Does Governance Travel Around The World? Evidence from Institutional Investors
Why am I such a sucker for these governance papers?….
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Abstract (Via SSRN)
We examine whether institutional investors affect corporate governance by analyzing institutional holdings in companies from 23 countries during the period 2003-2008. We find that firm-level governance is positively associated with international institutional investment. Changes in institutional ownership over time positively affect subsequent changes in firm-level governance, but the opposite is not true. Foreign institutions and independent institutions drive governance improvements outside of the U.S. The origin of the institution matters, as institutions in countries with strong shareholder protection are more effective in promoting good governance than are institutions from countries with weak shareholder protection. The shareholder protection of the country where the firm is located also matters, with foreign institutions playing a crucial role in countries with weak shareholder protection. Institutional investors affect not only which corporate governance mechanisms are in place, but also outcomes. Firms with higher institutional ownership are more likely to terminate poorly performing CEOs and exhibit improvements in valuation over time. Our results suggest that institutional investors promote good corporate governance practices around the world.
Excerpted Conclusion (Via SSRN)
We find that institutional investors promote good governance practices around the world. In particular, foreign institutional investors and institutions from countries with strong shareholder protection are the main promoters of good governance outside of the U.S. The results are particularly strong for the sample of firms located in civil-law countries. Thus, international institutional investment is particularly effective in improving governance when the investor protection in the institution’s home country is stronger than the one in the portfolio firm’s country. Our results also suggest that it is changes in institutional ownership over time that drive changes in firm-level governance, but the reverse is not true. We also provide evidence that institutional ownership has a direct effect on corporate governance outcomes, namely as a disciplinary mechanism in terminating poorly performing CEOs. Furthermore, increases in institutional ownership lead to increases in firm valuation, suggesting that institutional investment not only affect governance mechanisms but also has real effects.
Click Here To Read: Does Governance Travel Around The World? Evidence from Institutional Investors
