Hostname: page-component-cd9895bd7-q99xh Total loading time: 0 Render date: 2025-01-05T14:03:14.909Z Has data issue: false hasContentIssue false
  • English
  • Français

Investor Horizons and Corporate Policies

Published online by Cambridge University Press:  02 January 2014

François Derrien ,
Ambrus Kecskés  and
David Thesmar
François Derrien
Affiliation:
[email protected],
Ambrus Kecskés
Affiliation:
[email protected], Schulich School of Business, York University, 4700 Keele St, North York, ON M3J 1P3, Canada.
David Thesmar
Affiliation:
[email protected], Finance Department, HEC Paris, 1 rue de la Libération, Jouy en Josas 78351, France;
Get access Rights & Permissions [Opens in a new window]

Abstract

We study the effect of investor horizons on corporate behavior. We argue that longer investor horizons attenuate the effect of stock mispricing on corporate policies. Consistent with our argument, we find that when a firm is undervalued, greater long-term investor ownership is associated with more investment, more equity financing, and less payouts to shareholders. Our results do not appear to be explained by long-term investor self-selection, monitoring (corporate governance), or concentration (blockholdings). Our results are consistent with a version of market timing in which mispriced firms cater to the tastes of their short-term investors rather than their long-term investors.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 6 , December 2013 , pp. 1755 - 1780
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Admati, A. R., and Pfleiderer, P.. “The ‘Wall Street Walk’ and Shareholder Activism: Exit as a Form of Voice.” Review of Financial Studies, 22 (2009), 2445–2485.CrossRefGoogle Scholar
Asker, J.; Farre-Mensa, J.; and Ljungqvist, A.. “Does the Stock Market Harm Investment Incentives?” Working Paper, New York University (2010).Google Scholar
Baker, M.; Stein, J. C.; and Wurgler, J.. “When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms.” Quarterly Journal of Economics, 118 (2003), 969–1005.CrossRefGoogle Scholar
Baker, M., and Wurgler, J.. “Market Timing and Capital Structure.” Journal of Finance, 57 (2002), 1–32.CrossRefGoogle Scholar
Baker, M., and Wurgler, J.. “A Catering Theory of Dividends.” Journal of Finance, 59 (2004), 1125–1165.CrossRefGoogle Scholar
Barber, B. M., and Odean, T.. “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors.” Journal of Finance, 55 (2000), 773–806.CrossRefGoogle Scholar
Bebchuk, L.; Cohen, A.; and Ferrell, A.. “What Matters in Corporate Governance?” Review of Financial Studies, 22 (2009), 783–827.CrossRefGoogle Scholar
Becker, B.; Cronqvist, H.; and Fahlenbrach, R.. “Estimating the Effects of Large Shareholders: Using a Geographic Instrument.” Journal of Financial and Quantitative Analysis, 46 (2011), 907–942.CrossRefGoogle Scholar
Bushee, B. J. “The Influence of Institutional Investors on Myopic R&D Investment Behavior.” Accounting Review, 73 (1998), 305–333.Google Scholar
Carleton, W. T.; Nelson, J. M.; and Weisbach, M. S.. “The Influence of Institutions on Corporate Governance through Private Negotiations: Evidence from TIAA-CREF.” Journal of Finance, 53 (1998), 1335–1362.CrossRefGoogle Scholar
Cella, C.; Ellul, A.; and Giannetti, M.. “Investors’ Horizons and the Amplification of Market Shocks.” Review of Financial Studies, 26 (2011), 1607–1648.Google Scholar
Chen, X.; Harford, J.; and Li, K.. “Monitoring: Which Institutions Matter?” Journal of Financial Economics, 86 (2007), 279–305.CrossRefGoogle Scholar
Coval, J., and Stafford, E.. “Asset Fire Sales (and Purchases) in Equity Markets.” Journal of Financial Economics, 86 (2007), 479–512.CrossRefGoogle Scholar
Cremers, K. J. M., and Petajisto, A.. “How Active Is Your Fund Manager? A New Measure That Predicts Performance.” Review of Financial Studies, 22 (2009), 3329–3365.Google Scholar
Cronqvist, H., and Fahlenbrach, R.. “Large Shareholders and Corporate Policies.” Review of Financial Studies, 22 (2009), 3941–3976.CrossRefGoogle Scholar
Del Guercio, D. “The Distorting Effect of the Prudent-Man Laws on Institutional Equity Investments.” Journal of Financial Economics, 40 (1996), 31–63.CrossRefGoogle Scholar
Del Guercio, D., and Hawkins, J.. “The Motivation and Impact of Pension Fund Activism.” Journal of Financial Economics, 52 (1999), 293–340.CrossRefGoogle Scholar
Dlugosz, J.; Fahlenbrach, R.; Gompers, P.; and Metrick, A.. “Large Blocks of Stock: Prevalence, Size, and Measurement.” Journal of Corporate Finance, 12 (2006), 594–618.CrossRefGoogle Scholar
Edmans, A. “Blockholder Trading, Market Efficiency, and Managerial Myopia.” Journal of Finance, 64 (2009), 2481–2513.Google Scholar
Edmans, A.; Goldstein, I.; and Jiang, W.. “The Real Effects of Financial Markets: The Impact of Prices on Takeovers.” Journal of Finance, 67 (2012), 933–971.CrossRefGoogle Scholar
Froot, K. A.; Perold, A. F.; and Stein, J. C.. “Shareholder Trading Practices and Corporate Investment Horizons.” Journal of Applied Corporate Finance, Summer (1992), 42–58.Google Scholar
Gaspar, J.-M.; Massa, M.; and Matos, P.. “Shareholder Investment Horizons and the Market for Corporate Control.” Journal of Financial Economics, 76 (2005), 135–165.Google Scholar
Gaspar, J.-M.; Massa, M.; Matos, P.; Patgiri, R.; and Rehman, Z.. “Payout Policy Choices and Shareholder Investment Horizons.” Review of Finance, 17 (2012), 261–320.Google Scholar
Gilchrist, S.; Himmelberg, C. P.; and Huberman, G.. “Do Stock Price Bubbles Influence Corporate Investment?” Journal of Monetary Economics, 52 (2005), 805–827.Google Scholar
Gillan, S. L., and Starks, L. T.. “Corporate Governance Proposals and Shareholder Activism: The Role of Institutional Investors.” Journal of Financial Economics, 57 (2000), 275–305.Google Scholar
Gompers, P.; Ishii, J.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107–155.Google Scholar
Gompers, P. A., and Metrick, A.. “Institutional Investors and Equity Prices.” Quarterly Journal of Economics, 116 (2001), 229–259.Google Scholar
Goyal, A., and Wahal, S.. “The Selection and Termination of Investment Managers by Plan Sponsors.” Journal of Finance, 63 (2008), 1805–1847.Google Scholar
Graham, J. R.; Harvey, C. R.; and Rajgopal, S.. “The Economic Implications of Corporate Financial Reporting.” Journal of Accounting and Economics, 40 (2005), 3–73.CrossRefGoogle Scholar
Harford, J.; Jenter, D.; and Li, K.. “Institutional Cross-Holdings and Their Effect on Acquisition Decisions.” Journal of Financial Economics, 99 (2011), 27–39.CrossRefGoogle Scholar
Hoberg, G., and Phillips, G.. “Real and Financial Industry Booms and Busts.” Journal of Finance, 65 (2010), 45–86.CrossRefGoogle Scholar
Holderness, C. G. “A Survey of Blockholders and Corporate Control.” FRBNY Economic Policy Review, 9 (2003), 51–63.Google Scholar
Holderness, C. G. “The Myth of Diffuse Ownership in the United States.” Review of Financial Studies, 22 (2009), 1377–1408.CrossRefGoogle Scholar
Hong, H.; Wang, J.; and Yu, J.. “Firms as Buyers of Last Resort.” Journal of Financial Economics, 88 (2008), 119–145.CrossRefGoogle Scholar
Hotchkiss, E. S., and Strickland, D.. “Does Shareholder Composition Matter? Evidence from the Market Reaction to Corporate Earnings Announcements.” Journal of Finance, 58 (2003), 1469–1498.CrossRefGoogle Scholar
Ikenberry, D.; Lakonishok, J.; and Vermaelen, T.. “Market Underreaction to Open Market Share Repurchases.” Journal of Financial Economics, 39 (1995), 181–208.Google Scholar
Khan, M.; Kogan, L.; and Serafeim, G.. “Mutual Fund Trading Pressure: Firm-Level Stock Price Impact and Timing of SEOs.” Journal of Finance, 67 (2012), 1371–1395.Google Scholar
Loughran, T., and Ritter, J. R.. “The New Issues Puzzle.” Journal of Finance, 50 (1995), 23–51.CrossRefGoogle Scholar
McLean, R. D. “Share Issuance and Cash Savings.” Journal of Financial Economics, 99 (2011),693–715.CrossRefGoogle Scholar
Miller, M. H., and Rock, K.. “Dividend Policy under Asymmetric Information.” Journal of Finance, 40 (1985), 1031–1051.CrossRefGoogle Scholar
Pástor, L., and Veronesi, P.. “Stock Valuation and Learning about Profitability.” Journal of Finance, 58 (2003), 1749–1789.CrossRefGoogle Scholar
Peyer, U., and Vermaelen, T.. “The Nature and Persistence of Buyback Anomalies.” Review of Financial Studies, 22 (2009), 1693–1745.CrossRefGoogle Scholar
Polk, C., and Sapienza, P.. “The Stock Market and Corporate Investment: A Test of Catering Theory.” Review of Financial Studies, 22 (2009), 187–217.Google Scholar
Reingold, D. Confessions of a Wall Street Analyst: A True Story of Inside Information and Corruption in the Stock Market. New York, NY: Collins (2006).Google Scholar
Rhodes-Kropf, M.; Robinson, D. T.; and Viswanathan, S.. “Valuation Waves and Merger Activity: The Empirical Evidence.” Journal of Financial Economics, 77 (2005), 561–603.Google Scholar
Shleifer, A., and Vishny, R. W.. “Stock Market Driven Acquisitions.” Journal of Financial Economics, 70 (2003), 295–311.Google Scholar
Stein, J. C. “Rational Capital Budgeting in an Irrational World.” Journal of Business, 69 (1996),429–455.CrossRefGoogle Scholar
Yan, X., and Zhang, Z.. “Institutional Investors and Equity Returns: Are Short-Term Institutions Better Informed?” Review of Financial Studies, 22 (2009), 893–924.CrossRefGoogle Scholar