Long-term Institutional Investors Research Articles

The Market Reaction to Green Bond Issuance: Evidence from China

This paper provides the first evidence of the debt and stock market reaction to corporate green bond issuance in the simultaneously largest developing economy and largest emerging debt market, China. Utilizing a most comprehensive sample of Chinese green bonds, we document a pricing premium of corporate green bonds relative to conventional bonds. The economic magnitude of the Chinese green bond pricing premium is greatly larger than that of an international green bond documented in prior studies. The pricing premium of corporate green bonds is most pronounced for new issues from high corporate social responsibility (CSR) issuers and underwriters. It is also stronger for corporate issuers with less ownership concentration and held by long-term institutional investors. Further analysis reveals positive announcement stock returns for green bond new issues, consistent with the stakeholder value maximization theory that corporate engagement in sustainable financing practice increases firm value in a long run and thus is favored by shareholders.

Institutional Investment Horizon and Hedge Fund Activism

I examine how institutional investment horizon affects hedge fund activism. I find that hedge fund activism is higher in firms that long-term institutional investors invest. Furthermore, hedge fund campaigns and success rates differ with investment horizon of institutions. Firms with investors that have long-term investment horizons are more likely to receive demands on corporate governance improvements. These firms also experience significant improvement in firm performance post shareholder activism. Firms that are targeted by hedge funds and have institutional investors with shorter-term investment horizons, on the other hand, are more likely to be delisted. Also, there is no significant performance improvement in these firms post activism. Overall, the results suggest that investment horizon of institutional owners is an important factor in explaining strategies explored in hedge fund activism as well as their effects on firm value. The findings support the notion of collaborative monitoring role of long-term institutional investors and hedge fund activists.

Do institutional investors have homogeneous influence on corporate social responsibility? Evidence from investor investment horizon

PurposeThe purpose of this paper is to investigate the relation between the investment horizon of institutional investors and corporate social responsibility (CSR).Design/methodology/approachUtilizing unique datasets on CSR and the investor horizon measures (Gaspar et al., 2005), the authors categorize institutional investors into long-term and short-term investors. This method captures the heterogeneity of investors.FindingsThe authors show that long-term institutional investors promote CSR engagement, while short-term investors discourage it. The authors further document that shareholders’ ownership horizon has implications on corporate decisions in the CSR framework. The presence of long (short)-term institutional investors is positively (negatively) associated with dividend payout, discourages (encourages) managerial misbehaviors and enhances (reduces) firm valuation, only for firms with high CSR performance.Research limitations/implicationsDifferent from previous studies that treat institutional investors homogeneously, this paper provides empirical support that investors are indeed different in influencing CSR.Originality/valueFew prior studies address the question of whether active engagement by institutional shareholders on CSR issues differs by the types of institutional ownership. The study attempts to fill this gap by examining the effects of institutions’ investment horizon, one of the major ways to classify institutional shareholders, on the CSR performance of firms.

Shareholder Activism and Firms' Voluntary Disclosure of Climate Change Risks

This paper examines whether -- in the absence of mandated disclosure requirements -- shareholder activism can elicit greater disclosure of firms' exposure to climate change risks. We find that environmental shareholder activism increases the voluntary disclosure of climate change risks, especially if initiated by institutional investors, and even more so if initiated by long-term institutional investors. We also find that companies that voluntarily disclose climate change risks following environmental shareholder activism achieve a higher valuation post disclosure, suggesting that investors value transparency with respect to firms' exposure to climate change risks.

The Role of Institutional Investors in the Sustainable CEO Compensation Structure

Chief executive officer (CEO) retirement pension plans are known as sustainable compensation because they induce managers to make more sustainable and long-term-oriented corporate decisions. We focused on the role of institutional investors in awarding CEO pension plans. Long-term and short-term institutional investors are expected to increase and decrease the CEO pension plan, respectively, wherein the former is aimed at persuading the manager to focus more on the firm’s long-term performance and the latter is aimed at making the CEO assume more risk. We empirically tested our hypothesis and found significantly negative (positive) relationship between short-term (long-term) institutional ownership and CEO pension plans, which is consistent with our hypothesis. Our results suggest the institutional ownership horizon’s differing impact on managers’ sustainable compensation structure.

Investment horizon and corporate social performance: the virtuous circle of long-term institutional ownership and responsible firm conduct

We investigate the relationship between corporate social performance and institutional ownership. We distinguish between long-term and short-term institutional investors using holdings-based measures which directly capture the investment horizon of each institution. Our analysis shows that long term institutional investment is positively related to corporate social performance (mainly by an avoidance of investing in firms with significant controversies) whereas short-term institutional investment is negatively related to corporate social performance. Further investigation reveals that increased holdings of a firm by long-term investors are positively associated with its future corporate social performance. Hence, we provide evidence of a ‘virtuous circle’ between long term investment and social responsibility.

Public Information，Investment Term and Overvaluation

Institutional investors have become the dominant force in China’s stock market and play an important role in stabilizing the market and improving its efficiency. There are obvious distinctions in investment objectives, trading strategies and decision-making approach between short-term and long-term institutional investors, so it is necessary to distinguish them when exploring the relationship between institutional investors and the market stability. Positive public information often keeps investors in optimistic mind and leads to overvaluation of stocks. In the absence of short-selling constraints, stock mispricing will not be corrected by the market in time, so that overvaluation becomes obvious and persistent. Institutional investors with different term usually respond differently to the same information, which may lead to different extent of overvaluation. This paper examines whether there is a difference in the extent of overvaluation among the stocks of different investment term. It also examines whether this difference is affected by the overall market quotation, and whether the institutional investors of different term attach different importance to positive public information. The results suggest that, positive public information leads to more serious overvaluation of the stocks favored by short-term institutional investors when the market is short-sale constrained. The stocks with shorter term have higher cumulative returns during the issuance of positive analyst ratings. The difference in the extent of overvaluation among the stocks of different term is significant in the bull market, but no longer significant in the bear market. This may be because institutional investors（both long-term and short-term）are cautiously optimistic about positive public information in the bear market, and as the prices of stocks generally declined, previously excluded pessimistic” investors can enter the market. Short-term institutional investors are more reliant on public information than long-term institutional investors when they make decisions, which may be seemed as an explanation for the above phenomena. These results show that the short-term behavior of institutional investors aggravates market volatility, which is an important reason for stock price bubbles. Regulatory authorities can identify institutional investors according to investment term and the role of information dissemination. The relationship between short-selling constraints and stock overvaluation has been extensively studied. On this basis, we further explore the relationship between institutional investment term and stock overvaluation. It is always difficult to separate the effect of public information from private information when making an analysis on the impact of market information on institutional investors’ decision-making. We attempt to solve this problem by introducing the social network analysis into the study of institutional investors’ decision-making behavior. We explore the impact of positive public information on institutional investors’ valuation and trading behavior, which advances the research on the relationship between institutional investors’ decision-making behavior and the stability of the capital market, and also provides a reference for institutional investors to formulate relevant strategies.

Institutional investors and corporate investment

Using investors’ trading horizons to capture their incentives to collect information and monitor management's decisions, this paper shows that an increase in the ownership stake held by long-term institutional investors is associated with a subsequent decrease in real investment precisely in firms that invest too much. In support of the monitoring hypothesis, we show that results are driven by the purchases of long-term investors, while quasi-indexers and short-term investors have no influence on investment. We address the potential problem of endogeneity using the inclusion of a firm to the S&P 500 Index as an exogenous shock to institutional holdings.

Who Limits Arbitrage?

The cost of selling a security short is an equilibrium outcome of the demand for short positions and the willingness of long-term institutional investors to lend their securities to short sellers. We introduce an imperfectly competitive securities lending market into a model of securities traders with private information. Long-term institutional investors with greater liquidity risk tolerance are more willing to lend their securities, lowering the cost of taking short positions, which increases price informativeness in the spot trading market. We find empirical support for these predictions in the universe of corporate bond trades and life insurers' corporate bond loans.

Simulating Stress in the UK Corporate Bond Market: Investor Behaviour and Asset Fire-Sales

We build a framework to simulate stress dynamics in the UK corporate bond market. This quantifies how the behaviours and interactions of major market participants, including open-ended funds, dealers, and institutional investors, can amplify different types of shocks to corporate bond prices. We model market participants’ incentives to buy or sell corporate bonds in response to initial price falls, the constraints under which they operate (including those arising due to regulation), and how the resulting behaviour may amplify initial falls in price and impact market functioning. We find that the magnitude of amplification depends on the cause of the initial reduction in price and is larger in the case of shocks to credit risk or risk-free interest rates, than in the case of a perceived deterioration in corporate bond market liquidity. Amplification also depends on agents’ proximity to their regulatory constraints. We further find that long-term institutional investors (eg pension funds) only partially mitigate the amplification due to their slower-moving nature. Finally, we find that shocks to corporate bond spreads, similar in magnitude to the largest weekly moves observed in the past, could trigger asset sales that may test the capacity of dealers to absorb them.

Do long-term institutional investors promote corporate social responsibility activities?

Abstract This paper examines how the investment horizons of a firm's institutional investors affect its corporate social responsibility (CSR) activities. Using data on U.S. firms’ CSR ratings over the 1995–2012 period, we find that longer investment horizons are positively related to CSR. Further, active long-term institutions increase CSR whereas passive long-term institutions have no significant effect. Our results suggest that investors with long-term horizons have more incentives to monitor their firms which leads managers to engage in more vigorous CSR activities.

Institutional investors and cost stickiness: Theory and evidence

Cost stickiness measures the degree of suboptimal cost reduction in response to a decline in a firm’s activity. This study examines the role of institutional monitoring in addressing the value-decreasing cost-stickiness problem exhibited in many firms. Using alternative proxies for institutional monitoring, we find that long-term institutional investors are associated with reductions in cost stickiness and that these reductions lead to superior future market and accounting performance. Our findings are robust to different model specifications and are independent of the effect of internal governance.

Do institutional blockholders influence corporate investment? Evidence from emerging markets

This paper examines the relationship between firm investment ratios and institutional blockholders for a sample of 6300 publicly traded firms in 16 large emerging markets for the 2004–2016 period. Results show that independent, long-term, and local institutional investors boost investment ratios, and this is consistent with the monitoring role and blockholder voice intervention hypotheses. The presence of institutional blockholders, regardless of their monitoring involvement, reduces firm cash flow sensitivity ratios and thus, firms' financial constraints. Minority institutional investors complement the positive effect of blockholder investors. However, the effect on financial constraints decreases as the quality of the country's institutions increases.

Does Social Performance Influence Breadth of Ownership?

This study examines the hitherto unexplored question of whether and how a firm’s social performance influences the breadth of that firm’s share ownership. We predict and find that firms with higher corporate social responsibility (CSR) ratings attract more institutional investors (especially long-term, low-stake, and green institutional investors) and more individual investors. This finding is consistent with the notion that investors are more interested in firms with higher CSR ratings and thus prefer to hold stocks of such firms. We also find that firms with higher CSR ratings are associated with higher stock liquidity, lower cost of equity capital, more equity and debt issuance, and greater investment, and that sin stocks are associated with a lower investor base, which further corroborates our prediction. Our results are robust to potential endogeneity, the use of alternative model specifications, and an alternative proxy for CSR performance.

Do Long-Term Institutional Investors Contribute to Financial Stability? – Evidence from Equity Investment in Hong Kong and International Markets

This paper assesses whether long-term institutional investors help stabilise or destabilise Hong Kong and international stock markets. We use a novel dataset based on individual funds issued by insurance companies and pension funds worldwide. This allows us to examine each economic region in conjunction with the remaining regions, not in isolation as in bilateral flow-based analysis. Overall, our results indicate that these institutional investors would be counter-cyclical (i.e., they buy past losers and sell past winners) for most stock markets (including Hong Kong) during normal market conditions, which could temper upward and downward movements in asset prices. During adverse market conditions, these investors would become procyclical for some stock markets in advanced economies, which could exacerbate price volatility. This implies that these long-term institutions would have a destabilising impact on these markets during the market downturns. The pro-cyclicality may reflect that some AEs were the epicentre of several major stock market crashes during the sample period. Moreover, the influence of pro-cyclicality would be reinforced by the LTIIs’ herding behaviour.

Sovereign wealth funds, shareholder activism and socially responsible investing: impact on corporate governance and sustainability

Institutional shareholder activism is usually discussed within the business. Sovereign wealth funds (SWFs), as long-term institutional investors, are stepping into the sustainable investment movement and corporate governance discussion. But studies, from the regulatory perspective, that discuss the SWFs' shareholder activism are scant. As shareholders of investee companies, SWFs theoretically can exert activism to influence corporate performance, while their inherent feature poses challenges to regulators of host countries. This paper aims to explore the story of SWF activism, and its impacts on corporate governance and business sustainability. It analyses approaches that SWFs can utilise and the status quo of SWF activism. The issues and benefits of SWF activism are briefly assessed. Regulatory supports concerning social activism, responsible investing and transparency are analysed. It suggests that to ensure the benefits of SWF activism and reduce concerns, it is necessary to promote soft law and regulatory measures regarding transparency and SWFs' shareholder rights.

Off the Radar: Factors behind the Growth of Shadow Banking in Europe

This paper uses novel ECB/Eurosystem data on non-bank financial intermediation to investigate the potential factors of shadow banking growth for a panel of 24 EU countries. We find the EU shadow banking system to be highly procyclical and positively related to the increasing demand of long-term institutional investors, more stringent capital regulation, and steeper financial development. We also show that individual entities of shadow banking system can act as both complements and substitutes to traditional banking. In addition, we show that the functionality of factors of shadow banking development may vary significantly among countries with country-specific effects playing a role.

Does institutional investor horizon influence US corporate financing decisions?

This paper examines whether and how institutional investment horizon influences corporate financing decisions. Consistent with our predictions, we find that longer institutional investment horizon is negatively associated with the likelihood that a firm issues equity and debt, and with the amount of security issuance. Our results also indicate that firms with longer investment horizon prefer debt to equity. We also document that debt maturity decreases with the level of ownership by long-term institutional investors. In addition, we show that firms with long-term institutional investors adjust their capital structure at a slower pace.

An Integrated Control Tower: Coordinating and Unlocking Investment Capital for Clean Energy

As recent history highlights, there are numerous challenges in bringing novel energy technologies from the lab all the way to the global energy marketplace. But one challenge in particular has proven particularly intractable recently; the lack of financing for clean energy entrepreneurs. In this white paper, we propose a new coordinating platform that can facilitate an intelligent information flow over the entire clean energy development cycle. Through this platform, we expect that new capital inflows can and will increase as we better allocate the risks (and thus returns) of clean energy investments to the parties that can shoulder them. We develop a blueprint of this integrated control tower, which is a multi-strategy vehicle that better aligns risks with investors and thereby facilitates high investment returns. It will offer a tailored path to all agents participating in this sector, just as an air traffic control tower guides planes on different glide paths depending on their specific characteristics and objectives (destinations). The new control tower will simultaneously coordinate three core intermediary functions: (1) an anchoring institution that offers small amounts of priming capital that can even take a first-loss position; (2) a financial intermediary that raises capital, at-scale, from various funding sources and provides equity and debt capital to companies maturing commercially; and (3) a trusted infomediary that provides reliable and objective information about clean energy companies or projects in a highly transparent and trustworthy manner, and help long-term institutional investors (LTIs) to mobilize their capital into clean energy ventures while meeting their unique investment criteria. The control tower will, we hope, lower barriers to clean energy funding and optimize access to available financial resources by directing “investor traffic” towards the most efficient and aligned investments products and opportunities.

Institutional ownership stability and dividend payout policy

PurposeThe purpose of this paper is to empirically examine the link between institutional ownership stability and dividend payout ratio.Design/methodology/approachFirst, the authors estimate the propensity of a firm to pay dividend. Next, the authors perform panel fixed-effect regressions of dividend payouts on institutional ownership stability variables. The authors also compare institutional ownership between dividend paying and non-dividend paying investee firms. The authors analyze the dividend preferences of different types of institutional owners. Finally, the authors examine the cross-sectional variation in the volatility of dividend payouts.FindingsThe authors find that stable and large institutional owners favor dividend paying companies. There also exists a positive association between ownership persistence and dividend payout. Conversely, firms that change their dividend payout frequently are associated with larger deviations in institutional ownership. Additionally, the presence of pressure-sensitive institutional investors (i.e. investors that also hold business ties with the investee firm) is significantly linked to dividend payout policy. Conversely, pressure-insensitive investors use alternative forms of monitoring instead of requiring investee firms to pay dividends, which serve to reduce agency conflicts.Originality/valueThis paper considers the preferences of long-term stable institutional investors in their selection of dividend paying firms.