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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

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.

Suggested Citation

  • Attig, Najah & Cleary, Sean & El Ghoul, Sadok & Guedhami, Omrane, 2012. "Institutional investment horizon and investment–cash flow sensitivity," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1164-1180.
    • Handle: RePEc:eee:jbfina:v:36:y:2012:i:4:p:1164-1180
    DOI: 10.1016/j.jbankfin.2011.11.015
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    More about this item

    Keywords

    Institutional investors; Investment horizon; Corporate governance;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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