" (Redhead 2008) (Manow 2001) These factors are showing how institutional investors are playing an important part in offering additional amounts of liquidity to a variety of businesses. This helps them to address a number of issues they are facing ranging from managing strategic acquisitions to having additional financing for bringing new products or services in the marketplace. When this happens, these organizations become more competitive and flexible in meeting the needs of customers. (Manow 2001)

Institutional investors and the short-termism theory

However, one the biggest criticisms of the role of institutional investors is they are encouraging companies to focus on meeting short-term objectives. This is because all investors want to see an increase in their profit margins. When this happens, the price of the stock will move higher from these favorable perceptions. During the annual proxy vote (for the board of directors), this ensures that they will be reelected to their position by having large institutions on their side. These individuals will hire managers who are able to achieve the Wall Street estimates. (Palley 1997)

In situations where the company is dealing with declining earnings and stock prices; they can change the management team and who sits on the board. This is because these institutions are seeing negative returns. To reduce their risks and improve performance, they will replace executives with someone who can achieve these objectives. (Palley 1997)

This kind of short-term thinking is problematic, as it will limit the focus of management on meeting these goals vs. The longer term benchmarks. When this happens, there are increased amounts of volatility and firms are engaging practices which can hurt performance. This can cause the...

(Palley 1997)
Summary

Clearly, institutional investors are playing a major role in the financial markets. This is occurring through: increased shareholder activism / governance, improving transparency / disclosures and enhancing liquidity. These factors are important, as they will help companies to become more open and capable of receiving the working capital they need. When this takes place, these organizations can play role in assisting these corporations in meeting the demands of customers.

However, at the same time these stockholders are interested in the short-term financial results. This is because they want to see the value of their investments continually increasing. Over the course of time, this means that corporations will engage in practices which are hurting their ability to deliver long-term growth to investors. As a result, institutional shareholders are having positive and negative impacts on the financial markets.

References

Bhojraj, S, 2003, 'The Effects of Corporate Governance,' the Journal of Business, vol. 76, no.3, pp. 133 -- 142.

Davis, E, 2002, 'Institutional Investors, Corporate Governance and the Performance of the Corporate Sector', Economic Systems, vol. 26, no. 3, pp. 203 -- 229.

Manow, P, 2001, Comparing Welfare and Capitalism, Psychology Press, London.

Palley, T, 1997, 'Managerial Turnover,' Journal of Economic Behavior, vol. 32, no. 4, pp. 547 -- 557.

Redhead, K, 2008, Personal Finance Investment, Routledge, London.

Smith, M, 1996, 'Shareholder Activism by Institutional Investors,' the Journal of Finance, vol. 51, no.1, pp. 227 -- 252.

Vittas, D, 1998, Institutional Investors and…