ABSTRACT Purpose – Study the impact of the heterogeneity of institutional investors, evident in t... more ABSTRACT Purpose – Study the impact of the heterogeneity of institutional investors, evident in their investment horizon, on firm credit ratings.Methodology/approach – Use a large sample of U.S. firms over the period from 1985 to 2006 (20,670 U.S. firm-year observations) to empirically investigate the relationship between institutional investment horizon and firm credit ratings. Test whether institutional investors with long-term investment horizon are associated with important monitoring and informational roles and thus higher credit ratings.Findings – Stable shareholdings and relationship investing of institutional investors contribute to their monitoring and informational roles and result in higher firm credit ratings. Namely, ownership stakes of long-term institutional investors are associated with higher firm credit ratings than those of short-term institutional investors. In addition, the predominance and number of institutional investors with a long-term investment horizon affect firm's agency costs and information quality.Social implications – Institutional monitoring incentives seem to be susceptible to the heterogeneity of institutional investors. The results point to the benefits of the long-term investment horizon of institutional investors (beyond their shareholdings) that seem to be associated with more efficient monitoring and thus reduced managerial myopia and opportunism.Originality/value of the chapter – This is the first work to provide evidence on the extent to which the heterogeneity of institutional investors, evident in their investment horizon, alters firm's credit ratings.
We examine the effect of corporate social responsibility (CSR) on the cost of equity capital for ... more We examine the effect of corporate social responsibility (CSR) on the cost of equity capital for a large sample of U.S. firms. Using several approaches to estimate firms' ex ante cost of equity, we find that firms with better CSR scores exhibit cheaper equity financing. In particular, our findings suggest that investment in improving responsible employee relations, environmental policies, and
ABSTRACT Recent research suggests that collectivism breeds corruption in bank lending. This findi... more ABSTRACT Recent research suggests that collectivism breeds corruption in bank lending. This finding, together with the stickiness of culture, poses a direct challenge to economic growth in collectivist societies. In this paper, we address this grim outlook by examining the types of firms that are susceptible to the detrimental effect of collectivism on lending integrity and the formal institutions that can help alleviate such effect. We find that the adverse effect of collectivism on bank corruption is more severe in small and medium-sized firms, privately owned firms, and non-exporting firms, while it is considerably weaker in countries with more effective private monitoring, a higher (lower) fraction of foreign-owned (government-owned) banks, a more competitive banking sector, better information sharing, and stronger legal and political institutions. Our findings are robust to using alternative measures of collectivism and alternative dependent variables. These results highlight how firm-level characteristics and formal institutions interact with collectivism in affecting firms’ access to bank credit.
Journal of Multinational Financial Management, 2015
ABSTRACT Using a large sample of firms from 46 countries, we investigate the impact of political ... more ABSTRACT Using a large sample of firms from 46 countries, we investigate the impact of political institutions on firm growth. We find that tighter political constraints stimulate firm growth and that this positive impact is more pronounced in weak legal environments. Our results are economically significant and robust to a number of sensitivity tests, including alternative proxies for political institutions, alternative measures of firm growth, additional controls, firm- versus country-level regressions, as well as when we address the endogeneity of political constraints. Our results suggest that reforms aimed at improving a country's political institutions can significantly impact firm growth, and that it is indeed through improved political institutions that firms are incentivized to invest in profitable projects.
ABSTRACT We report large sample evidence on the importance of auditor choice to the ex ante cost ... more ABSTRACT We report large sample evidence on the importance of auditor choice to the ex ante cost of capital for public firms from 37 countries. In regressions that control for country, industry, and year fixed effects as well as other firm-level determinants, we find that corporate equity financing worldwide is cheaper when Big Four auditors monitor the financial reporting process, although this relation is weaker outside the U.S. where the implicit insurance coverage that auditors afford investors is much lower. Economically, our coefficient estimates translate into U.S. and non-U.S public firms’ cost of equity capital falling 49 and 20 basis points, respectively, in the presence of a Big Four auditor. We also generally provide empirical support for the predictions that the equity pricing role of Big Four auditors is stronger in countries with better institutions governing investor protection and disclosure standards. Collectively, our research implies that rather than governments having to resort to imposing the extreme auditor litigation exposure that prevails in the U.S., moderately protecting investors’ interests with these institutions is sufficient for them to benefit from differential audit quality.
ABSTRACT Using the high-power setting of newly privatized firms from 64 countries, we examine the... more ABSTRACT Using the high-power setting of newly privatized firms from 64 countries, we examine the relationship between ownership type and firm-level capital allocations as captured by the sensitivity of investment expenditure to investment opportunities. Consistent with our predictions that government and foreign institutional owners are associated with different levels of information asymmetry and agency problems, we find strong and robust evidence that government (foreign) ownership weakens (strengthens) investment-Q sensitivity, thereby increasing investment inefficiency (efficiency). Moreover, we find that the relation between foreign ownership and investment efficiency is stronger when governments relinquish control and country-level governance institutions are weaker. Overall, our findings highlight the important role of ownership type in determining firms’ investment behavior and efficiency.
ABSTRACT Purpose – Study the impact of the heterogeneity of institutional investors, evident in t... more ABSTRACT Purpose – Study the impact of the heterogeneity of institutional investors, evident in their investment horizon, on firm credit ratings.Methodology/approach – Use a large sample of U.S. firms over the period from 1985 to 2006 (20,670 U.S. firm-year observations) to empirically investigate the relationship between institutional investment horizon and firm credit ratings. Test whether institutional investors with long-term investment horizon are associated with important monitoring and informational roles and thus higher credit ratings.Findings – Stable shareholdings and relationship investing of institutional investors contribute to their monitoring and informational roles and result in higher firm credit ratings. Namely, ownership stakes of long-term institutional investors are associated with higher firm credit ratings than those of short-term institutional investors. In addition, the predominance and number of institutional investors with a long-term investment horizon affect firm's agency costs and information quality.Social implications – Institutional monitoring incentives seem to be susceptible to the heterogeneity of institutional investors. The results point to the benefits of the long-term investment horizon of institutional investors (beyond their shareholdings) that seem to be associated with more efficient monitoring and thus reduced managerial myopia and opportunism.Originality/value of the chapter – This is the first work to provide evidence on the extent to which the heterogeneity of institutional investors, evident in their investment horizon, alters firm's credit ratings.
We examine the effect of corporate social responsibility (CSR) on the cost of equity capital for ... more We examine the effect of corporate social responsibility (CSR) on the cost of equity capital for a large sample of U.S. firms. Using several approaches to estimate firms' ex ante cost of equity, we find that firms with better CSR scores exhibit cheaper equity financing. In particular, our findings suggest that investment in improving responsible employee relations, environmental policies, and
ABSTRACT Recent research suggests that collectivism breeds corruption in bank lending. This findi... more ABSTRACT Recent research suggests that collectivism breeds corruption in bank lending. This finding, together with the stickiness of culture, poses a direct challenge to economic growth in collectivist societies. In this paper, we address this grim outlook by examining the types of firms that are susceptible to the detrimental effect of collectivism on lending integrity and the formal institutions that can help alleviate such effect. We find that the adverse effect of collectivism on bank corruption is more severe in small and medium-sized firms, privately owned firms, and non-exporting firms, while it is considerably weaker in countries with more effective private monitoring, a higher (lower) fraction of foreign-owned (government-owned) banks, a more competitive banking sector, better information sharing, and stronger legal and political institutions. Our findings are robust to using alternative measures of collectivism and alternative dependent variables. These results highlight how firm-level characteristics and formal institutions interact with collectivism in affecting firms’ access to bank credit.
Journal of Multinational Financial Management, 2015
ABSTRACT Using a large sample of firms from 46 countries, we investigate the impact of political ... more ABSTRACT Using a large sample of firms from 46 countries, we investigate the impact of political institutions on firm growth. We find that tighter political constraints stimulate firm growth and that this positive impact is more pronounced in weak legal environments. Our results are economically significant and robust to a number of sensitivity tests, including alternative proxies for political institutions, alternative measures of firm growth, additional controls, firm- versus country-level regressions, as well as when we address the endogeneity of political constraints. Our results suggest that reforms aimed at improving a country's political institutions can significantly impact firm growth, and that it is indeed through improved political institutions that firms are incentivized to invest in profitable projects.
ABSTRACT We report large sample evidence on the importance of auditor choice to the ex ante cost ... more ABSTRACT We report large sample evidence on the importance of auditor choice to the ex ante cost of capital for public firms from 37 countries. In regressions that control for country, industry, and year fixed effects as well as other firm-level determinants, we find that corporate equity financing worldwide is cheaper when Big Four auditors monitor the financial reporting process, although this relation is weaker outside the U.S. where the implicit insurance coverage that auditors afford investors is much lower. Economically, our coefficient estimates translate into U.S. and non-U.S public firms’ cost of equity capital falling 49 and 20 basis points, respectively, in the presence of a Big Four auditor. We also generally provide empirical support for the predictions that the equity pricing role of Big Four auditors is stronger in countries with better institutions governing investor protection and disclosure standards. Collectively, our research implies that rather than governments having to resort to imposing the extreme auditor litigation exposure that prevails in the U.S., moderately protecting investors’ interests with these institutions is sufficient for them to benefit from differential audit quality.
ABSTRACT Using the high-power setting of newly privatized firms from 64 countries, we examine the... more ABSTRACT Using the high-power setting of newly privatized firms from 64 countries, we examine the relationship between ownership type and firm-level capital allocations as captured by the sensitivity of investment expenditure to investment opportunities. Consistent with our predictions that government and foreign institutional owners are associated with different levels of information asymmetry and agency problems, we find strong and robust evidence that government (foreign) ownership weakens (strengthens) investment-Q sensitivity, thereby increasing investment inefficiency (efficiency). Moreover, we find that the relation between foreign ownership and investment efficiency is stronger when governments relinquish control and country-level governance institutions are weaker. Overall, our findings highlight the important role of ownership type in determining firms’ investment behavior and efficiency.
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