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Institutional investment horizon and investment–cash flow sensitivity

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  • Attig, Najah
  • Cleary, Sean
  • El Ghoul, Sadok
  • Guedhami, Omrane
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    Abstract

    This paper examines the relevance of institutional investors’ investment horizon, as reflected in the response of firm investment to internal cash flows. We argue that institutional investors with longer investment horizons have greater incentives and efficiencies to engage in effective monitoring. This improved monitoring mitigates asymmetric information and agency problems, and in turn reduces the wedge between the costs of internal and external funds. As a result, the sensitivity of firms’ investment outlays to internal cash flows decreases in the presence of institutional investors with long-term investment horizons. Using a sample of 8402 US firms over the period 1981–2008, we provide empirical evidence consistent with these arguments.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 36 (2012)
    Issue (Month): 4 ()
    Pages: 1164-1180

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    Handle: RePEc:eee:jbfina:v:36:y:2012:i:4:p:1164-1180

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Institutional investors; Investment horizon; Corporate governance;

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    Cited by:
    1. Quader, Manzur & Taylor, Karl, 2014. "Corporate Efficiency, Credit Status and Investment," IZA Discussion Papers 8285, Institute for the Study of Labor (IZA).

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