Institutional Investment Horizon and Firm Credit Ratings

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.

Citation

Attig, N., El Ghoul, S. and Guedhami, O. (2011), "Institutional Investment Horizon and Firm Credit Ratings", Boubakri, N. and Cosset, J.-C. (Ed.) Institutional Investors in Global Capital Markets (International Finance Review, Vol. 12), Emerald Group Publishing Limited, Leeds, pp. 51-82. https://doi.org/10.1108/S1569-3767(2011)0000012005