How Institutional Investor Objectives Affect Firm Valuation and Governance

Over the last 30 years, institutional investors have dramatically increased their stakes in U.S. companies. In the 1980s, they held approximately 20 percent to 30 percent of the average firm in the U.S. By 2010, they held over 65 percent. This increase in institutional holdings coincides with the growing complexity of markets and importance of corporate governance. Prior research has focused on the different effects on firms of the informed “smart money” of the institutional investor in contrast to the less sophisticated individual “retail” investor. Yet, as SEC Commissioner Luis Aguilar said in a recent speech, “Institutional investors are not … Read more

The Role of the Chief Legal Officer in Corporate Governance

Corporate governance mitigates agency costs by protecting outside investors from exploitation from insiders, as well as aligning the financial and other incentives of insiders with those of the principal. The literature remains underdeveloped, however, on those tasked with shaping and enforcing internal corporate governance. These executives, known as gatekeepers, serve as reputational intermediaries who verify and certify information to the market. The most prominent gatekeeper in the firm is the Chief Legal Officer (CLO). The CLO is responsible for monitoring for firm misconduct, supervising internal and external legal resources, and advising the CEO and the board of directors on matters … Read more

Do Managers Seek Control and Entrenchment?

Do managers seek control of the firm, or the level of ownership consistent with entrenchment? Entrenched managers own shares within a range which is high enough to give them control, but sufficiently low to make other shareholders bear the brunt of their non-value maximizing actions. There is a large literature on how entrenched managers can benefit themselves by extracting wealth from other shareholders, but conclusive evidence that managers seek entrenchment is currently lacking.

One way to proceed is to try to infer the optimal ownership structure from the managers’ perspective from revealed preferences in existing ownership structure. Prior literature finds … Read more