Two Essays on Investments: Corporate and Institutional Perspective

In my dissertation, I study factors that influence investments from either corporate or institutional perspective. First, I examine the sensitivity of corporate investment to internally generated cash flow and its pattern of change over time across countries. Second, I investigate how a firm's customer profile can shape its ownership structure of institutional investors.

Existing studies have documented a puzzling disappearance of investment-cash flow (ICF) sensitivity in the U.S.. In the first chapter, I explore whether economic and financial development can explain the extent of a country's ICF sensitivity and its evolution through time. I find that, in aggregate, ICF sensitivity has also faded around the world; yet it has remained high in countries with low economic and financial development. Further, I find that the access to external finance, especially equity finance, is a key channel through which country-level development affects the sensitivity of investment to internal cash flow. In more developed countries, external finance has become more accessible for firms when their internal cash flow is insufficient, thereby reducing their reliance on internal cash flow. The results indicate that once a country advances to a certain degree of financial and economic development, it becomes more efficient in allocating resources and therefore financial constraints at the individual firm level become less binding.

A growing literature has documented different financial implications of a concentrated customer base. In the second chapter, I examine how customer concentration affects institutional investors' investment decisions. I find that a firm's customer concentration tends to attract different groups of institutional investors, depending upon their investment horizons. Specifically, those institutions who trade actively (short-term) would buy the stocks of firms with a more concentrated customer base. Conversely, those institutions who trade less actively (long-term) would buy the stocks of firms with a less concentrated customer base. While the preference of long-term investors is supported by the increased risk associated with the dependency on a few large customers, I find that the improved stock liquidity is the channel through which a concentrated customer base attracts short-term investors. Further, my findings cannot be explained by information transfer along the supply chain.