Coordination Costs and Institutional Investors: Evidence from the Market for Corporate Control

Abstract:     
Coordination costs among a firm's institutional shareholders have an important impact on the market for corporate control. I use two measures, one based on the geographic distance among institutional shareholders and the other based on the correlation in their portfolio allocation decisions, to proxy for coordination costs. I find that target firms with low coordination costs experience significantly higher abnormal returns around the takeover announcement. In a similar vein, acquirer firms with low coordination costs are associated with higher acquisition announcement returns. Using the SEC's 1992 proxy reform as an exogeneous shock that reduces barriers to communication and coordination among shareholders, I show that the above effects become significantly stronger after the reform. These findings suggest that the ease of coordination enhances the monitoring role of institutional investors.

Number of Pages in PDF File: 69

Keywords: Coordination costs, Mergers and acquisitions, Institutional investors, Shareholder monitoring

JEL Classification: G23, G34

working papers series