Motivated Monitoring Institutional Investors and Firm Investment Efficiency

Abstract

We find that motivated monitoring by institutional investors mitigates firm investment inefficiency, estimated by Richardson's (2006) approach. This relation is robust when using the annual reconstitution of the Russell indexes as exogenous shocks to institutional ownership during the period 1995-2015 and after classifying institutional ownership by institution type. We also show that closer monitoring mitigates the problem of both over-investing free cash flows and under-investment due to managers' career concerns. Finally, we document that the effectiveness of the monitoring by institutional investors appears to increase monotonically with respect to the firm's relative importance in their portfolios.

Mandatory CSR disclosure, monitoring and investment efficiency: evidence from China

“…The arguments underpinning this conclusion are based on the evidence that institutional shareholders have incentive and ability to monitor the insiders’ behaviour for their own benefit. Following this line, higher institutional ownership is found to mitigate investment inefficiency (Ward et al , 2019). We thus expect that, according to the improved monitoring view, mandatory CSR reports will be more valuable for firms with lower institutional ownership in alleviating agency issues and minimising monitoring costs, which could decrease investment inefficiency for firms with lower institutional ownership to a greater extent than for firms with higher institutional ownership.…”

Differences in CEO compensation under large and small institutional ownership

“…Over the last 20 years, there has been an increasing trend among institutional investors to accumulate a large amount of stock. Several studies have examined the potential impact of increased institutional ownership on various firm policies (e.g., Becker, Cronqvist, & Fahlenbrach, ; Chichernea, Petkevich, & Zykaj, ; Holderness, ; Knyazeva, Knyazeva, & Kostovetsky, ; Ward, Yin, & Zeng, ; Yan & Zhang, ). Some papers have analyzed the possible effects on chief executive officer (CEO) compensation in general (e.g., Clifford & Lindsey, ; Cronqvist & Fahlenbrach, ).…”

Monitoring intensity, investment inefficiency and institutional shareholders: Evidence from JSE listed companies in South Africa

“…This becomes intense when the monitoring intensity of the shareholders is relaxed. Other extant literature equally affirmed that the conflicting interest between shareholders and managers might prevent companies from investing efficiently (Ward et al, 2017…”

“…Inefficient investment is defined as the digression from the investment level capable of being anticipated by a company-specific investment model (Ward et al, 2017). Richardson (2006) studied the link between free cash flows and the extent of overinvestment at the company level.…”

“…They are essential in the capital market due to their large holding of shares. The market value of their investment in the United States, British, and South African stocks is vast and significant (Bhikha, 2014;Blume & Keim, 2012;Thomas, 2017;Ward et al, 2017). 80% of the US stock market's equity market is held by institutional investors (Intractive, 2017); institutional investors in FTSE 100 in the UK account for 62% of total ownership (Segerstrom, 2020).…”