Institutional Investor

Last updated: March 22, 2024

What Does Institutional Investor Mean?

An institutional investor is mainly a large organization that has considerable cash reserves with which to invest in securities and other investment assets. Institutional investors include endowment funds, hedge funds, insurance companies, pension funds, mutual funds, etc. Other operating companies, which invest a part of their profits in different types of assets, may also be called institutional investors.


Divestopedia Explains Institutional Investor

An institutional investor is a non-bank organization that trades in large enough quantities to qualify for preferential treatment. They have to deal with fewer protective regulations as they are considered to be more knowledgeable about market operations and, hence, are better able to protect themselves. They act as highly specialized investors on behalf of others and supply capital to firms seeking to raise financing, or to those that are in dire straits. Economies of scale increase the returns on their investments and lower the cost of capital for entrepreneurs. Furthermore, they can yield significant influence in the managements of corporations as they are usually entitled to exercise the voting rights in a company.

Enterprise value of both target and acquiring firms becomes more volatile after the announcement of a proposed deal. Institutional Investors may own stock in both the target and acquiring firms and can have a significant say in the matter. The merger acts as a shock that increases its ownership concentration. They allocate their monitoring efforts to a firm on the relative importance of the firm's stock and portfolio. The probability of deal completion increases in the holdings of institutional investors in the target firm. They result in higher final premiums and lower acquirer's returns as well. By virtue of their size, they become natural candidates for monitoring management.


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