We show that following large permanent negative shocks, firms with more short-term institutional investors suffer smaller drops in sales, investment and employment and have better long-term performance than similar firms affected by the shocks. To do so, these firms increase their R&D and advertising expenses, differentiate their products from those of the competitors, conduct more diversifying acquisitions, and have higher executive turnover in the aftermath of the shocks, suggesting that they put stronger effort in adapting their business to the new competitive environment. Endogeneity of institutional ownership and other selection problems do not appear to drive our findings.
Professor of Finance
Korea University Business School
Sterling Professor of Law
Yale Law School
Associate Professor of Business Administration / Darden school of Business- University of Virginia