Firm Life Cycle and Institutional Investors on Investment Efficiency: Evidence from an Emerging Market

Abstract

This study extends to include the theory of firm life cycle to explain investment efficiency, in addition to the commonly cited agency and information asymmetry theories. Using a sample of 791 publicly listed firms, with 10,669 firm-year observations for the period 1999–2018 from an emerging market, Malaysia, we employ the Generalized Method of Moments (GMM) approach to reveal the impact of the firm life cycle and institutional investors on investment efficiency. My study results indicate that investment efficiency is significantly associated with the life cycle. Investment efficiency is higher for growth firms but is lower for firms at the introduction, mature, and decline stages. In addition, institutional investors are found to improve investment efficiency by mitigating underinvestment and/or overinvestment problems, especially at the growth and mature stages. When we control for a higher proportion of block institutional ownership, the significant role of these investors is evident at each stage of the life cycle. This research is different from previous literature and provides additional insights by suggesting that the firm life cycle matters in explaining corporate investment policies. I also contribute to corporate governance literature, focusing on institutional investors, as results suggest a dynamic relationship between investment efficiency and institutional investors across the firm life cycle. My study, for the first time, implies that to improve investment efficiency, institutional investors do not play a similar monitoring role across the firm life cycle stages.