Institutional Economic Growth

Economic growth is influenced by several issues. This can be in a positive way, for example with investments by firms which leads to a bigger gross domestic product, or in a negative way, like increasing currency exchange rates which are used when trading with other countries and leads to a lower gross domestic product. Besides these simple examples there are also more difficult factors that can influence growth. One of these difficult factors that can influence economic growth are institutional investors and mutual funds. Economists are not unanimous about the question if the institutional investors affect economic growth in a positive or in a negative way. Therefore, I will study the literature about this topic and I will try to provide an

Some studies agree with the question that institutional investors and mutual funds affect growth and hinder it others disagree. One of the studies which agree with the question is the study of He and Tian (2013). Their study (He and Tian, 2013) offers novel evidence of a previously under-explored adverse consequence of analyst coverage, namely, its hindrance to firm innovation. Their evidence is consistent with their hypothesis that analysts exert too much pressure on managers to meet short-term goals, impeding firms' investment in long-term innovative projects (He and Tian, 2013). So, too much pressure from the institutional investors and mutual funds on the managers leads to minor investment in long-term projects. Despite meeting the short-term goals, which the investors want, growth can be affected due to less investment in long-term projects. The institutional investors are focusing on the short run rather than the long run, because they want cash returns as soon as possible. This is easier to achieve in the short run than in the long

Buying-back shares is not without a risk says the article in The Economist (2014). “Some view buy-backs as a form of financial sorcery, on a par with all those abstruse credit derivatives that helped cause the financial crisis. Others accept that buy-backs are a legitimate way to return cash to shareholders but worry about their extent. They fear they have become a kind of corporate cocaine that induces a temporary feeling of invincibility but masks weakness and vacuity. They worry the boom will damage firms and the economy.” (The Economist,