of institutional ownership on a firm’s decision to hire sustainability assurance services and consider the effect of the institutional investors’ investment horizon – LT versus ST – and the channel – selection methods and/or active engagement – used by them to exert their influence. The authors also propose several measures of sustainability assurance quality to demonstrate the relevance of the contents of the assurance statement for the capital market in general and the institutional investors in particular.

Isolation and Identification of Bacteria Associated with Pre and Post Processing of Groundnut Cake in Sokoto State, North-Western Nigeria

Optimal capital structure and minimizing the cost of financing and, consequently, increasing the value of the stock market has long been an important issue in companies. In this study, the relationship between long-term debt, market leverage and institutional investors with information asymmetry in companies listed on the Tehran Stock Exchange in the period 2015-2020 has been investigated using combined data. For this purpose, 97 companies listed on the Tehran Stock Exchange have been selected as the selected sample. From the relative gap, the stock bid is considered as a measure of information asymmetry. Eviews software has been used to estimate descriptive statistics and parameters of the existing model and statistical analysis and inference. The independent variables of the study are long-term debt, market leverage, institutional investors and the dependent variable of the study is information asymmetry. The findings of this study show that there is a significant relationship between long-term debt, market leverage and institutional shareholders with lack of There is information symmetry in companies listed on the Tehran Stock Exchange. This means that long-term debt, market leverage and institutional shareholders have an adverse and negative effect on information asymmetry. Keywords: Long-term debt, market leverage, institutional investors and information asymmetry DOI: 10.7176/RJFA/12-13-01 Publication date: July 31 st 2021

Gauging the effects of stock liquidity on earnings management: Evidence from the SEC tick size pilot test

This paper studies whether stock market liquidity has a causal effect on real earnings management. We introduce a new and cleaner identification of liquidity shock - the 2016 Tick Size Pilot Program - to show that firms with less liquid stocks are more likely to engage in real earnings management. We provide direct evidence that stock liquidity helps to deter real earnings management via enhancing governance by long-term institutional investors through trading and direct intervention, and via facilitating short selling to discipline managers. The effect is stronger in firms that do not pay dividends.

Does the investment horizon of institutional investors matter for stock liquidity?

This paper examines the role of the investment horizon of institutional investors on stock liquidity of firms. We show that an increase in long-term institutional ownership is negatively associated with firm liquidity, while an increase in short-term ownership is positively related to a firm's stock liquidity. We identify the ownership-liquidity relationship by examining two major channels: the trading activity channel and the informational friction channel. Long-term investors reduce stock liquidity through low frequency trading and access to value-enhancing and private information, which induces adverse selection bias. In contrast, short-term investors improve liquidity through trading activity and competition with other investors, which lowers transaction costs. Our findings further suggest that the effects of an increase in long-term (short-term) institutional investors on liquidity weaken (strengthen) when a firm has more publicly available information. Finally, we show that the positive impact of an increase in long-term ownership on valuation is more pronounced for firms with higher liquidity and the valuation effect is persistent.

The Influence of Long-Term and Short-Term Institutional Investors on Complicated Mispricing of Stocks

Taking Chinese listed companies from 2009 to 2017 as the research objects, this paper aims at exploring the heterogeneous effect of short-term and long-term institutional investors on stock mispricing. The empirical study finds that long-term institutional investors have an inhibiting effect on stock mispricing, while short-term institutional investors have an opposite effect. When the company information opacity is high, long-term institutional investors have a more obvious inhibiting effect on stock mispricing while short-term institutional investors have a more obvious promoting effect on stock mispricing. When the attention of analysts is enhanced, long-term institutional investors further restrain the stock mispricing while short-term institutional investors further promote the stock mispricing.

Life-cycle welfare losses from rules-of-thumb asset allocation

How should workers invest over the life-cycle? Should they follow some typical prescriptions (“rules of thumb”) in personal finance implying higher equity investments when young? We show that the answer hinges on the risk of long-term unemployment spells, entailing permanent declines in workers’ future earnings prospects. Absent unemployment risk, extant prescriptions deliver portfolios that are close to optimal, implying negligible welfare losses. They instead lead to sizeable welfare losses (3%–9% of annual consumption) when the risk of human capital depreciation following long-term unemployment is considered and realistically calibrated to the U.S. labor market. These losses stem from excess risk taking when young investors face uncertainty about future labor and pension incomes. This result points to a new design for pension plans offered by long-term institutional investors.

Off the radar: Factors behind the growth of shadow banking in Europe

This paper uses novel data from the European Central Bank and the Eurosystem on non-bank financial intermediation to investigate the potential factors of shadow banking growth for a panel of twenty-four countries in the European Union (EU). We find that the EU shadow banking system is highly procyclical and positively related to increasing demand by long-term institutional investors and to more stringent capital regulation. We show that individual entities in the shadow banking system can act as both complements and substitutes to traditional banking. In addition, we estimate four country-specific models using a Bayesian estimation method. We supplement the panel model estimates, which serve as a priori information, with data from a specific economy. We assert that, although some shadow banking determinants are uniform across countries, other may have heterogeneous effects across countries because of country-specific characteristics.

The effect of institutional ownership and ownership dispersion on eco-innovation

This paper aims to determine the role that the different institutional investors play in promoting eco-innovation, focusing on the analysis of the corrective or enhancing effect that can be derived from ownership dispersion related to the participation in a company's stock capital of institutional investors with different time horizons. The results obtained for a sample of 6,454 companies for the period 2002–2017 show the convergence of the short-term institutional investors’ interests with the long-term institutional investors’ demands, which has a positive effect on the implementation of proactive environmental strategies, such as eco-innovation. Additionally, this positive effect is enhanced by disperse ownership structures associated with the participation in a company's stock capital of both types of institutional investors, thereby increasing the firm's commitment to environmental sustainability. Although financial institutions and pension funds diverge from this long-term orientation, seeking an immediate economic return, ownership dispersion allows for correcting their individual negative effect on eco-innovation.

Long-Term Institutional Investors and social

Long-Term Institutional Investors and social

Do Institutional Investors Mitigate Social Costs of Privatization? Evidence from Prisons

This paper examines whether institutional investors mitigate social costs that arise when government services are outsourced to private enterprises. Using hand-collected data on U.S. prisons, I find that privatization is associated with an increase in prisoner suicides by up to 39%. However, institutional investors of public companies managing private prisons decrease suicide rates by one third. These effects are stronger for long-term institutional investors since failing to internalize social externalities negatively impacts the long-term success of portfolio firms. Evidence from a tax reform that exogenously increases institutional ownership of prison management companies suggests that the relationship between ownership and social outcomes is causal. To explain these results, I show that institutional investors have incentives to be socially responsible due to litigation and reputation risks.