Institutional investors might actually spur corporations to invest in longer-term projects, according to a new academic study that contradicts the belief held by many.
The study, "Do Institutional Investors Exacerbate Managerial Myopia?", examined corporate spending on property, plants and equipment, and research and development from 1987 to 1996. The authors then compared the spending to the amount of institutional ownership of those companies.
The authors found a positive relationship between corporate investment and institutional ownership, which indicates the corporations that spend more for the long term are sought out by institutional investors.
"We've seen a fair number of people making accusations without having (them) substantiated," said one of the authors, Sunil Wahal, assistant professor of finance at Emory University's Roberto C. Goizueta Business School, Atlanta. Mr. Wahal's co-author is John J. McConnell, the Emanuel T. Weiler Professor of Management for the Krannert School of Business, Indiana University, Bloomington, Ind.
The results run counter to arguments made by some noted experts.
"Fund managers are portrayed as being ever ready to 'dump' a stock, thereby beating down its price at the first hint of an earnings decline," according to the study.
"We looked at (the issue). We found, lo and behold, the exact opposite," Mr. Wahal said.
Although the argument was perhaps more relevant during the takeover boom of the 1980s, the question is still worth examining, he said.
The authors suggest in the study that perhaps corporate spending on investment and research increases with institutional ownership because institutions take a longer view than do individual owners.
The authors' reasoning: "Professional money managers are likely to be better informed than individuals (perhaps because of economies of scale in gathering information, unique information gathering abilities, or for other reasons)."
There are some caveats to the authors' conclusions. The study examines corporate investment only where hard numbers were available. The study says some have argued that "myopic" investment by corporate managers is most likely to show up in difficult to observe investments such as human resource development.
"To the extent that that argument is true, we are missing the target," according to the study.
Moreover, the authors note their approach does not address the question of whether firms are underinvested relative to the "value maximizing strategy."
"We're looking at deviation from the industry norm," Mr. Wahal said.
It could be that all U.S. firms underinvest, but firms with more institutional ownership underinvest to a lesser degree. Conversely, it could be that all U.S. firms overinvest, and firms with large institutional ownership do so the most.
