Advanced Search
MyIDEAS: Login

Stock market and investment : the governance role of the market

Contents:

Author Info

  • Samuel, Cherian
Registered author(s):

    Abstract

    Institutional investors have become tremendously important in U.S. capital markets in recent years. But a study of 557 U.S. manufacturing firms (1985-90) shows the role of such investors to be mixed. Results show the following: 1) institutional ownership has a positive effect on capital spending but apparently a negative effect on research and development spending and no effect on advertising expenditures. So, institutional ownership might contribute to a firm's underinvestment in intangible assets and hence exacerbate managerial myopia; 2) institutional investors are complex institutions, so the regulatory and investment environment in which they operate must be carefully designed. The institutionalization of the stock market happened gradually in the U.S. and some other industrial countries and may happen gradually in developing countries as their financial markets are reformed and deepened; 3) there is a fundamental conflict between liquidity and control as objectives on institutional investment. In the U.S., liquidity has been the dominant objective and"exit"rather than"voice"has been the preferred option of institutional investors on corporate governance issues. But recently"voice"has begun to be a more important objective; 4) institutional investors'monitoring and disciplinary activities may (through corporate governance) substitute for the disciplinary and signaling roles of debt. But there is no definite evidence that institutional ownership by itself improves firm performance. Still, activism by institutional investors has replaced takeovers as the central mechanism of corporate government in the U.S. in the 1990s. The implication for developing countries: encourage institutional ownership of equity, and promote activism among institutional investors. The U.S. experience cannot always be generalized to other countries, but it does demonstrate that such activism can be a viable alternative to takeovers as a vehicle for corporate governance. It is also important for curbing the excesses of managerial discretion and maximizing shareholder values.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/1996/03/01/000009265_3961019185533/Rendered/PDF/multi0page.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1578.

    as in new window
    Length:
    Date of creation: 31 Mar 1996
    Date of revision:
    Handle: RePEc:wbk:wbrwps:1578

    Contact details of provider:
    Postal: 1818 H Street, N.W., Washington, DC 20433
    Phone: (202) 477-1234
    Email:
    Web page: http://www.worldbank.org/
    More information through EDIRC

    Related research

    Keywords: Payment Systems&Infrastructure; International Terrorism&Counterterrorism; Economic Theory&Research; Fiscal&Monetary Policy; Financial Crisis Management&Restructuring; Environmental Economics&Policies; Private Participation in Infrastructure; International Terrorism&Counterterrorism; Economic Theory&Research; Financial Crisis Management&Restructuring;

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Mark J. Roe, 1997. "The Political Roots Of American Corporate Finance," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(4), pages 8-22.
    2. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1990. "The Stock Market and Investment: Is the Market a Sideshow?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 157-216.
    3. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    4. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    5. Vittas, Dimitri & Iglesias, Augusto, 1992. "The rationale and performance of personal pension plans in Chile," Policy Research Working Paper Series 867, The World Bank.
    6. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 5-50, April.
    7. Roe, Mark J., 1990. "Political and legal restraints on ownership and control of public companies," Journal of Financial Economics, Elsevier, vol. 27(1), pages 7-41, September.
    8. Vittas, Dimitri & Michelitsch, Roland, 1995. "Pension funds in Central Europe and Russia : their prospects and potential role in corporate governance," Policy Research Working Paper Series 1459, The World Bank.
    9. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, vol. 27(2), pages 595-612, October.
    10. Grundfest, Joseph A., 1990. "Subordination of American capital," Journal of Financial Economics, Elsevier, vol. 27(1), pages 89-114, September.
    11. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-77, December.
    12. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
    13. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
    14. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Samuel, Cherian, 1996. "The stockmarket as a source of finance : a comparison of U.S. and Indian firms," Policy Research Working Paper Series 1592, The World Bank.
    2. Samuel, Cherian, 1996. "The investment decision : a re-examination of competing theories using panel data," Policy Research Working Paper Series 1656, The World Bank.
    3. Rim Zouari-Hadiji & Ghazi Zouari, 2011. "Investisseurs institutionnels et investissement en R&D:une étude comparative," Working Papers CREGO 1110101, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
    4. Samuel, Cherian, 1996. "Stock market and investment : the signaling role of the market," Policy Research Working Paper Series 1612, The World Bank.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1578. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.