The Impact of Institutional Investment Horizon on Corporate Governance and Firm Performance

The purpose of this research study is to explore the impact of institutional investors in corporate governance and market measure firm performance mechanism. The study defined the investment horizon of the financial institutions on the bases of their long or short term investment objectives in the investee companies. In order to study these relationships the research analyzed an unbalanced panel of 287 non-financial firms’ from 2005 to 2016. The selected sample was analyzed by fixed effect, random effect and Arellano–Bond dynamic panel models. The results of the study confirm the positive impact of institutional investors (as a homogenous group) in enhancing the corporate governance and firms’ performance mechanism in the light of agency and signaling theories. However, when the financial institutions are analyzed on the basis of their investment horizon the empirical results deviated from the previous predicted theoretical findings. The research further concludes that long investment horizon institutional investors play a positive role in improving corporate governance index and Tobin’s Q, however, short investment horizon institutional investors are found detrimental for both the corporate governance and performance mechanism in Pakistani firms. The current study is unique in the context of the emerging economies, as it provides response to the previous contradictory opinions about the role of financial institutions in firm performance and corporate governance mechanism. Moreover, the current research is also useful for individual investors, corporate managers and regulatory authorities for better understanding of this phenomenon.