Institutional Investment Horizons and the Cost of Equity Capital


  • Najah Attig,

  • Sean Cleary,

  • Sadok El Ghoul,

  • Omrane Guedhami

    Search for more papers by this author
    • Najah Attig is an Associate Professor at Saint Mary's University, Sobey School of Business in Halifax, Canada.. Sean Cleary is the BMO Professor of Finance at Queen's School of Business at Queen's University in Kingston, Canada. Sadok El Ghoul is an Associate Professor at the University of Alberta in Edmonton, Canada. Omrane Guedhami is an Associate Professor at the University of South Carolina in Columbia, SC and an Adjunct Research Professor at Memorial University of Newfoundland in St. John's, Canada.

  • We thank Bill Christie (Editor), two anonymous reviewers, Narjess Boubakri, Eric Brisker, Kershen Huang, and participants at the 2012 Eastern Finance Association Meeting, 12th Symposium on Finance, Banking, and Insurance, 2011 Northern Finance Association Conference, 2011 FMA Applied Finance Conference, and 2010 Southern Finance Association for their insights on an earlier version of this paper. We appreciate generous financial support from Canada's Social Sciences and Humanities Research Council.


We examine the influence of institutional investors’ investment horizons on a firm's cost of equity. We argue that the cost of equity will decrease in the presence of institutional investors with longer-term investment horizons due to improved monitoring and information quality. Our empirical results demonstrate that the cost of equity declines in the presence of institutional investors with long-term investment horizons, all else remaining equal. Our results indicate also that the monitoring role of long-term institutional investors is more pronounced for firms with higher agency problems (poorly governed firms). Overall, our evidence suggests that when considering the influence of institutional investors, it is critical to account for institutional heterogeneity, which leads to new directions for future research.