Do Long-Term Investors Improve Corporate Decision Making?
University of Washington
York University - Schulich School of Business
Virginia Tech
April 18, 2015
Finance Down Under 2015 Building on the Best from the Cellars of Finance Paper
Asian Finance Association 2015 Conference Paper
Abstract:
We study the effect of investor horizons on a comprehensive set of corporate decisions. Long-term investors have the means and motive to monitor corporate managers, which generates corporate decisions that are consistent with shareholder value maximization. We find that long-term investors strengthen corporate governance and restrain managerial misbehaviors such as earnings management and financial fraud. They discourage a range of investment and financing activities but encourage payouts. Shareholders benefit through higher stock returns, higher profitability that is not fully anticipated by the market, and lower risk. Firms diversify their operations. We use a popular identification strategy to establish causality of our results.
Number of Pages in PDF File: 66
Keywords: Agency problems; Monitoring; Managerial myopia; Investor horizons; Corporate governance; Managerial misbehavior; Investment; Financing; Off balance sheet debt; Debt maturity; Payouts; Valuation; Profitability; Volatility; Credit events; Real diversification
JEL Classification: G23, G31, G32, G34, G35
