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The effects of institutional investor objectives on firm valuation and governance

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  • Borochin, Paul
  • Yang, Jie

Abstract

We find that ownership by different types of institutional investors has varying implications for future firm misvaluation and governance characteristics. Dedicated institutional investors decrease future firm misvaluation, in both direction and magnitude, relative to fundamentals. In contrast, transient institutional investors have the opposite effect. Using the U.S. Securities and Exchange Commission (SEC) Regulation FD as an exogenous shock to information dissemination, we find evidence consistent with dedicated institutions having an information advantage. Similarly, dedicated investors are associated with better future governance characteristics, while transient investors are not. 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.

Suggested Citation

  • Borochin, Paul & Yang, Jie, 2017. "The effects of institutional investor objectives on firm valuation and governance," Journal of Financial Economics, Elsevier, vol. 126(1), pages 171-199.
  • Handle: RePEc:eee:jfinec:v:126:y:2017:i:1:p:171-199
    DOI: 10.1016/j.jfineco.2017.06.013
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    Keywords

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

    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
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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