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The Effects of Institutional Investor Objectives on Firm Valuation and Governance

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Abstract

We find that ownership by different types of institutional investor has different implications for future firm misvaluation and governance characteristics. Dedicated institutional investors decrease future firm misvaluation relative to fundamentals, as well as the magnitude of this misvaluation. In contrast, transient institutional investors have the opposite effect. Using SEC Regulation FD as an exogenous shock to information dissemination, we find evidence consistent with dedicated institutions having an information advantage. The valuation effects are primarily driven by institutional portfolio concentration while the governance effects are driven by portfolio turnover. These results imply a more nuanced relationship between institutional ownership and firm value and corporate governance.

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  • Paul Borochin & Jie Yang, 2016. "The Effects of Institutional Investor Objectives on Firm Valuation and Governance," Finance and Economics Discussion Series 2016-088, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2016-88
    DOI: 10.17016/FEDS.2016.088
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    More about this item

    Keywords

    Institutional investors; Investor type; Dedicated; Transient; Misvaluation; Corporate governance; Blockholding; Portfolio turnover; Information dissemination; SEC Regulation FD;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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