Institutional investors have been increasing ownership in the corporate sector in developed markets in recent years. The investment horizons of institutional investors can be either short-term or long-term, which can impact the strategic development of a company. In this study, we investigate the impact of long-term institutional investors on the quality of corporate governance and firm performance.

Through regression analysis on a sample of nonfinancial US companies from RUSSELL 3000 index companies, we find evidence that increasing the long-term ownership of long-term institutional investors improves the quality of a company's corporate governance. Moreover, our research suggests that the effect is more substantial for more concentrated ownership. By improving the quality of corporate governance, long-term investors ultimately positively impact a company's performance.

The critical governance indicators used in the research were the percentage of independent directors on the board, the proportion of women on the board, the degree of independence of the nominating committee, and the proportion of insider ownership. The investment horizon of institutional investors was determined based on the turnover of their investment portfolios.

Government agencies can use the study results to create incentives for higher long-term investment in companies, by current shareholders of companies when choosing a new major shareholder, and by minority shareholders when selecting companies to invest in.