Do UK Institutional Shareholders Monitor Their Investee Firms?
Cardiff University - Cardiff Business School; European Corporate Governance Institute (ECGI)
Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)
University of Warwick - Finance Group
TILEC Discussion Paper No. 2008-016
CentER Discussion Paper Series No. 2008-38
ECGI - Finance Working Paper No. 208/2008
As institutional investors are the largest shareholders in most listed UK firms, one expects them to monitor the firms they invest in. However, there is mounting empirical evidence which suggests that they do not perform any monitoring. This paper provides a new test on whether UK institutional investors engage in monitoring. The test consists of an event study on directors' trades. If institutional shareholders act as monitors, their monitoring activities convey new information about a firm's future value to other outside shareholders and reduce the informational asymmetry between the managers and the market. As a result, directors' trades convey less information to the market, and the stock price reaction is weaker. However, our results show that institutional shareholders do not have any significant impact on the stock price reaction which stands in marked contrast with the impact that families, individuals and other firms have on stock prices.
Number of Pages in PDF File: 28
Keywords: Insider trading, institutional investor monitoring, shareholder activism, corporate
JEL Classification: G14, G39
Date posted: April 15, 2008 ; Last revised: March 18, 2014