Institutional Investor Preferences for Corporate Governance Mechanisms

49 Pages Posted: 12 Dec 2007 Last revised: 25 Mar 2015

See all articles by Brian J. Bushee

Brian J. Bushee

University of Pennsylvania - The Wharton School

Mary Ellen Carter

Boston College - Department of Accounting

Joseph Gerakos

Tuck School of Business at Dartmouth College

Date Written: June 1, 2013

Abstract

We examine institutional investors’ preferences for corporate governance mechanisms. We find little evidence of an association between total institutional ownership and governance mechanisms. However, using revealed preferences, we identify a small group of “governance-sensitive” institutions that exhibit persistent associations between their ownership levels and firms’ governance mechanisms. We also find that firms with a high level of ownership by institutions sensitive to shareholder rights have significant future improvements in shareholder rights, consistent with shareholder activism. Further, we find that factors describing the characteristics of institutions’ portfolios are correlated with governance preferences. Large institutions, those holding a large number of portfolio stocks, and those with preferences for growth firms are more likely to be sensitive to corporate governance mechanisms, suggesting those mechanisms may be a means for decreasing monitoring costs and may be more essential for firms with a high level of growth opportunities. Finally, our results suggest that common proxies for governance sensitivity by investors (e.g., legal type, blockholding) do not cleanly measure governance preferences.

Keywords: Corporate Governance, Institutional Investors, Board of Directors

JEL Classification: G11, G20, G34

Suggested Citation

Bushee, Brian J. and Carter, Mary Ellen and Gerakos, Joseph, Institutional Investor Preferences for Corporate Governance Mechanisms (June 1, 2013). Journal of Management Accounting Research, Vol. 26, No. 2, 2014, Available at SSRN: https://ssrn.com/abstract=1070168 or http://dx.doi.org/10.2139/ssrn.1070168

Brian J. Bushee

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-4872 (Phone)
215-573-2054 (Fax)

Mary Ellen Carter

Boston College - Department of Accounting ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Joseph Gerakos (Contact Author)

Tuck School of Business at Dartmouth College ( email )

Hanover, NH 03755
United States

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