This paper challenges the view that foreign investors lead firms to adopt a short-term orientation and forgo long-term investment. Using a comprehensive sample of publicly listed firms in 30 countries over the 2001-2010 period, we find instead that greater foreign institutional ownership fosters long-term investment in tangible, intangible, and human capital. Foreign institutional ownership also leads to significant increases in innovation output. We identify these effects by exploiting the exogenous variation in foreign institutional ownership that follows the addition of a firm to the MSCI indices. Our results suggest that foreign institutions exert a disciplinary role on entrenched corporate insiders worldwide.
Pedro Matos is an Associate Professor in the Finance area at the University of Virginia, Darden School of Business. His research focuses on international corporate governance and the growing importance of institutional investors in financial markets worldwide. His work has been published in the Journal of Finance, the Journal of Financial Economics and the Review of Financial Studies. It has been featured also in the press, including in The Economist, The Financial Times, The New York Times, The Washington Post, Fortune and Forbes. He is a Research Associate at the European Corporate Governance Institute (ECGI) and has received numerous research grants and awards. At Darden, he has published numerous case studies and won the Wells Fargo Award for Excellence in Course Material Development. He previously taught at the University of Southern California, Marshall School of Business where he received a Golden Apple teaching award. He holds a PhD in Finance from INSEAD. Prior to his PhD, he worked with the Portuguese Ministry of Finance and consulted for the World Bank.