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This chapter investigates the role of macro corporate governance (legal and extra legal institutions) in determining the extent of ultimate excess control (i.e., the ownership-controls rights divergence of the ultimate owner) using a large sample of Asian and European companies. We find that the level of excess control is lower in countries with (1) good investor protection and better enforcement of information disclosure and (2) fairer competition laws, higher newspaper diffusion, and more regulated insider trading. Controlling for institutions subsumes the effect of firm-level determinants, as only leverage appears to be negatively and significantly related to excess control.

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.

Institutional investors have increasingly gained importance since the early 1990s. The assets under management in these funds have increased threefold since 1990 to reach more than US$45 trillion in 2005, including over US$20 trillion in equity (Ferreira & Matos, 2008). Further, the value of institutional investors' assets represents roughly 162.6% of the OECD gross domestic product in 2005 (Gonnard, Kim, & Ynesta, 2008). Given the magnitude of institutional investors' holdings relative to the world market capitalization, challenging questions on the economic role of these investors have been raised. One such question concerns their impact on the stability of stock markets. On the one hand, active strategies of buying and selling shares by these investors may contribute to moving stock prices away from their fundamental values. On the other hand, if all institutional investors react to the same information in a timely manner, they are in fact helping to increase market efficiency by speeding up the adjustment of prices to new fundamentals (for competing theories on the role of institutional investors, see, e.g., Lakonishok, Shleifer, & Vishny, 1992). This view of institutional investors as “efficiency drivers” generated considerable debate for many years (see, e.g., Ferreira & Laux, 2007; French & Roll, 1986).