Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

Abstract: 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.

Keywords: Institutional ownership; investors’ investment horizons; over-investment; under-investment; management monitoring’

JEL-codes: B20; G31; G32

24 pages, April 1, 2019

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