Hostname: page-component-78c5997874-94fs2 Total loading time: 0 Render date: 2024-11-03T08:18:13.890Z Has data issue: false hasContentIssue false
  • English
  • Français

Corporate Governance and Institutional Ownership

Published online by Cambridge University Press:  05 November 2010

Kee H. Chung  and
Hao Zhang
Kee H. Chung
Affiliation:
School of Management, State University of New York at Buffalo, 360 Jacobs Management Center, Buffalo, NY 14260. [email protected]
Hao Zhang
Affiliation:
Saunders College of Business, Rochester Institute of Technology, 105 Lomb Memorial Dr., Rochester, NY 14623. [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

In this study we examine the relation between corporate governance and institutional ownership. Our empirical results show that the fraction of a company’s shares that are held by institutional investors increases with the quality of its governance structure. In a similar vein, we show that the proportion of institutions that hold a firm’s shares increases with its governance quality. Our results are robust to different estimation methods and alternative model specifications. These results are consistent with the conjecture that institutional investors gravitate to stocks of companies with good governance structure to meet fiduciary responsibility as well as to minimize monitoring and exit costs.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 1 , February 2011 , pp. 247 - 273
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Almeida, H., and Campello, M.. “Financial Constraints, Asset Tangibility, and Corporate Investment.” Review of Financial Studies, 20 (2007), 1429–1460.CrossRefGoogle Scholar
Badrinath, S. G.; Kale, J. R.; and Ryan, H. E. Jr. “Characteristics of Common Stock Holdings of Insurance Companies.” Journal of Risk and Insurance, 63 (1996), 49–76.CrossRefGoogle Scholar
Baker, M., and Gompers, P. A.. “The Determinants of Board Structure at the Initial Public Offering.” Journal of Law and Economics, 46 (2003), 569–598.CrossRefGoogle Scholar
Berger, P. G.; Ofek, E.; and Swary, I.. “Investor Valuation of the Abandonment Option.” Journal of Financial Economics, 42 (1996), 257–287.CrossRefGoogle Scholar
Boone, A.; Field, L. C.; Karpoff, J. M.; and Raheja, C. G.. “The Determinants of Corporate Board Size and Composition: An Empirical Analysis.” Journal of Financial Economics, 85 (2007), 66–101.CrossRefGoogle Scholar
Brav, A.; Jiang, W.; Partnoy, F.; and Thomas, R.. “Hedge Fund Activism, Corporate Governance, and Firm Performance.” Journal of Finance, 63 (2008), 1729–1775.CrossRefGoogle Scholar
Brown, L. D., and Caylor, M. L.. “Corporate Governance and Firm Valuation.” Journal of Accounting and Public Policy, 25 (2006), 409–434.CrossRefGoogle Scholar
Brown, L. D., and Caylor, M. L.. “Corporate Governance and Firm Operating Performance.” Review of Quantitative Finance and Accounting, 32 (2009), 129–144.CrossRefGoogle Scholar
Bushee, B. J.; Carter, M. E.; and Gerakos, J.. “Institutional Investor Preferences for Corporate Governance Mechanisms.” Working Paper, University of Pennsylvania (2010).CrossRefGoogle Scholar
Bushee, B. J., and Noe, C. F.. “Corporate Disclosure Practices, Institutional Investors, and Stock Return Volatility.” Journal of Accounting Research, 38 (2000), 171–202.CrossRefGoogle Scholar
Chen, X.; Harford, J.; and Li, K.. “Monitoring: Which Institutions Matter?” Journal of Financial Economics, 86 (2007), 279–305.CrossRefGoogle Scholar
Chung, K. H.; Elder, J.; and Kim, J.-C.. “Corporate Governance and Liquidity.” Journal of Financial and Quantitative Analysis, 45 (2010), 265–291.CrossRefGoogle Scholar
Chung, K. H., and Jo, H.. “The Impact of Security Analysts’ Monitoring and Marketing Functions on the Market Value of Firms.” Journal of Financial and Quantitative Analysis, 31 (1996), 493–512.CrossRefGoogle Scholar
Chung, K. H., and Pruitt, S. W.. “A Simple Approximation of Tobin’s q.” Financial Management, 23 (1994), 70–74.CrossRefGoogle Scholar
Dahlquist, M.; Pinkowitz, L.; Stulz, R. M.; and Williamson, R.. “Corporate Governance and Home Bias.” Journal of Financial and Quantitative Analysis, 38 (2003), 87–110.CrossRefGoogle Scholar
Del Guercio, D. “The Distorting Effect of the Prudent-Man Laws on Institutional Equity Investment.” Journal of Financial Economics, 40 (1996), 31–62.CrossRefGoogle Scholar
Diamond, D. W. “Optimal Release of Information by Firms.” Journal of Finance, 40 (1985), 1071–1094.CrossRefGoogle Scholar
Easley, D.; Kiefer, N. M.; O’Hara, M.; and Paperman, J. B.. “Liquidity, Information, and Infrequently Traded Stocks.” Journal of Finance, 51 (1996), 1405–1436.CrossRefGoogle Scholar
Ellis, K.; Michaely, R.; and O’Hara, M.. “The Accuracy of Trade Classification Rules: Evidence from Nasdaq.” Journal of Financial and Quantitative Analysis, 35 (2000), 529–551.CrossRefGoogle Scholar
Falkenstein, E. G. “Preferences for Stock Characteristics as Revealed by Mutual Fund Portfolio Holdings.” Journal of Finance, 51 (1996), 111–135.CrossRefGoogle Scholar
Fama, E. F., and Jensen, M. C.. “Separation of Ownership and Control.” Journal of Law and Economics, 26 (1983), 301–325.CrossRefGoogle Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.CrossRefGoogle Scholar
Ferreira, M. A., and Matos, P.. “The Colors of Investors’ Money: The Role of Institutional Investors around the World.” Journal of Financial Economics, 88 (2008), 499–533.CrossRefGoogle Scholar
Giannetti, M., and Simonov, A.. “Which Investors Fear Expropriation? Evidence from Investors’ Portfolio Choices.” Journal of Finance, 61 (2006), 1507–1547.CrossRefGoogle Scholar
Gillan, S. L., and Starks, L. T.. “Corporate Governance Proposals and Shareholder Activism: The Role of Institutional Investors.” Journal of Financial Economics, 57 (2000), 275–305.CrossRefGoogle Scholar
Gompers, P.; Ishii, J.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107–155.CrossRefGoogle Scholar
Gompers, P. A., and Metrick, A.. “Institutional Investors and Equity Prices.” Quarterly Journal of Economics, 116 (2001), 229–259.CrossRefGoogle Scholar
Grinstein, Y., and Michaely, R.. “Institutional Holdings and Payout Policy.” Journal of Finance, 60 (2005), 1389–1426.CrossRefGoogle Scholar
Grossman, S. J., and Hart, O. D.. “The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration.” Journal of Political Economy, 94 (1986), 691–719.CrossRefGoogle Scholar
Hawley, J. P., and Williams, A. T.. The Rise of Fiduciary Capitalism: How Institutional Investors Can Make Corporate America More Democratic. Philadelphia, PA: University of Pennsylvania Press (2000).Google Scholar
Hermalin, B. E., and Weisbach, M. S.. “Endogenously Chosen Boards of Directors and Their Monitoring of the CEO.” American Economic Review, 88 (1998), 96–118.Google Scholar
Huang, J.“Dynamic Liquidity Preferences of Mutual Funds.” Working Paper, Boston College (2009).Google Scholar
ISS Corporate Governance: Best Practices User Guide and Glossary. Rockville, MD (2003).Google Scholar
Jensen, M. C., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Cost and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
Klein, A. “Firm Performance and Board Committee Structure.” Journal of Law and Economics, 41 (1998), 275–303.CrossRefGoogle Scholar
Klein, A., and Zur, E.. “Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors.” Journal of Finance, 64 (2009), 187–229.CrossRefGoogle Scholar
Klock, M. S.; Mansi, S. A.; and Maxwell, W. F.. “Does Corporate Governance Matter to Bondholders?” Journal of Financial and Quantitative Analysis, 40 (2005), 693–719.CrossRefGoogle Scholar
Lakonishok, J.; Shleifer, A.; and Vishny, R. W.. “The Impact of Institutional Trading on Stock Prices.” Journal of Financial Economics, 32 (1992), 23–43.CrossRefGoogle Scholar
Lehn, K. M.; Patro, S.; and Zhao, M.. “Determinants of the Size and Composition of U.S. Corporate Boards: 1935–2000.” Financial Management, 38 (2009), 747–780.CrossRefGoogle Scholar
Leuz, C.; Lins, K. V.; and Warnock, F. E.. “Do Foreigners Invest Less in Poorly Governed Firms?” Review of Financial Studies, 22 (2009), 3245–3285.CrossRefGoogle Scholar
Li, K.; Ortiz-Molina, H.; and Zhao, X.. “Do Voting Rights Affect Institutional Investment Decisions? Evidence from Dual-Class Firms.” Financial Management, 37 (2008), 713–745.CrossRefGoogle Scholar
Linck, J. S.; Netter, J. M.; and Yang, T.. “The Determinants of Board Structure.” Journal of Financial Economics, 87 (2008), 308–328.CrossRefGoogle Scholar
McCahery, J. A.; Sautner, Z.; and Starks, L. T.. “Behind the Scenes: The Corporate Governance Preferences of Institutional Investors.” Working Paper, University of Amsterdam (2010).CrossRefGoogle Scholar
McKinsey & Company. “Global Investor Opinion Survey: Key Findings.” http://www.mckinsey.com/clientservice/organizationleadership/service/corpgovernance/pdf/globalinvestoropinionsurvey2002.pdf (2002).Google Scholar
Merton, R. C. “A Simple Model of Capital Market Equilibrium with Incomplete Information.” Journal of Finance, 42 (1987), 483–510.CrossRefGoogle Scholar
Nofsinger, J. R., and Sias, R. W.. “Herding and Feedback Trading by Institutional and Individual Investors.” Journal of Finance, 54 (1999), 2263–2295.CrossRefGoogle Scholar
O’Brien, P. C., and Bhushan, R.. “Analyst Following and Institutional Ownership.” Journal of Accounting Research, 28 (1990), 55–76.CrossRefGoogle Scholar
Parrino, R.; Sias, R. W.; and Starks, L. T.. “Voting with Their Feet: Institutional Ownership Changes around Forced CEO Turnover.” Journal of Financial Economics, 68 (2003), 3–46.CrossRefGoogle Scholar
Petersen, M. A. “Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435–480.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R. W.. “A Survey of Corporate Governance.” Journal of Finance, 52 (1997), 737–783.CrossRefGoogle Scholar
Sias, R. W. “Institutional Herding.” Review of Financial Studies, 17 (2004), 165–206.CrossRefGoogle Scholar
Song, W.-L., and Szewczyk, S. H.. “Does Coordinated Institutional Investor Activism Reverse the Fortunes of Underperforming Firms?” Journal of Financial and Quantitative Analysis, 38 (2003), 317–336.CrossRefGoogle Scholar
Williamson, O. E. The Economic Institutions of Capitalism. New York, NY: The Free Press (1985).Google Scholar