Are Foreign Investors Locusts? The Long-Term Effects of Foreign Institutional Ownership

Are Foreign Investors Locusts? The Long-Term Effects of Foreign Institutional Ownership

Jan Bena, Miguel Ferreira, Pedro Matos, Pedro Pires

Series number :

Serial Number: 
468/2016

Date posted :

August 01 2016

Last revised :

April 25 2016
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Keywords

  • Corporate innovation • 
  • R&D • 
  • Patents • 
  • Institutional ownership • 
  • financial globalization • 
  • monitoring • 
  • short-termism

This paper challenges the view that foreign investors lead firms to adopt a short-term orientation and forgo long-term investment. Using a comprehensive sample of publicly listed firms in 30 countries over the 2001-2010 period, we find instead that greater foreign institutional ownership fosters long-term investment in tangible, intangible, and human capital.

Foreign institutional ownership also leads to significant increases in innovation output. We identify these effects by exploiting the exogenous variation in foreign institutional ownership that follows the addition of a firm to the MSCI indices. Our results suggest that foreign institutions exert a disciplinary role on entrenched corporate insiders worldwide.

Authors

Real name: 
Jan Bena
Real name: 
Research Member
Darden School of Business, University of Virginia
Real name: 
Pedro Pires