Skip to main content
SpringerLink
Log in

Economic policy uncertainty and heterogeneous institutional investor horizons

  • Original Research
  • Published:
Review of Quantitative Finance and Accounting Aims and scope Submit manuscript

Abstract

Existing literature has extensively discussed the impact of economic policy uncertainty (EPU) on firm-related activities, but there is sparse evidence of its impact on the behavior of institutional investors. Using quarterly U.S firm-level data for 1980Q1-2020Q4, we find heterogeneous responses of institutional investors to EPU shocks to different horizons. Specifically, long-term institutional investors respond positively to EPU shocks, while short-term institutional investors reduce their holdings during periods of uncertainty. We posit that different expectations about the future of firms between long- and short-term investors may account for the heterogeneous responses. We test this hypothesis by investigating how firm growth opportunities, volatility, and investment activity influence the relationship between EPU and institutional investor horizons. The results show that the positive (negative) effect of EPU on long-term (short-term) institutional investors becomes stronger for firms with higher growth opportunities, higher volatility, and more investment. Our paper has important economic implications that the countercyclical behavior of long-term institutional investors improves firm value and liquidity during uncertain periods.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Our sample period starts from 1980 when the Security Exchange Commission started to require institutional investors with more than $100 million in assets under management to report their holdings every quarter (Lewellen and Lewellen 2022). According to Wharton Research Data Services, “The Thomson/Refinitiv Institutional (13f) Holdings are available on WRDS as part of the Thomson Financial Network (TFN) group with holdings data starting in the first quarter of 1980. The data provide detail on holdings of US equities, and a limited set of other securities, including foreign stocks, and are based on documents filed by registered investment companies and professional money managers." Our sample period ends in 2020 to avoid the potential impact of COVID-19. We have added the discussion for the justification of our sample period in the revised manuscript.

  2. For more details on variable construction, see https://www.policyuncertainty.com/us_monthly.html

  3. Several other measures are also used in existing literature. For instance, Gulen and Ion (2016) uses the first dimension of the DW-NOMINATE scores and calculates the political polarization as the average of these scores for the Republican party members in the Senate minus the average for the Democratic party members in the Senate. Xu (2020) considers a simple political polarization defined as the average dispersion about bills or joint resolutions considered in the House across both parties. Specifically, it is calculated as \(\frac{1}{N} \sum _{n=1}^N 1-|Yea_{n,t}\% - Nay_{n,y}\%|\), where \(Yea_{n,t}\%\) (\(Nay_{n,t}\%\)) is the percentage of Yea (Nay) votes among all votes for bill n in year t. N is the total number of bills or joint resolutions in year t. Note that this measure does not distinguish the disagreement between Republican and Democratic legislators in the House. Clearly, our measure of political polarization is an extension of Xu (2020) by highlighting the disagreement between two parties. As a robustness check, we also construct Xu (2020)’s measure and find the correlation between these two is 0.673. In unreported results, we obtain similar estimate results.

  4. We only report the results using the news-based EPU and the predicted news-based EPU to simplify the discussions as the results are robust to other EPU and IV measures.

  5. Since the illiquidity is measured as the average of the daily Amihud (2002) illiquidity measure within a quarter, a higher value of the measure entails lower stock liquidity.

References

  • Abel AB (1983) Optimal investment under uncertainty. Am Econ Rev 73(1):228–233

    Google Scholar 

  • Abel AB, Dixit AK, Eberly JC, Pindyck RS (1996) Options, the value of capital, and investment. Q J Econ 111(3):753–777

    Article  Google Scholar 

  • Aggarwal R, Erel I, Ferreira M, Matos P (2011) Does governance travel around the world? evidence from institutional investors. J Financ Econ 100(1):154–181

    Article  Google Scholar 

  • Amihud Y (2002) Illiquidity and stock returns: cross-section and time-series effects. J Financ Mark 5(1):31–56

    Article  Google Scholar 

  • Amihud Y, Mendelson H (1986) Asset pricing and the bid-ask spread. J Financ Econ 17(2):223–249

    Article  Google Scholar 

  • Amihud Y, Mendelson H (2012) Liquidity, the value of the firm, and corporate finance. J Appl Corp Financ 24(1):17–32

    Article  Google Scholar 

  • Anderson RW, Bustamante MC, Guibaud S, Zervos M (2018) Agency, firm growth, and managerial turnover. J Financ 73(1):419–464

    Article  Google Scholar 

  • Attig N, Cleary S, El Ghoul S, Guedhami O (2012) Institutional investment horizon and investment-cash flow sensitivity. J Bank Financ 36(4):1164–1180

    Article  Google Scholar 

  • Attig N, El Ghoul S, Guedhami O, Zheng X (2021) Dividends and economic policy uncertainty: international evidence. J Corp Financ 66:101785

    Article  Google Scholar 

  • Baker SR, Bloom N, Davis SJ (2016) Measuring economic policy uncertainty. Q J Econ 131(4):1593–1636

    Article  Google Scholar 

  • Barinov A (2017) Institutional ownership and aggregate volatility risk. J Empir Financ 40:20–38

    Article  Google Scholar 

  • Bena J, Ferreira MA, Matos P, Pires P (2017) Are foreign investors locusts? The long-term effects of foreign institutional ownership. J Financ Econ 126(1):122–146

    Article  Google Scholar 

  • Bernanke BS (1983) Irreversibility, uncertainty, and cyclical investment. Q J Econ 98(1):85–106

    Article  Google Scholar 

  • Bhagat S, Welch I (1995) Corporate research & development investments international comparisons. J Account Econ 19(2–3):443–470

    Article  Google Scholar 

  • Bhattacharya U, Hsu P-H, Tian X, Xu Y (2017) What affects innovation more: policy or policy uncertainty? J Financ Quant Anal 52(5):1869–1901

    Article  Google Scholar 

  • Białkowski J, Dang HD, Wei X (2021) High policy uncertainty and low implied market volatility: An academic puzzle? J Financ Econ 143(3):1185–1208

    Article  Google Scholar 

  • Biswas S, Zhai W (2021) Economic policy uncertainty and cross-border lending. J Corp Financ 67:101867

    Article  Google Scholar 

  • Bloom N (2014) Fluctuations in uncertainty. J Econ Perspect 28(2):153–76

    Article  Google Scholar 

  • Bolton P, Halem Z, Kacperczyk M (2022) The financial cost of carbon. J Appl Corp Financ 34(2):17–29

    Article  Google Scholar 

  • Bolton P, Kacperczyk M (2021) Do investors care about carbon risk? J Financ Econ 142(2):517–549

    Article  Google Scholar 

  • Bonaime A, Gulen H, Ion M (2018) Does policy uncertainty affect mergers and acquisitions? J Financ Econ 129(3):531–558

    Article  Google Scholar 

  • Borochin P, Yang J (2017) The effects of institutional investor objectives on firm valuation and governance. J Financ Econ 126(1):171–199

    Article  Google Scholar 

  • Boutchkova M, Doshi H, Durnev A, Molchanov A (2012) Precarious politics and return volatility. Rev Financ Stud 25(4):1111–1154

    Article  Google Scholar 

  • Brogaard J, Detzel A (2015) The asset-pricing implications of government economic policy uncertainty. Manag Sci 61(1):3–18

    Article  Google Scholar 

  • Bushee BJ (1998) The influence of institutional investors on myopic r &d investment behavior. Account Rev 73(3):305–333

    Google Scholar 

  • Bushee BJ (2001) Do institutional investors prefer near-term earnings over long-run value? Contemp Account Res 18(2):207–246

    Google Scholar 

  • Bushee BJ, Noe CF (2000) Corporate disclosure practices, institutional investors, and stock return volatility. J Account Res 38:171–202

    Article  Google Scholar 

  • Caballero RJ (1991) On the sign of the investment-uncertainty relationship. Am Econ Rev 81(1):279–288

    Google Scholar 

  • Campbell JY, Lettau M, Malkiel BG, Xu Y (2001) Have individual stocks become more volatile? an empirical exploration of idiosyncratic risk. J Financ 56(1):1–43

    Article  Google Scholar 

  • Cella C, Ellul A, Giannetti M (2013) Investors’ horizons and the amplification of market shocks. Rev Financ Stud 26(7):1607–1648

    Article  Google Scholar 

  • Chen X, Harford J, Li K (2007) Monitoring: which institutions matter? J Financ Econ 86(2):279–305

    Article  Google Scholar 

  • Chen Z, Da Z, Huang D, Wang L (2023) Presidential economic approval rating and the cross-section of stock returns. J Financ Econ 147(1):106–131

    Article  Google Scholar 

  • Chichernea DC, Petkevich A, Zykaj BB (2015) Idiosyncratic volatility, institutional ownership, and investment horizon. Eur Financ Manag 21(4):613–645

    Article  Google Scholar 

  • Chung KH, Zhang H (2011) Corporate governance and institutional ownership. J Financ Quant Anal 46(1):247–273

    Article  Google Scholar 

  • Cline BN, Fu X, Tang T (2020) Shareholder investment horizons and bank debt financing. J Bank Financ 110:105656

    Article  Google Scholar 

  • Çolak G, Durnev A, Qian Y (2017) Political uncertainty and ipo activity: Evidence from us gubernatorial elections. J Financ Quant Anal 52(6):2523–2564

    Article  Google Scholar 

  • Colak G, Gounopoulos D, Loukopoulos P, Loukopoulos G (2021) Political power, local policy uncertainty and ipo pricing. J Corp Financ 67:101907

    Article  Google Scholar 

  • Coles JL, Daniel ND, Naveen L (2006) Managerial incentives and risk-taking. J Financ Econ 79(2):431–468

    Article  Google Scholar 

  • Cremers M, Pareek A (2015) Short-term trading and stock return anomalies: momentum, reversal, and share issuance. Rev Financ 19(4):1649–1701

    Article  Google Scholar 

  • Cremers M, Pareek A, Sautner Z (2020) Short-term investors, long-term investments, and firm value: evidence from Russell 2000 index inclusions. Manag Sci 66(10):4535–4551

    Article  Google Scholar 

  • Da Z, Gao P, Jagannathan R (2011) Impatient trading, liquidity provision, and stock selection by mutual funds. Rev Financ Stud 24(3):675–720

    Article  Google Scholar 

  • Derrien F, Kecskés A, Thesmar D (2013) Investor horizons and corporate policies. J Financ Quant Anal 48(6):1755–1780

    Article  Google Scholar 

  • Döring S, Drobetz W, El Ghoul S, Guedhami O, Schröder H (2021) Cross-country determinants of institutional investors’ investment horizons. Financ Res Lett 39:101641

    Article  Google Scholar 

  • Driss H, Drobetz W, El Ghoul S, Guedhami O (2021) Institutional investment horizons, corporate governance, and credit ratings: International evidence. J Corp Financ 67:101874

    Article  Google Scholar 

  • Ferreira MA, Matos P (2008) The colors of investors’ money: The role of institutional investors around the world. J Financ Econ 88(3):499–533

    Article  Google Scholar 

  • Ferrell A, Liang H, Renneboog L (2016) Socially responsible firms. J Financ Econ 122(3):585–606

    Article  Google Scholar 

  • Gaspar J-M, Massa M, Matos P (2005) Shareholder investment horizons and the market for corporate control. J Financ Econ 76(1):135–165

    Article  Google Scholar 

  • Gaspar J-M, Massa M, Matos P, Patgiri R, Rehman Z (2013) Payout policy choices and shareholder investment horizons. Rev Financ 17(1):261–320

    Article  Google Scholar 

  • Ghaly M, Dang VA, Stathopoulos K (2020) Institutional investors’ horizons and corporate employment decisions. J Corp Financ 64:101634

    Article  Google Scholar 

  • Gompers PA, Metrick A (2001) Institutional investors and equity prices. Q J Econ 116(1):229–259

    Article  Google Scholar 

  • Goyal VK, Lehn K, Racic S (2002) Growth opportunities and corporate debt policy: the case of the us defense industry. J Financ Econ 64(1):35–59

    Article  Google Scholar 

  • Guan J, Xu H, Huo D, Hua Y, Wang Y (2021) Economic policy uncertainty and corporate innovation: Evidence from china. Pacific-Basin Financ J 67:101542

    Article  Google Scholar 

  • Gulen H, Ion M (2016) Policy uncertainty and corporate investment. Rev Financ Stud 29(3):523–564

    Google Scholar 

  • Hao Q (2014) Institutional shareholder investment horizons and seasoned equity offerings. Financ Manag 43(1):87–111

    Article  Google Scholar 

  • Harford J, Kecskés A, Mansi S (2018) Do long-term investors improve corporate decision making? J Corp Financ 50:424–452

    Article  Google Scholar 

  • Hartzell JC, Starks LT (2003) Institutional investors and executive compensation. J Financ 58(6):2351–2374

    Article  Google Scholar 

  • Hirschman AO (1970) Exit, voice, and loyalty: Responses to decline in firms, organizations, and states, vol 25. Harvard University Press

    Google Scholar 

  • Holmström B, Tirole J (1993) Market liquidity and performance monitoring. J Polit Econ 101(4):678–709

    Article  Google Scholar 

  • Jankensgard H, Vilhelmsson A (2018) The shareholder base hypothesis of stock return volatility: empirical evidence. Financ Manag 47(1):55–79

    Article  Google Scholar 

  • Jens CE (2017) Political uncertainty and investment: Causal evidence from us gubernatorial elections. J Financ Econ 124(3):563–579

    Article  Google Scholar 

  • Jensen MC (1986) Agency costs of free cash flow, corporate finance, and takeovers. Am Econ Rev 76(2):323–329

    Google Scholar 

  • Jordan BD, Kim S, Liu MH (2016) Growth opportunities, short-term market pressure, and dual-class share structure. J Corp Financ 41:304–328

    Article  Google Scholar 

  • Julio B, Yook Y (2012) Political uncertainty and corporate investment cycles. J Financ 67(1):45–83

    Article  Google Scholar 

  • Kang W, Lee K, Ratti RA (2014) Economic policy uncertainty and firm-level investment. J Macroecon 39:42–53

    Article  Google Scholar 

  • Kavadis N, Thomsen S (2023) Sustainable corporate governance: a review of research on long-term corporate ownership and sustainability. Corp Gov Int Rev 31(1):198–226

    Article  Google Scholar 

  • Kaviani MS, Kryzanowski L, Maleki H, Savor P (2020) Policy uncertainty and corporate credit spreads. J Financ Econ 138(3):838–865

    Article  Google Scholar 

  • Kelly B, Pástor L, Veronesi P (2016) The price of political uncertainty: theory and evidence from the option market. J Financ 71(5):2417–2480

    Article  Google Scholar 

  • Kim I, Ryou JW, Yang R (2020) The color of shareholders’ money: institutional shareholders’ political values and corporate environmental disclosure. J Corp Financ 64:101704

    Article  Google Scholar 

  • Kogan L, Papanikolaou D (2014) Growth opportunities, technology shocks, and asset prices. J Financ 69(2):675–718

    Article  Google Scholar 

  • Lewellen J, Lewellen K (2022) Institutional investors and corporate governance: the incentive to be engaged. J Financ 77(1):213–264

    Article  Google Scholar 

  • Liew J, Vassalou M (2000) Can book-to-market, size and momentum be risk factors that predict economic growth? J Financ Econ 57(2):221–245

    Article  Google Scholar 

  • Liu L, Zhang T (2015) Economic policy uncertainty and stock market volatility. Financ Res Lett 15:99–105

    Article  Google Scholar 

  • McCahery JA, Sautner Z, Starks LT (2016) Behind the scenes: the corporate governance preferences of institutional investors. J Financ 71(6):2905–2932

    Article  Google Scholar 

  • McDonald R, Siegel D (1986) The value of waiting to invest. Q J Econ 101(4):707–727

    Article  Google Scholar 

  • Moreira A, Muir T (2019) Should long-term investors time volatility? J Financ Econ 131(3):507–527

    Article  Google Scholar 

  • Nguyen P-A, Kecskés A, Mansi S (2020) Does corporate social responsibility create shareholder value? the importance of long-term investors. J Bank Financ 112:105217

    Article  Google Scholar 

  • Pástor L, Veronesi P (2013) Political uncertainty and risk premia. J Financ Econ 110(3):520–545

    Article  Google Scholar 

  • Rodrik D (1991) Policy uncertainty and private investment in developing countries. J Dev Econ 36(2):229–242

    Article  Google Scholar 

  • Shen H, Zhang M, Liu R, Hou F (2020) Economic policy uncertainty and corporate innovation: evidence from China. Asian Econ Lett 1(1):1–6

    Article  Google Scholar 

  • Shleifer A, Vishny RW (1990) Equilibrium short horizons of investors and firms. Am Econ Rev 80(2):148–153

    Google Scholar 

  • Sias RW (1996) Volatility and the institutional investor. Financ Anal J 52(2):13–20

    Article  Google Scholar 

  • Smith CW, Watts RL (1992) The investment opportunity set and corporate financing, dividend, and compensation policies. J Financ Econ 32(3):263–292

    Article  Google Scholar 

  • Stein JC (1988) Takeover threats and managerial myopia. J Polit Econ 96(1):61–80

    Article  Google Scholar 

  • Stohs MH, Mauer DC (1996) The determinants of corporate debt maturity structure. J Bus 69(3):279–312

    Article  Google Scholar 

  • Von Thadden E-L (1995) Long-term contracts, short-term investment and monitoring. Rev Econ Stud 62(4):557–575

    Article  Google Scholar 

  • Wang L, Wang Q, Jiang F (2023) Booster or stabilizer? economic policy uncertainty: new firm-specific measurement and impacts on stock price crash risk. Financ Res Lett 51:103462

    Article  Google Scholar 

  • Wang X, Wei S (2021) Does the investment horizon of institutional investors matter for stock liquidity? Int Rev Financ Anal 74:101648

    Article  Google Scholar 

  • Wang Y, Chen CR, Huang YS (2014) Economic policy uncertainty and corporate investment: evidence from china. Pacific-Basin F J 26:227–243

    Article  Google Scholar 

  • Weeds H (2002) Strategic delay in a real options model of r &d competition. Rev Econ Stud 69(3):729–747

    Article  Google Scholar 

  • Xu Y, Malkiel B (2003) Investigating the behavior of idiosyncratic volatility. J Bus 76(4):613–645

    Article  Google Scholar 

  • Xu Z (2020) Economic policy uncertainty, cost of capital, and corporate innovation. J Bank Financ 111:105698

    Article  Google Scholar 

  • Yan X, Zhang Z (2009) Institutional investors and equity returns: are short-term institutions better informed? Rev Financ Stud 22(2):893–924

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. College of Business and Industry, Jacksonville State University, Jacksonville, AL, 36265, USA

    Xiaoqiong Wang

  2. David Nazarian College of Business and Economics, California State University Northridge, Northridge, CA, 91330, USA

    Siqi Wei

  3. School of Business, Wichita State University, Wichita, KS, 67260, USA

    Xiaoyang Zhu

Authors
  1. Xiaoqiong Wang
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Siqi Wei
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Xiaoyang Zhu
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Siqi Wei.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Authors thank the editor and the anonymous referee of this journal for helpful comments and editorial assistance. All errors are authors' own.

Appendix

Appendix

See Tables 8 and 9

Table 8 Variable Definition
Full size table
Table 9 Economic Policy Uncertainty and Heterogeneous Institutional Investors: Results from GMM estimation
Full size table

Rights and permissions

Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Wang, X., Wei, S. & Zhu, X. Economic policy uncertainty and heterogeneous institutional investor horizons. Rev Quant Finan Acc 62, 39–67 (2024). https://doi.org/10.1007/s11156-023-01191-y

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11156-023-01191-y

Keywords

JEL Classification

Search

Navigation