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Abstract:
We examine the relation between corporate governance and ownership structure, focusing on the role of institutional investors. In many countries, institutional investors have become dominant players in the financial markets. We discuss the theoretical basis for, history of, and empirical evidence on institutional investor involvement in shareholder monitoring. We examine cross-country differences in ownership structures and the implications of these differences for institutional investor involvement in corporate governance. Although there may be some convergence in governance practices across countries over time, the endogenous nature of the interrelation among governance factors suggests that variation in governance structures will persist.

Abstract:
We examine the relation between corporate governance and ownership structure, focusing on the role of institutional investors. In many countries, institutional investors have become dominant players in the financial markets. We discuss the theoretical basis for, history of, and empirical evidence on institutional investor involvement in shareholder monitoring. We examine cross-country differences in ownership structures and the implications of these differences for institutional investor involvement in corporate governance. Although there may be some convergence in governance practices across countries over time, the endogenous nature of the interrelation among governance factors suggests that variation in governance structures will persist.

Corporate Governance, Corporate Ownership, Institutional Investors, International

Abstract:
Shareholder activism by institutions is an important aspect of U.S. financial markets. We provide an overview of shareholder activism by institutional and individual investors, emphasising their focus on corporate governance, the identity of the activists, and a brief history of their activities. We also present a survey of the theoretical and empirical research regarding the motivations and outcomes of shareholder activism.

Corporate Governance, Shareholder Activism

Abstract:
We provide an overview of shareholder activism by institutional and individual investors. We discuss the objectives of activist shareholders, the identity of the activists, and provide a brief history of their activities. We also present a survey of the theoretical and empirical research regarding the motivations and outcomes of shareholder activism.

I. What is Shareholder Activism;

II. History of Shareholder Activism
A. Early Activism
B. Shareholder Activism by Institutional Investors
C. Recent Developments

III. Motivation for Shareholder Activism
A. Impact of a Large Shareholder
B. Monitoring and Liquidity Effects
C. Activism through the Proxy Process

IV. Who Gets Targeted;

V. Does Shareholder Activism Work;
A. Short-term stock market reactions around the date of
announcement of activism
B. Voting outcomes on shareholder proposals
C. Long-term Performance after the Shareholder Activism
D. Changes in Other Aspects of the Target Firm
E. Relationship Investing

VI. Conclusions

Abstract:
We find that institutional ownership concentration is positively related to the pay-for-performance sensitivity of executive compensation and negatively related to the level of compensation, even after controlling for firm size, industry, investment opportunities and performance. These results suggest that the institutions serve a monitoring role in mitigating the agency problem between shareholders and managers. Additionally, we find that clientele effects exist among institutions for firms with certain compensation structures, suggesting that institutions also influence compensation structures through their preferences.

Executive compensation, institutional investors, pay-for-performance, large shareholders, agency problems

Abstract:
We provide arguments and present evidence that corporate governance structures are endogenous responses to the costs and benefits firms face when they choose the mechanisms that comprise those structures. In particular, an industry's investment opportunities, product uniqueness, competitive environment, information environment, and leverage help explain its corporate governance. Examining groups of similar corporate governance mechanisms shows that firm and industry factors can have quite different associations (in strength and direction) with the monitoring capabilities of the board of directors versus the shareholder orientation of corporate charter provisions. Although industry factors play a dominant role in explaining an index of total governance, we find that firm and industry factors contribute almost equally in explaining the variation of sub-indices capturing aspects of board structure and charter provision use.

Corporate Governance, Endogeneity, Board of Directors, Charter Provisions

Abstract:
In the early 1900's American financial institutions were active participants in U.S. corporate governance but the enactment of securities laws in the 1930's limited the power of financial intermediaries and thus their governance role. The consequence of such laws and regulations was a progressive widening of the gap between ownership and control in large U.S. public companies. In 1942, SEC rule changes allowed shareholders to submit proposals for inclusion on corporate ballots. Since that time, shareholder activists have used the proxy process, and other approaches, to pressure corporate boards and managers for change. In particular, during the mid-1980s, the involvement of large institutional shareholders increased dramatically with the advent of public pension fund activism. At the heart of shareholder activism is the quest for value, yet the empirical evidence suggests that effects of such activism are mixed. We review the evidence on activism and, while some studies have found positive short-term market reactions to announcements of certain kinds of activism, there is little evidence of improvement in the long-term operating or stock-market performance of the targeted companies. A recent increase in hedge fund activism appears to be associated with dramatic corporate change, however, the research in this area is still somewhat nascent and the long-term effects are still unknown.

Corporate Governance, Shareholder Activism

Abstract:
Recent studies document a strong positive relation between quarterly and annual changes in institutional ownership and returns measured over the same period. The source of this positive correlation could arise from institutional investors' intra-period positive feedback trading, institutions forecasting intra-period price changes, or from price pressure caused by institutional trades. Price pressure can in turn arise for inventory/liquidity reasons, or because market participants infer information from institutional trades. Our results suggest that the price impact of institutional trading is primarily responsible for the documented positive covariance between quarterly changes in institutional ownership and quarterly returns. Moreover, our analyses suggest this price pressure results from information revealed through institutional trading.

Abstract:
Because sell-side analysts are dependent on institutional investors for performance ratings and trading commissions, we argue that analysts are less likely to succumb to investment banking or brokerage pressure in stocks highly visible to institutional investors. Examining a comprehensivesample of analyst recommendations over the 1994-2000 period, we find that analysts recommendations relative to consensus are positively associated with investment bankingrelationships and brokerage pressure, but negatively associated with the presence of institutional investor owners. The presence of institutional investors is also associated with more accurate earnings forecasts and more timely re-ratings following severe share price falls.

Abstract:
Because sell-side analysts are dependent on institutional investors for performance ratings and trading commissions, we argue that analysts are less likely to succumb to investment banking or brokerage pressure in stocks highly visible to institutional investors. Examining a comprehensivesample of analyst recommendations over the 1994-2000 period, we find that analysts recommendations relative to consensus are positively associated with investment bankingrelationships and brokerage pressure, but negatively associated with the presence of institutional investor owners. The presence of institutional investors is also associated with more accurate earnings forecasts and more timely re-ratings following severe share price falls.

Analyst recommendations, Analyst forecast accuracy, Investment banking, Banking Relationships

Abstract:
Because sell-side analysts are dependent on institutional investors for performance ratings and trading commissions, we argue that analysts are less likely to succumb to investment banking or brokerage pressure in stocks highly visible to institutional investors. Examining a comprehensive sample of analyst recommendations over the 1994-2000 period, we find that analysts' recommendations relative to consensus are positively associated with investment banking relationships and brokerage pressure, but negatively associated with the presence of institutional investor owners. The presence of institutional investors is also associated with more accurate earnings forecasts and more timely re-ratings following severe share price falls.

Analyst recommendations, analyst forecast accuracy, investment banking, conflicts of interest, institutional investors, banking relationships

Abstract:
Sell-side analysts face pressure to provide favorable opinions on their employers' investment banking clients and to boost brokerage business, yet institutional investors value unbiased research. Because of their dependence on institutional investors for performance ratings and trading commissions, we argue that analysts are less likely to succumb to pressure in stocks that are highly visible to their institutional investor constituency. Given the apparent severity of analyst conflicts of interest in the late 1990s, we examine a comprehensive sample of analyst recommendations over the 1994-2000 period. We find that analysts' recommendations relative to consensus are positively associated with investment banking relationships and brokerage pressure, but negatively associated with the presence of institutional investors in the firm being followed. This is especially true when there are more institutions holding larger blocks in the firm, and for firms whose institutional holdings are concentrated in the hands of the largest institutional investors. The presence of institutional investors is also associated with more accurate earnings forecasts and more timely re-ratings following severe share price falls.

Analyst recommendations, Analyst forecast accuracy, Investment banking, Conflicts of Interest, Institutional investors, Banking Relationships

Abstract:
Although evidence suggests that institutional investors play a role in monitoring management, not all institutions are equally willing or able to serve this function. We present a stylized model that examines the effects of institutional monitoring on executive compensation. The model predicts that institutions' influence on managers' pay-for-performance sensitivity and level of compensation is enhanced when institutions have lower implied costs of monitoring, but that these effects are attenuated when the firm-specific cost of monitoring is high. Our empirical results are broadly consistent with these implications, suggesting that independent investment advisors and investment company managers have advantages in monitoring firms' management.

Abstract:
Although evidence suggests that institutional investors play a role in monitoring management, not all institutions are equally willing or able to serve this function. We present a stylized model that examines the effects of institutional monitoring on executive compensation. The model predicts that institutions' influence on managers' pay-for-performance sensitivity and level of compensation is enhanced when institutions have lower implied costs of monitoring, but that these effects are attenuated when the firm-specific cost of monitoring is high. Our empirical results are broadly consistent with these implications, suggesting that independent investment advisors and investment company managers have advantages in monitoring firms' management.

Active institutional investors, Executive compensation, Agency, Monitoring

Abstract:
We provide arguments and present evidence that corporate governance structures are composed of interrelated mechanisms, which are in turn endogenous responses to the costs and benefits firms face when they choose those mechanisms. Examining board structures and the use of corporate charter provisions in a sample of more than 2,300 firms over a four-year period we find that firms cluster in their use of governance mechanisms. In particular, the set of charter provisions that firms use, as measured by the Gompers, Ishii, and Metrick (2003) G Index, is associated with board structure, with the laws of the state in which the firm is incorporated, and with firm and industry characteristics. We also find that some governance structures appear to serve as substitutes. Specifically, firms that have powerful boards (as measured by board independence) also have the greatest number of charter provisions, suggesting that the market for corporate control is less effective as a monitoring mechanism for these firms. In contrast, firms that have less powerful boards tend to have few charter provisions, suggesting that the market for corporate control plays a greater monitoring role at such firms. To address potential endogeneity issues, we employ three-stage least squares analysis to estimate these relationships within a system of equations. Our results from this analysis are consistent with the hypothesis that powerful boards serve as a substitute for the market for corporate control. Finally, our findings suggest that causality runs from the board to the choice of charter provisions, but not vice versa.

Corporate Governance, Charter Provisions, Boards of Directors

Abstract:
Institutional investors are the dominant force in financial markets today, yet their preferences about corporate governance are generally undisclosed and their activities in this area tend to be performed privately. We conduct a survey to elicit their views on investor protection and corporate governance mechanisms. We find that among the institutions who responded to our survey corporate governance is of importance to their investment decisions and a number of them are willing to engage in shareholder activism. Further, an examination of the institutional investors' portfolio holdings shows that their investment decisions appear to be related to their preferences.

Abstract:
We test the investor recognition hypothesis through an examination of the high volume return premium across countries. Our cross-country tests are consistent with the hypothesis in that we find the magnitude of the premium is associated with market characteristics that relate to the importance of a stock's visibility, including proxies for information dissemination, investor confidence, and investor demographics. Further, we find that the high volume return premium is a persistent phenomenon found in almost all developed equity markets and in emerging equity markets as well.

high volume, high volume premium, investor recognition hypothesis, IRH

Abstract:
We examine the high volume return premium across countries as a test of the investor recognition hypothesis. Our cross-country tests are consistent with the hypothesis in that we find the magnitude of the premium is associated with market characteristics that relate to the importance of a stock's visibility, including proxies for information dissemination, investor confidence, and investor demographics. Further, we find that the high volume return premium, first documented by Gervais, Kaniel, and Mingelgrin (2001) for the United States, is a persistent phenomenon found in almost all developed equity markets and in emerging equity markets as well.

Abstract:
This paper provides direct evidence in support of the tax-loss-selling hypothesis as an explanation for the January effect. Specifically, we examine the turn-of-the-year return and volume patterns of an asset class held almost entirely by tax-sensitive individual investors: municipal bond closed-end funds. First, we document a January effect for the municipal bond closed-end funds. Next, we provide direct evidence that the observed January effect can be largely explained by the tax-loss-selling activities at the end of the previous year. Moreover, we find that funds associated with brokerage firms, which should be providing investors with tax advice, display more tax-loss-selling behavior.

January effect, tax-loss-selling

Abstract:
We examine the effects of mutual fund families' strategic decisions, particularly the advertising decision, on investor flows into the families. We find evidence that beyond performance a family's strategic decisions such as advertising, distribution channels, fund offerings and expense ratios, have significant effects on investor flows. Consistent with evidence at the individual fund level, investor flows have an increasing and convex relation to a family's past performance for high performing families. We also find a similar association between a family's flows and its relative levels of advertising expenditures with a significant positive effect for high relative advertisers only.

funds, advertising, flows, fundflows

Abstract:
In this paper we hypothesize that because of firms' ability to adjust to exchange rate movements over the longer term, stock prices are unlikely to reflect foreign exchange exposure unless a firm is particularly sensitive to short-term cash flow variability. Controlling for firms' ability to adjust their cost structures, we find that the magnitude of exchange rate exposure of U.S. manufacturing firms is related to firms' short-term leverage, availability of internal funds, size, costs of underinvestment and product specialization. Further, during large, unexpected movements of the dollar, firms with higher expected costs of financial distress show larger exposures as measured by their larger abnormal returns and abnormal volatilities in response to exchange rate shocks.

Foreign Exchange Exposure, Cash Flow, Financial Distress Cost

Abstract:
We explore whether the motivation for CEO deal-making activities is related more to expected compensation increases or signals of CEO quality. We analyze firms executing joint ventures, strategic alliances, seasoned equity offerings, and spin-offs and find that total CEO compensation increases, on average, from these activities, even when the deals are not expected to improve firm value or when monitoring appears to be weak, as proxied by busy and/or hand-picked boards. Our results also indicate that deal-making CEOs are less likely to be fired for poor performance. Overall, the results support the CEO activity hypothesis over the CEO quality signaling hypothesis.

Deals, Executive Compensation, Corporate Governance

Abstract:
To study attention and learning effects in financial markets, we investigate the role of media coverage in investment decisions of mutual fund investors and the consequent effects on fund flows. Employing a database of nearly 10,000 news articles and controlling for endogeneity in media coverage, we find that fund characteristics affect the probability of a news story and that the existence and stance of media coverage affects net investor flows into the fund in ways consistent with investor attention and learning.

mutual funds, attention, learning, fund flows, media

Abstract:
We find that advertising appears to have significant effects on investor flows at the industry, family and individual fund level. At the industry level, flows are higher in months with more advertising dollars spent, even for non-advertising families. At the family level, flows have a convex relation with advertising expenditures, similar to that for performance, with a significant positive effect for high relative advertisers only. At the individual fund level, advertising stems redemptions rather than increasing purchases of fund shares. We further find that advertising can affect the fund's flow-performance sensitivity, dampening it for poorly performing funds and increasing it for highly performing funds.

mutual fund, flow, advertising, fund flows

Abstract:
Due to institutional investors' increasing ownership and interest in corporate governance, we hypothesize that the presence of institutional investors is associated with certain executive compensation structures. We find a significantly negative relation between the level of compensation and the concentration of institutional ownership, suggesting that institutions serve a monitoring role in the shareholder-manager agency problem. We further find a significantly positive relation between the pay-for-performance sensitivity of executive compensation and both the level and concentration of institutional ownership.These results suggest that the institutions act as a complement rather than a substituteto incentive compensation in mitigating the agency problem.

Abstract:
Mutual funds are pooled investment vehicles with diverse tax clienteles. Whereas many mutual funds are held primarily by taxable investors, a significant fraction of mutual fund assets are held in tax-qualified retirement accounts. Our paper investigates whether the characteristics, investment strategies, and performance of mutual funds held by diverse tax clienteles differ. Examining both mutual fund income distributions and mutual fund holdings, we find that funds held primarily by taxable investors tend to be more tax-efficient than funds held primarily in tax-deferred retirement accounts. Despite these differences, we find no evidence that any investment constraints that may arise from the funds that pursue tax efficient management strategies result in performance differences between funds held by different tax clienteles.

mutual fund, taxes, retirement

Abstract:

Abstract:
Mutual funds are pooled investment vehicles with diverse tax clienteles. Whereas many mutual funds are held primarily by taxable investors, a significant fraction of mutual fund assets are held in tax-qualified retirement accounts. Our paper investigates whether the characteristics, investment strategies, and performance of mutual funds held by diverse tax clienteles differ. Examining both mutual fund income distributions and mutual fund holdings, we find that funds held primarily by taxable investors tend to be more tax-efficient than funds held primarily in tax-deferred retirement accounts. Despite these differences, we find no evidence that any investment constraints that may arise from the funds that pursue tax efficient management strategies result in performance differences between funds held by different tax clienteles.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
This article is the keynote address from the Eastern Finance Association meeting in New Orleans in March 2007 with updated references and examples. In this keynote address, I discuss what we can learn about institutional investors' views on corporate governance and corporate social responsibility from research and surveys.

Abstract:
This study examines the hypothesis that closed-end fund shareholders garner greater returns than holders of the underlying assets as compensation for bearing "noise trader risk." We demonstrate that fund share returns are more volatile and exhibit greater mean reversion than the returns on the underlying assets consistent with the hypothesis that noise traders play a more active role in closed-end fund shares than the underlying assets. Inconsistent with the De Long, Shleifer, Summers, and Waldmann (1990) noise trader model, however, we find that once accounting for fund expenses, fund shareholders do not earn returns greater than holders of the underlying assets.

Abstract:
We examine whether institutional investor activism by public pension funds is effective in achieving its stated goal of increasing shareholder value. An investigation of the short term performance indicates that there are significantly positive abnormal returns surrounding the targeting of firms for governance reform. In contrast, in an analysis of long term performance we find that the magnitude of the cumulated excess return varies depending on the specific benchmark portfolio employed. Moreover, we do not find any evidence of statistically significant positive returns. This leads us to question the effectiveness of this form of shareholder activism.

Abstract:
This study examines serial correlation in daily portfolio returns for securities held primarily by individual investors versus securities held primarily by institutional investors. The results implicate institutional investors as the primary source of positive serial correlation in portfolio returns. Both own- and cross-autocorrelations are higher for the securities in which institutional investors play a greater role. The results are not consistent with pricing error corrections by market makers, non-synchronous trading or transaction costs as the major cause of the observed positive autocorrelations in daily portfolio returns. The results are most consistent with the autocorrelations being caused by the correlated trading patterns of institutional investors due to such activities as herding, momentum investing or other positive-feedback trading strategies.

Abstract:
Large revisions in dividends are accompanied by stock price reactions for industry rivals of the announcing firm. Though these effects are near-zero on average, their magnitude differs systematically across the firms in the industry. Rivals that are unlikely to be affected by competitive realignments within the industry tend to experience stock price effects like those of the announcing firm. Those that are likely to be affected tend to experience statistically insignificant reactions of the opposite sign. Thus, for some rivals, competitive effects apparently offset contagion effects. We find supporting results for changes in rival's dividends over a longer period.

Abstract:
This paper examines potential explanations for the wealth effects surrounding dividend change announcements. We find that new information concerning managers' investment policies is not revealed at the time of the dividendannouncement. We also find that dividend increases (decreases) are associated with subsequent significant increases (decreases) in capital expenditures over the three years following the dividend change and that dividend change announcements are associated with revisions in analysts' forecasts of current earnings. These results are consistent with the cash-flow-signaling hypothesis rather than the free-cash-flow hypothesis as an explanation for the observed stock price reactions to dividend change announcements.

Abstract:
We test the hypothesis that when their compensation is linked to relative performance, managers of investment portfolios likely to end up as "losers" will manipulate fund risk differently than those managing portfolios likely to be "winners." An empirical investigation of the performance of 334 growth-oriented mutual funds during 1976 to 1991 demonstrates that mid-year losers tend to increase fund volatility in the latter part of an annual assessment period to a greater extent than mid-year winners. Further, we show that this effect became stronger as industry growth and investor awareness of fund performance increased over time.

Abstract:
We study shareholder proposals across a period of substantial activity and find systematic differences both across sponsor identity and across time. To understand how these proposals are perceived by other investors, we examine voting outcomes and short-term market reactions conditioned on proposal type and sponsor identity. The voting analysis documents that sponsor identity, issue type, prior performance and time period are important influences on the voting outcome. Moreover, it appears that proposals by institutional and coordinated activists act as substitutes. The nature of the stock market reaction, while typically small, varies according to the issue and the sponsor identity.

Abstract:
This study evaluates the tax-loss-selling hypothesis against the window-dressing hypothesis as explanations for the turn-of-the-year return anomalies. We examine differences between securities dominated by individual investors versus those dominated by institutional investors and find that the effect is more pervasive in the former. Controlling for capitalization, we find that in early January, stocks with greater individual investor interest outperform stocks with greater institutional investor interest. These results hold for both stocks that previously appreciated in value and stocks that previously depreciated in value. The results are most consistent with the tax-loss-selling hypothesis as an explanation for the turn-of-the-year effect.