Institutional Investment Horizon and Firm Credit Ratings

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 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 Paper: 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