Institutional Investment Horizon and Firm Valuation: A Global Perspective

Using a comprehensive dataset of firms from 34 countries, we study the effect of institutional investors’ investment horizons on firm valuation around the world. Long-term investors prefer to invest in firms domiciled in countries with a more investor-friendly institutional environment, while short-term investors tend to be less concerned about the quality of the financial and legal environment. The positive association between institutional ownership and firm value is driven by short-horizon institutions. This valuation effect of short-horizon institutions is stronger in countries with high market liquidity and in firms with high stock liquidity. This result is consistent with short-term investors increasing firm value by disciplining managers through a credible threat of exit.

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