International evidence on the monitoring role of foreign institutional investors in corporate investment efficiency

Purpose: This study examines whether and how the legal origin of foreign institutional investors (FIIs) impacts corporate investment efficiency. Design/methodology/approach: The study employs a large panel dataset of firms from 32 non-USA countries from 2005 to 2018. Financial and institutional ownership data are obtained from the COMPUSTAT Global and Public Ownership databases in S&P Capital IQ, respectively. The study employed ordinary least squares (OLS) regression with year and firm fixed effects. In addition, two-stage least squares with instrumental variable regression (2SLS-IV) and propensity score matching (PSM) approaches were employed to address the potential endogeneity. Findings: The findings of this study suggest that common- and civil-law FIIs differ in their monitoring capabilities to promote investment efficiency. The authors find evidence that increased equity ownership by common-law FIIs, not civil-law investors, strengthens the investment-Q sensitivity, resulting in higher investment efficiency. Consistent with the monitoring and information channel, the results further indicate that the positive impact of common-law FIIs on investment efficiency is stronger in host environments susceptible to agency conflicts and information asymmetry. Originality/value: This study offers novel evidence on the heterogeneous monitoring role of FIIs with regard to their home countries' legal origins and their impact on investment efficiency in an international context.