Alan D. Crane is Assistant Professor of Finance at the Jesse H. Jones Graduate School of Business at Rice University. This post is based on a recent paper by Professor Crane; Andrew Koch, Assistant Professor of Business Administration at the University of Pittsburgh; and Sebastien Michenaud, Assistant Professor of Finance at Kellstadt Graduate School of Business.
Do institutional investors work together to influence firm policies and governance? Researchers often think of owners as independent actors. This leads to the common view that dispersed ownership will result in poorer governance, all else equal, because small owners will not have the incentive to monitor individually (the “free rider” problem). However, in recent years it has become widely acknowledged that some investors do not act independently, but instead share information about their investment decisions and even work together to influence corporate policies in the firms they own (see, for example, Top US financial groups hold secret summits on long-termism, FT.com, February 2016).
In our paper, we examine the relationship between ownership structure and firm governance, taking into account investor interactions. We empirically identify groups of investors that are likely to be working together to influence the firms they own. We then examine how the presence of these coordinating owners relates to governance. Our results support a more complex view of the relation between ownership structure, coordination, and governance. Shareholder coordination increases governance via “voice” by overcoming the free-riding problem, consistent with Shleifer and Vishny (1986). At the same time, coordination weakens governance via threat of exit as predicted in Edmans and Manso (2011).
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