INTERNATIONAL EVIDENCE ON THE MONITORING ROLE OF FOREIGN INSTITUTIONAL INVESTORS IN CORPORATE STRATEGIC DECISIONS

Abstract

This thesis examines whether the presence of foreign institutional investors is an effective monitoring channel in influencing previously unexplored corporate strategic decisions. To this end, this thesis first examines the effect of foreign institutional investors on the value linked with the use of excess cash holdings, namely the value of excess cash holdings. Second, the thesis examines the effect of foreign institutional investors on investment efficiency proxied by the relationship between investment and growth opportunities (Tobin’s Q). Finally, it examines the relative effect of foreign and domestic institutional investors on the value of excess cash holdings in Pakistan. The main sample of the thesis includes publicly listed firms from 32 non-US countries. The excess cash holdings’ value is measured by regressing excess cash holdings on firm value. The data is analyzed using Ordinarily Least Squares (OLS) regression, including fixed effects at different levels (e.g., year, firm, and industry). The overall findings of the thesis show that an increase in foreign institutional investors around the world is an effective monitoring channel in their portfolios’ firms. Specifically, the thesis findings are based on three sets of investigations. First, this thesis reinforces the agency view of cash holdings by revealing that excess cash holdings are valued at a premium in firms with high foreign institutional ownership. The study implies that the effective monitoring by foreign institutional investors translates into a higher marginal value of excess cash holdings. Further, it shows that investors from common law countries have a more pronounced and consistently positive impact on the excess cash value. Additionally, the positive valuation effect of foreign institutional investors is more prominent in weak investor protection countries and in firms with high agency costs. x Consistent with the agency and information asymmetry view, the second essay of the dissertation shows that an increase in equity ownership by FIIs strengthens the investment-Q sensitivity, resulting in higher investment efficiency. The study also shows that the positive association between foreign institutional investors and investment efficiency is driven by investors from common-law countries, not civil-law investors. In addition, consistent with the institutional monitoring hypothesis, the relationship between foreign institutional ownership and investment efficiency is stronger in countries with weaker institutional controls: countries with weak governance and investor protection. Third, motivated by the dual agency perspective, this dissertation extends the initial investigation concerning the excess cash holdings’ value in the context of Pakistan. To this end, the study employs a panel sample of 220 listed firms on the Pakistan Stock Exchange (PSX) to explore the relative effect of foreign and domestic institutional investors on the excess cash holdings’ value. Consistent with the hypotheses, the study finds evidence that domestic investors do not significantly influence the value of excess cash holdings, while foreign institutional investors positively impact this value. Further evidence show that the positive effect on the value of excess cash holdings is primarily driven by foreign investors domiciled in countries where governance mechanisms are strong (e.g., common law countries). Moreover, this effect is more substantial in low financial constraints firms.