Monitoring the monitor: Distracted institutional investors and board governance

Claire Liu; Angie Low; Ronald W. Masulis; Le Zhang

doi:10.1093/rfs/hhaa014

Monitoring the monitor: Distracted institutional investors and board governance

Claire Liu, Angie Low, Ronald W. Masulis^*, Le Zhang

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

64 Citations (Scopus)

Abstract

Boards are crucial to shareholder wealth. Yet little is known about how shareholder oversight affects director incentives. Using exogenous shocks to institutional investor portfolios, we find that institutional investor distraction weakens board oversight. Distracted institutions are less likely to discipline ineffective directors with negative votes. Consequently, independent directors face weaker monitoring incentives and exhibit poor board performance; ineffective independent directors are also more frequently appointed. Moreover, we find that the adverse effects of investor distraction on various corporate governance outcomes are stronger among firms with problematic directors. Our findings suggest that institutional investor monitoring creates important director incentives to monitor.

Original language	English
Pages (from-to)	4489-4531
Number of pages	43
Journal	Review of Financial Studies
Volume	33
Issue number	10
DOIs	https://doi.org/10.1093/rfs/hhaa014
Publication status	Published - 1 Oct 2020

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AB - Boards are crucial to shareholder wealth. Yet little is known about how shareholder oversight affects director incentives. Using exogenous shocks to institutional investor portfolios, we find that institutional investor distraction weakens board oversight. Distracted institutions are less likely to discipline ineffective directors with negative votes. Consequently, independent directors face weaker monitoring incentives and exhibit poor board performance; ineffective independent directors are also more frequently appointed. Moreover, we find that the adverse effects of investor distraction on various corporate governance outcomes are stronger among firms with problematic directors. Our findings suggest that institutional investor monitoring creates important director incentives to monitor.

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Monitoring the monitor: Distracted institutional investors and board governance

Abstract

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