Once Dedicated, Always Dedicated? Long-Term Effects of Dedicated Ownership by Institutional Investors (CEIBS Working Paper, No. 012/2020/STR/ACC)

It is widely accepted that dedicated institutional investors with a long-term investment horizon encourage more long-term strategic investments than other types of institutional investors. Longterm does not necessarily mean permanent ownership. To deliver return to their clients at the end of the fund life cycle, eventually the dedicated institutional investors also prepare their exit plan from existing investments. We find that dedicated institutional investors’ ownership becomes negatively associated with the firm-level capital expenditure ratio when we expand our firm reaction window from a short-term to a relatively long-term horizon. We also find that, on average, tight control imposed by dedicated investors appears to degrade firm performance. This has important public policy implications regarding the allocation of investment resources in the economy.