Institutional Ownership Influence on Advising Performance
Abstract
Institutional investors’ involvement in advising top management has increased over the past years. In this study, I examine whether independent institutional investors (i.e., institutions that do not have business relationships with the investee firm) provide better advising to the investee’s board of directors and management. Consistent with my expectation, I find that firms that have high percentages of independent institutional investors have higher ROAs and higher Tobin’s Qs. In contrast, high percentages of conflicted institutional investors (i.e., institutional investors that are likely to have business relationships with the investee firm) have no impact on these metrics. I also investigate whether independent institutional investors provide better advising in specific decision-making related to acquisitions and divestitures by analyzing stock price responses during the announcement period. I find that as the percentage in independent institutional ownership increases, investors react more positively to the acquisition or divestiture announcement. Thus, a strong presence of these institutions in a firm’s investor base is consistent with their providing superior advising to their investees’ boards of directors and management.
Degree
Ph.D.
Advisors
Watts, Purdue University.
Subject Area
Accounting
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