Relationship Institutions: Evidence From IPOs

Abstract

Using a sample of newly public firms, we study the firm–institution relationship and its effect on firm value and the real decision channels through which this effect takes place. In contrast to the conventional measure of investor horizon that primarily focuses on investor portfolio share turnover, we suggest an alternative measure based on the investment horizon between institutions and firms to capture the firm-institution relationship. Our study shows that relationship institutions, defined as institutions that maintain their positions in a firm after its initial public offering, contribute positively to firm value. Relationship institutions enhance firm value through increased investments by the firm, better acquisition decisions, higher overall payout, and lower firm risk. The positive effects of relationship institutions are reflected in higher future stock returns and are not sensitive to the alternative explanation of institutional relationships, institution types, institution share turnover, blockholding status, and alternative cut-off time in relationship definition. JEL Codes: G23, G31, G32, G34