An investigation of institutional investor and firm heterogeneity
Qayyum, Muhammad Arif
Highfield, J. Michael
In the first essay, we extend the research of Grinstein and Michaely (2005) on the relation between institutional ownership and payout policy by focusing on the institutions most likely to vote their shares. We account for heterogeneity among institutional investors as well as for firms. This paper accounts for heterogeneity among institutional investors based on their portfolio concentration and investment horizon and firms are differentiated based on their importance for institutional investors (based on percentage of total portfolio invested in the firm), free cash flow and debt-to-equity ratio. We examine the institutional holding data from 1980 to 2006. Like Grinstein and Michaely (2005) we don’t find evidence that institutional investors influence dividend payouts even after controlling for heterogeneity among institutional investors and firms. Our results indicate that institutional investors increase their holding prior to increase in repurchases in firms where they are long-term institutional investors. We also find similar relation between firm importance and repurchases. Our results do not support the notion that institutional investors are attracted to high dividend paying firms or firms with higher repurchases. In the second essay, we investigate relation between institutional holding and firm value. We examine whether institutional investor influence firm performance or they just follow momentum strategies. This paper takes into account the heterogeneity among institutional investors in that firm, firm importance for an institutional investor and institutional focus on a particular firm. We analyze annual data from 1980 to 2006. We don't find statistically significant evidence that institutional investors monitor and influence firm decisions to increasing firm value. In addition, our results suggest that that firms that increase their firm value attract investment from institutional investors. We also find that this relationship is stronger for institutional investors with long-term investment horizon.