Three Essays on InstitutionalInvestors Participation in Infrastructure Projects
Despite a theoretical perfect match between institutionalinvestors and infrastruc- ture investments, allocations to infrastructure have been slow and small. This dis- sertation investigates using empirical methods the question of how to make a bet- ter match between infrastructure investments and institutionalinvestors. The dis- sertation contributes to the literature on private participation in infrastructure and shifts the debate from private participation in infrastructure as a public policy mat- ter to what is needed to be done from an investment standpoint to unlock the full potential of institutionalinvestors in infrastructure. First, the relation between in- frastructure project risks and projects’ attractiveness for institutionalinvestors is investigated. The results highlight that higher macroeconomic, regulatory and po- litical risk can hinder investment by institutionalinvestors. Furthermore, a different risk appetite among direct institutionalinvestors, asset managers and infrastructure funds is found. Second, the role of financial multilateral support in crowding-in institutionalinvestors’ capital into infrastructure is analyzed in developed and de- veloping countries. The results suggest a positive effect in developed countries and a crowding-out effect in developing countries. Finally, an exit and bail-out options mechanism to overcome ex-ante fear of investment in infrastructure is proposed and tested in the lab. Concurrent exit and bail-out options were found to increase part- nership formation, cooperative behavior and partnership sustainability compared to situations without exit or unilateral exit from the government only.
Force on Climate-related Financial Disclosures (TCFD) which has as an objective to “develop voluntary, consistent climate-related financial risk disclosures” (“Global guide to responsible investment regulation”, PRI, MSCI 2016)
In terms of other regulations, it is hard to know their results and how efficient they are as they are relatively new and it will take a few years before observing their true impact. However, seeing how sustainable finance is growing and what has been done until now, it seems to be working well. Indeed, only by looking at the numbers of agents who take part in the different organisations that we mentioned in the introduction and latterly in this part is a positive sign. In the report titled “Global guide to responsible investment regulation”, they found “a strong correlation between responsible investment regulation and better ESG risk management by companies”. This shows that regulations could be a serious motivation for institutionalinvestors in the adoption of sustainable practices especially if we take into account how recent the policies are. In any case, still according to the report “Global guide to responsible investment regulation”, just by introducing “new rules, or even voluntary initiative” has a positive impact as it raises investors’ awareness and enhances advisers knowledge. Indeed, these initiatives open up the vision of investors. In the report titled “Fiduciary Duty in the 21st century” they found that in interviews, some agents said that “being a PRI signatory is now seen as a core expectation of investment managers” in the UK. What’s more, the interviewees agreed that there will be a strong chance that in the UK institutionalinvestors will link responsible investment with their fiduciary duty. They explain that this phenomenon will be
This also leads to a greater pressure on firms to move toward a better corporate social performance (CSP). While, not too long ago, the task of managing stakeholders’ expectations was mainly the task of operations’ executives for the environment and the marketing department or the legal team for the community, it is now of common knowledge that the genuine implication in corporate social responsibility generally needs to be driven by decisions at the upper echelons of a firm (Chin et al., 2013). CEOs and the other executives are naturally the prime source of such choices. However, in the publicly traded firms, there are governance mechanisms in place to oversee those choices. The board of directors has this important responsibility. Since the Sarbanes and Oxley Act (SOX), independent directors have a noteworthy role in the boardroom (Duchin et al., 2010). Also, they now account for 80% of the board members while they were a mere 20% in the 1950s (Gordon, 2006). Since they are elected by shareholders, their decision-making process should take into account even more the needs of those owners (Petra, 2005; Nguyen and Nielsen, 2010). In addition, shareholders are able by themselves to promote their interests. Institutionalinvestors are generally seen as shareholders with the capacity to have significant impact on firm they own (Hirschman, 1970; McCahery et al., 2016).
The second kind deals with access to control. Shareholders are supposed to be financially and legally limited in their pretention to intervene in these business matters for which they lack competence.
Lastly, the third kind of assumptions concerns risk-bearing and residual claims. In the SOC model, risk-bearing and residual claims give shareholder legitimate claims over the corporation (Fama and Jensen 1983a). Since they freely invest and face the risk of loosing their investment without any previous contractual insurance, they are the corporation’s residual claimants. They have claims over the corporation’s net cash flows (Fama and Jensen 1983a). These claims provide shareholders with legitimacy. Indeed, arguments in favour of shareholder primacy and shareholder control also rely on legitimacy reasoning (Stout 2007). However, empirical works on institutionalinvestors have casted some doubt on the extent to which institutionalinvestors verify these assumptions.
Real Estate Investment Strategy
Real estate investment is a specialized investment in many ways. Many institutional investment
companies set up real estate investment divisions to directly invest in properties. Some set up funds and issue bonds while others allocate their own equity in real estate. No specific criteria were given as to who tend to invest directly with their own equity and who tend to manage outside funds to invest in real estate. However, some traditional banks tend to lean on management of outside sources of funds that invest in real estate while some sovereign wealth funds prefer equity investment. Because investing in real estate requires real estate expertise, only certain numbers of institutionalinvestors see real estate as a major investment or key business. There are many real estate investment management companies who just specialize in this industry.
control variables, which are described below; δ j , θ i , and λ i,j are institution, IPO, and
institution-IPO fixed effects; u i,j,b,t is the error term, which we allow to be correlated
within institution. The hide-and-sell hypothesis predicts β < 0.
The vector of control variables includes the trading volume RelV ol, which is the number of shares traded by the institution scaled by the number of shares issued and multiplied by 100. We control for the relationship between institutionalinvestors and lead underwriters. Lead underwriters’ usual clients are more likely to choose a lead un- derwriter as a broker at any point in time, including the IPO aftermarket (see Goldstein et al. (2009)). They might also be more likely to support the IPO price to preserve their relationship with the underwriters, thus being less likely to sell IPO shares than other investors. Conversely, institutions that are not usual underwriters’ clients are less likely to trade with them and might be more likely to be IPO sellers. Therefore, a negative correlation between the decision to sell IPO shares and the decision to trade with a lead underwriter might be driven by the relationship between investors and underwriters. We control for it by means of the variable N ormalT radeLead. For each institution-IPO pair, we compute the percentage volume traded in non-IPO stocks by the institution through the lead underwriters in a 6-month period prior to the issue. 11 We compute this variable separately for buy and sell trades, to capture any potential heterogeneity in the investor-lead underwriters relationship by trade side. We include in the specification the variable Day, which is the day in which the trade is executed relative to the issue date, in order to control for the likely decreasing trend in the probability of trading with a lead underwriter. One important determinant of the choice to trade with the lead un- derwriters might be their trading expenses. ExcLeadComm is the average percentage commission to the lead underwriters minus the average percentage commission to any
U.S. stock market crash of October 1987, 84% of institutionalinvestors thought that the market was overpriced; 78% of them thought that this belief was shared by the rest of investors and, still, 93% of them were net buyers. Such an observation calls in our view for a new modelling of bounded rationality, allowing (at least a fraction of) agents to have some but not full understanding of the situation. In most existing approaches, agents are assumed to be either fully rational, thereby, in equilibrium, having a complete understanding of the market dynamics, or completely mechanical, and so lacking any understanding that they are in a bubble and that the market may crash. By contrast, in our model, it is common knowledge among agents that they are in a bubble and that the market must crash. At the same time, bubbles are sustained as agents believe, rightly or wrongly, that they can pro…t by investing in the speculative market and exiting at the right time.
We contribute to the literature on seasonal effects in market anomalies and dynamic style preferences of investors :
• Revisiting the Turn-of-the year effect : Sikes (2014) concludes that institutionalinvestors contribute to the turn-of-the-year effect whatever their incentives (window-dressing or tax-loss-selling).
Chapter 2: InstitutionalInvestors’ Allocation to Real Estate
According to the PREA Sponsor Survey 2010, over 50% of Institutionalinvestors surveyed (representing $1.9 trillion in assets) have a target real estate allocation of 10% of higher. The current average real estate allocation of the sample group is 8.9%. Real estate is an attractive asset class to institutionalinvestors for many of the reasons listed in Chapter 1. In addition, the long-term investment horizon needed for real estate assets matches well with the structure of liabilities held at most pension funds and endowments; most institutionalinvestors are investing for capital preservation, longevity risk, 6 inflation risk, and current yield. The long-term perspective allows them to overlook (to a degree) the illiquidity of the asset class with the expectation that they will earn higher risk adjusted returns as compensation. Finally, the asset class is viewed as an inefficient marketplace due to lags in pricing, opaqueness (non-transferability) of pricing, and the relationship-centric nature of the business. The combination of these factors produces the potential for outsized returns, if executed skillfully.
Then, we investigate possible explanations of investors’ inattention to connected firms’ announcements. Unawareness may be correlated to the degree of ownership complexity that may require more sophisticated analysis by investors. Besides, there are several reasons why subsidiary’s investors may be more susceptible to inattention. Investors are more likely to obtain a broad picture of a complex group when they invest in the head of the group rather than in an entity within the corporate network. When holding equity in the parent, investors seek what drives value, or in other words, which subsidiaries contribute most to value. Furthermore, from the point of view of a listed subsidiary’s outside investors, the parent company’s news, even if it is disclosed first, may be less informative because other subsidiaries’ performance may blur that of the listed subsidiary. Hence, understanding how the consolidated news relates to the individual entities of the group may require sophisticated analysis. Moreover, smaller subsidiaries are less liquid because of more concentrated ownership and the presence of fewer institutionalinvestors. If a majority of the shareholders of the subsidiary are non-sophisticated investors, the reaction to announcements, especially for complicated firms, may be understandably delayed. We find that investors are less myopic when a subsidiary is located in the same country and is directly owned. Still, information is not more readily incorporated into share prices when the parent and subsidiary share part of a corporate name, and when the subsidiary contributes to greater extent to the parent’s value (a higher ownership stake of the parent in the subsidiary combined with a larger relative size of the subsidiary). The presence of institutionalinvestors and of common institutionalinvestors holding equity in both parent and subsidiary does not affect our results.
1 Existing evidence of investor misreaction re- garding earnings information
Since the seminal articles by De Bondt and Thaler (1985) and Jegadeesh and Titman (1993), empirical research in finance has confirmed the existence of two families of pervasive anomalies: short-term underreaction and long- term overreaction. From a theoretical perspective, underreaction defines a situation where individuals fail to react completely and immediately to new information. Overreaction is sometimes mistakenly considered as the opposite phenomenon. Investors excessively react to news, which results in a later reversal. But over- and underreaction do not cancel each other out, for they do not focus on the same underlying information and do not arise in the same context. Underreaction seems to be related to anchoring, and tends to produce effects systematically. Conversely, overreaction may stem from representativeness, which arises only after a series of similar information. 1 The following subsection briefly reviews empirical and theoretical findings
retical framework, there is the need to face a major challenge that
institutional as well as organizational theory faces and to which
NIE and/or its paradigmatic successor(s) did not, do not escape:
how to make progress from already very substantial conceptual
Inter-American Board of Agriculture ( IBA )
IICA Executive Committee ( EC ) Offices of the Director General & Deputy Director General ( D/DDG )
Directorate of External and Institutional Relations ( DIREXI ) IICA’s Organizational Units ( OU ) 3
Political-institutional barriers to energy efficiency 1. Introduction
Energy efficiency has been touted as a critical component of societies’ response to the challenges of climate change, economic development, and energy security [1,2]. Substantial improvements in energy efficiency can “reduce the need for investment in energy infrastructure, cut fuel costs, increase competitiveness, lessen exposure to fuel price volatility, increase energy affordability for low-income households and cut local and global pollutants improving consumer welfare” [3, p. 36]. Energy efficiency is considered a major energy resource, as it can potentially deliver reductions in demand exceeding any other fuel output in several countries. Hence it is not merely a “hidden” fuel, but is in fact the “first fuel” .
Indeed, when it comes to exploring environmental innovations, the emphasis on technological developments, for example the search for alternative sources of energy, too often ignores their embedment in organizational structures and the changes they may require. The development of green energy or smart grids may allow substantial reduction in energy consumption but may be conditional to a radically different approach to the organization needed. Shifting from a centralized network to decentralized provision might require dramatic changes in the allocation of rights, in decision-making process, and in coordination among parties. As shown by Ostrom for as different situations as the management of water, forest, or security, innovative organization, not technological innovation, is often the solution. However, the sustainability of alternative answers must be assessed in relation to the institutional context: what would be the transaction costs of an arrangement delegating the management of a common pool resource like the Nile basin to local communities and coordinating them?
We developed an institutionalist view for organizational capabilities around the concept of values. Central to this view is the analysis of capability dynamics in its entirety. By entirety we mean accounting for the values occurring in three levels: the institutional environment pressures, the organizational values, and the social action at routine level. We first considered the environmental pressures emanating from what we called institutional fields. Organizations act to strive for legitimacy according to field pressures. At the action level, organizational routines were viewed as social actions. We took the Weberian concepts of substantive (value-laden) and formal (efficiency- oriented) rationality to understand the interactions between two types of social action: value-rational and instrumentally rational, respectively. Following Weber, we allowed for a two-directional transition between the types of rationality underlying routine performances. Environment, organization and routine levels recursively influence each other. We called attention to the concept of congruency of the mutual influences for any two-level relationship. If a routine has overall congruence, that is, if each relationship with each one of the other two levels is congruent, then its encapsulating capability becomes a hardcore capability oriented by a substantive rationality. The lack of congruency of any one of the two-level combinations reverses the aligned, hardcore capability to its original efficiency-based orientation.
The second fixed FDI cost is the adaptation investment in the new institutional environment. To produce in the host country, firms must adapt to its legal system, tax laws, political and governmental framework, conditions of access to credit, and regulations. Such adaptation costs depend on the institutional framework of the host country. Countries with weak institutional environments have high adaptation costs, while improvements in the institutional environment lower these costs (Daude and Stein, 2007). On the other hand, firms are already accustomed to the institutional environments of their domestic markets and have experience in coping with them. Such experience can reduce adaptation costs, especially when the institutional environments of the country-pair are similar (Bénassy-Quéré et al., 2007; Guiso et al., 2009; Habib and Zurawicki, 2002). Thus, institutional proximity between source and host countries reduces adaptation costs and facilitates FDI. A firm accustomed to a weak institutional environment will find it easier to invest in a country with similar characteristics, while the same firm will need to invest more to adapt to a country with an efficient institutional system.