4

The French equity market has witnessed the rising power of institutional investors over the past few years. Despite this increase in power, their effect on firm productive efficiency remains complex and worthy of further investigation and empirical analysis. This paper attempts to fill this gap by examining the influence of institutional investors on firm productive efficiency through focusing on their investment horizon. Using a sample of 123 French listed firms over the 2008–2018 period, we employ semi-parametric and non-parametric approaches to estimate firm productive efficiency. The findings show a positive association between institutional investors’ ownership, in particular those with a long investment horizon, and firm productive efficiency. This finding is totally consistent with the efficient monitoring hypothesis. Further analysis shows that this positive effect is more prevalent in firms operating in a low competitive environment, or in those with low governance quality. These findings are indicative of the effective monitoring by institutional investors in countries with strong civil law such as France. Overall, our findings are robust to several endogeneity tests and have important policy implications.