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Are foreign investors locusts? The long-term effects of foreign institutional ownership

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  • Bena, Jan
  • Ferreira, Miguel A
  • Matos, Pedro
  • Pires, Pedro

Abstract

This paper challenges the view that foreign investors lead firms to adopt a short-term orientation and forgo long-term investment. Using a comprehensive sample of publicly listed firms in 30 countries over the period 2001–2010, we find instead that greater foreign institutional ownership fosters long-term investment in tangible, intangible, and human capital. Foreign institutional ownership also leads to significant increases in innovation output. We identify these effects by exploiting the exogenous variation in foreign institutional ownership that follows the addition of a stock to the MSCI indexes. Our results suggest that foreign institutions exert a disciplinary role on entrenched corporate insiders worldwide.

Suggested Citation

  • Bena, Jan & Ferreira, Miguel A & Matos, Pedro & Pires, Pedro, 2017. "Are foreign investors locusts? The long-term effects of foreign institutional ownership," Journal of Financial Economics, Elsevier, vol. 126(1), pages 122-146.
  • Handle: RePEc:eee:jfinec:v:126:y:2017:i:1:p:122-146
    DOI: 10.1016/j.jfineco.2017.07.005
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    Cited by:

    1. Anil K. Kashyap & Natalia Kovrijnykh & Jian Li & Anna Pavlova, 2018. "The Benchmark Inclusion Subsidy," NBER Working Papers 25337, National Bureau of Economic Research, Inc.
    2. repec:gam:jsusta:v:11:y:2019:i:6:p:1599-:d:214414 is not listed on IDEAS
    3. Germán Gutiérrez & Thomas Philippon, 2017. "Investmentless Growth: An Empirical Investigation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(2 (Fall)), pages 89-190.
    4. Newham, M. & Seldeslachts, J. & Banal-Estanol, A., 2018. "Common Ownership and Market Entry: Evidence from the Pharmaceutical Industry," Working Papers 18/03, Department of Economics, City University London.
    5. repec:eee:jfinec:v:131:y:2019:i:3:p:693-714 is not listed on IDEAS
    6. Josh Lerner & Amit Seru, 2017. "The Use and Misuse of Patent Data: Issues for Corporate Finance and Beyond," NBER Working Papers 24053, National Bureau of Economic Research, Inc.
    7. repec:jes:journl:y:2019:v:10:p:133-150 is not listed on IDEAS
    8. repec:pal:jintbs:v:50:y:2019:i:1:d:10.1057_s41267-018-0160-x is not listed on IDEAS
    9. repec:eee:corfin:v:51:y:2018:i:c:p:20-49 is not listed on IDEAS
    10. repec:bla:acctfi:v:57:y:2017:i:5:p:1635-1670 is not listed on IDEAS
    11. repec:eee:pacfin:v:53:y:2019:i:c:p:236-253 is not listed on IDEAS
    12. repec:eee:ecolet:v:172:y:2018:i:c:p:1-4 is not listed on IDEAS
    13. repec:bla:acctfi:v:58:y:2019:i:5:p:1581-1612 is not listed on IDEAS
    14. repec:eee:empfin:v:50:y:2019:i:c:p:93-112 is not listed on IDEAS
    15. Korkeamäki, Timo & Virk, Nader & Wang, Haizhi & Wang, Peng, 2018. "Learning Chinese? The changing investment behavior of foreign institutions in the Chinese stock market," BOFIT Discussion Papers 19/2018, Bank of Finland, Institute for Economies in Transition.
    16. Olsson, Martin & Tåg, Joacim, 2018. "Are foreign private equity buyouts bad for workers?," Economics Letters, Elsevier, vol. 172(C), pages 1-4.
    17. Georgios Sermpinis & Arman Hassanniakalager & Charalampos Stasinakis & Ioannis Psaradellis, 2018. "Technical Analysis and Discrete False Discovery Rate: Evidence from MSCI Indices," Papers 1811.06766, arXiv.org, revised Jun 2019.
    18. Dyck, Alexander & Lins, Karl V. & Roth, Lukas & Wagner, Hannes F., 2019. "Do institutional investors drive corporate social responsibility? International evidence," Journal of Financial Economics, Elsevier, vol. 131(3), pages 693-714.
    19. repec:eee:jaecon:v:66:y:2018:i:1:p:67-93 is not listed on IDEAS

    More about this item

    Keywords

    Innovation; Institutional ownership; Investment; Monitoring; Patents;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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