Institutional investors' corporate site visits and corporate investment efficiency

• Published date: 01 June 2023
• Author: He Xiao
• Date: 01 June 2023
• DOI: http://doi.org/10.1111/irfi.12401

ORIGINAL ARTICLE

Institutional investors' corporate site visits

and corporate investment efficiency

He Xiao

Faculty of Business and Management, Beijing

Normal University-Hong Kong Baptist

University United International College,

Zhuhai, China

Correspondence

He Xiao, Faculty of Business and

Management, Beijing Normal University-Hong

Kong Baptist University United International

College, Zhuhai, China.

Email: tigerhxiao@uic.edu.cn

Abstract

This study examines the association between institutional

investors' corporate site visits (CSVs) and the visited firms'

investment efficiency. Using unique CSVs' data from China,

this study provides empirical evidence that institutional

investors' CSVs lessen the visited firms' corporate invest-

ment inefficiency, including both over- and underinvest-

ment. The negative relationship between CSVs and

investment inefficiency is less pronounced for firms with

higher quality financial reporting and better corporate gov-

ernance. In addition, CSVs show a decrease in corporate

overinvestment by monitoring the risk-taking activities of

younger CEOs and expansionary firms, and supervising the

use of excess free cash flows. Meanwhile, CSVs could miti-

gate underinvestment by reducing managerial shirking from

entrenched CEOs, such as dual or longer-tenured CEOs.

The possible economic mechanism behind this association

is that CSVs increase institutional shareholding percentages.

All the main findings are robust to a battery of endogeneity

and robustness tests.

KEYWORDS

corporate governance, corporate site visits, financial report

quality, investment efficiency

JEL CLASSIFICATION

G24, G29, G34

Received: 30 December 2021 Revised: 3 November 2022 Accepted: 3 November 2022

DOI: 10.1111/irfi.12401

© 2022 International Review of Finance Ltd.

International Review of Finance. 2023;23:359–392. wileyonlinelibrary.com/journal/irfi 359

1|INTRODUCTION

In recent years, researchers have paid increasing attention to the benefits of institutional investors' corporate site

visits (CSVs). In previous studies, CSVs are considered a significant information dissemination channel between cor-

porate investors and managers (e.g., Bowen et al., 2018; Bushee et al., 2018; Cheng et al., 2016). Unlike other com-

munication platforms, such as broker-hosted investor conferences (Green et al., 2014), earnings conference calls

(Mayew et al., 2013), and analyst/investor days (Kirk & Markov, 2016), CSVs not only facilitate face-to-face interac-

tions between investors and corporate managers but also allow investors to observe business operations at the site

and access firsthand inside information (e.g., Cheng et al., 2016). However, it is important to note that firms listed in

major financial markets worldwide either do not release private information regarding site visits or prohibit the dis-

closure of the visit data (e.g., Cheng et al., 2016; Qi et al., 2021). Therefore, the empirical data related to the fre-

quency of CSVs and the background of visitors became accessible only after 2009 (Gao et al., 2017; Jiang &

Yuan, 2018), when the Shenzhen Stock Exchange (SZSE) in China required records of CSVs to be released to the

public and further inform regulators through annual reports. However, no extant study has explored the impact of

CSVs on firm investment behaviors. Thus, taking advantage of the unique data set of CSVs in China, this study

attempts to close this gap in the literature and examine the impact of CSVs on corporate investment efficiency.

The existing literature (e.g., Broadstock & Chen, 2021; Jiang & Yuan, 2018; Qi et al., 2021) provides evidence

that CSVs could lead to a more transparent corporate information environment and a more robust monitoring mech-

anism over managerial behaviors such as earnings management and corporate fraud. Meanwhile, studies have shown

that corporate investment efficiency can be improved by greater financial reporting quality, higher information trans-

parency, and better corporate governance (e.g., Benlemlih & Bitar, 2018; Biddle et al., 2009; Chen, Hope,

et al., 2011; Gan, 2019). Furthermore, as institutional investors employ suitable monitoring mechanisms as part of

CSVs, corporate managers are obligated to either invest excess free cash flows more wisely during overinvestment

or seek more profitable investment opportunities during underinvestment (Ward et al., 2020). Therefore, this study

hypothesizes that CSVs improve firm investment efficiency.

As expected, these findings suggest that institutional investors' frequencies of CSVs and the number of visited

institutions significantly mitigate corporate investment inefficiency. More specifically, both over- and underinvest-

ment were found to be negatively related to CSVs, showing that firms facing more frequent CSVs and more institu-

tional visits invest more efficiently. These findings suggest that the negative relationship between CSVs and

investment inefficiency was less pronounced for firms with higher financial reporting quality and better corporate

governance. This study also identifies that CSVs lessened the overinvestment problem for firms by monitoring the

risk-taking activities of younger CEOs and expansionary firms, and by supervising the use of free cash flows. Addi-

tionally, CSVs could mitigate the underinvestment issues by reducing managerial shirking from entrenched CEOs,

including dual or longer-tenured CEOs. By exploring the possible channels through which CSVs reduce investment

inefficiency, the study findings reveal that CSVs increase institutional shareholding percentages. To address the

issues of endogeneity, two stage-least square (2SLS) regression analyses were conducted in this study; it was found

that all the main results continue to hold. Additionally, the empirical findings are robust to a battery of robustness

tests, such as alternative measures of investment inefficiency and the inclusion of the 1-year lag of the CSVs. Further

analysis disclosed that CSVs conducted in the previous year did not affect corporate investment efficiency except

for the marginally positive impacts on corporate underinvestment in the current year.

This study contributes to the existing literature in the following ways. There exist two streams of research

regarding the impacts of CSVs. The first stream focuses on the effects of CSVs on listed firms' market performance,

such as stock price determination (Cheng et al., 2019), stock price crash risks (Firth et al., 2019; Gao et al., 2017), and

analyst forecast accuracy (Brown et al., 2015; Cheng et al., 2016; Han et al., 2018). The second stream studies the

impact of CSVs on corporate behaviors, including earnings management (Qi et al., 2021), corporate fraud

(Broadstock & Chen, 2021), innovation (Jiang & Yuan, 2018), and insider trading (Bowen et al., 2018). This study

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contributes to the second stream of literature and is among the first to investigate the impact of CSVs on corporate

investment strategies, including over- and underinvestment.

Second, this study relates to numerous investment efficiency studies. Previous studies have examined the deter-

minants of investment efficiency from three aspects. The first aspect associates investment efficiency with firm

accounting quality, such as financial reporting quality (Biddle et al., 2009; Biddle & Hilary, 2006; Chen, Hope,

et al., 2011), auditor selection (Elaoud & Jarboui, 2017), mandatory IFRS adoption (Chen et al., 2013), and accounting

conservatism (Lara et al., 2016). The second aspect concerns the impacts of government, for example, governmental

intervention (Chen, Sun, et al., 2011), government integrity (Du et al., 2018), political connection (Wang et al., 2019;

Yu et al., 2020), and state-owned statutes (O'Toole et al., 2016) on investment efficiency. The third aspect targets

the effect of corporate governance, including managerial ability (Gan, 2019), executive compensation (Eisdorfer

et al., 2013), board structure (Ullah et al., 2020), institutional ownership structure (Cao et al., 2020; Ward

et al., 2020), and corporate social responsibility (Benlemlih & Bitar, 2018) on investment efficiency. Following the

monitoring role played by institutional investors, this study provides new insights into the relationship between insti-

tutional investors and corporate investment efficiency by focusing on the singular but significant information acquisi-

tion channel of institutional investors, that is, CSVs.

The remainder of the article proceeds as follows. Section 2reviews the literature and describes the main hypoth-

eses development. Section 3presents research methodologies and sample data. Section 4presents the analyses of

empirical results, endogeneity issues, and robustness tests. Section 5provides the conclusion.

2|LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

The neoclassical investment theory identifies a firm's growth opportunities as the primary component of its investment

policy (e.g., Abel, 1983; Hayashi, 1982). Abel (1983) states that firms could attain optimal investment efficiency when

their marginal benefits are equal to the sum of their marginal cost and adjusted cost of capital. However, in practice, firm

investment efficiency cannot always reach its optimal level due to agency problems (i.e., managerial overconfidence and

conflict of interests between managers and shareholders) and frictions in the capital market (i.e., information asymmetry

and external costs of capital) (Aghion et al., 2013; Asker et al., 2015;Biddleetal.,2009; Malmendier & Tate, 2005).

Prior studies classify investment inefficiency into over- and underinvestment based on the positive and negative

deviations from the firm's expected investment estimated based on its future growth opportunities (e.g., Biddle

et al., 2009; Chen, Hope, et al., 2011; Richardson, 2006). Jiang and Yuan (2018) and Ward et al. (2020) further iden-

tify that a pair of managerial actions, including CEOs' excessive risk-taking and shirking behaviors, cause corporate

over- and underinvestment, respectively.

First, overinvestment is likely to take place when CEOs are more inclined to initiate excessively risky projects.

Firms with younger CEOs, during expansionary life cycles, and with higher free cash flow are generally inclined to

overinvest in ways through which managers could pursue benefits for themselves (Richardson, 2006). Second, under-

investment is more likely to take place when entrenched CEOs shirk their responsibilities and prefer a quiet life. Par-

ticularly, corporate managers might enjoy a “quiet life”when facing less corporate governance. Due to this pursuit of

a“quiet life,”they do not spend the necessary time and effort to look for profitable investment projects

(e.g., Bertrand & Mullainathan, 2003).

Both over- and underinvestment damage firms' market value in the long term (e.g., Cai & Zhang, 2011; Titman

et al., 2004). Consequently, stockholders, especially institutional investors, have a strong motivation to monitor man-

agerial investment decisions and promote firm investment efficiency (e.g., Ward et al., 2020). Nevertheless, institu-

tional investors can only give limited attention to each firm since they have to monitor all firms in their portfolio

(Kempf et al., 2017). In this situation, CSVs provide an excellent opportunity for institutional investors to concentrate

on individual visited firms, observe their actual business situation directly, and conduct face-to-face interactions with

their managers and other employees. Such visiting and communicating opportunities facilitated via CSVs are

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