Institutional investors' site visits and investment-cash flow sensitivity: Mitigating financing constraints or inhibiting agent conflicts?

Abstract

Taking Chinese non-financial A-share companies listed on the Shenzhen Stock Exchange (SZSE) between 2003 and 2018 as a sample, this paper empirically examines whether and how institutional investors' site visits (SVs) affect corporate investment-cash flow sensitivity (ICFS). The results show that institutional investors' SVs can reduce ICFS, and this effect is more obvious for companies with fewer investment opportunities, larger sizes, higher internal cash flows, and higher agency costs, indicating that institutional investors' SVs primarily inhibit ICFS caused by agency conflicts rather than financing constraints. In addition, the inhibitory effect of institutional investors' SVs on ICFS exists mainly in companies with poor internal supervision governance and weak executive compensation incentive mechanisms, indicating that institutional investors' SVs and other forms of corporate governance mechanisms operate as substitutes in reducing ICFS. This paper reveals the important role of institutional investors' SVs in reducing ICFS, with important theoretical and practical implications for regulators to progressively regulate and promote this form of investor activity.