Selection or Influence? Institutional Investors and Corporate Acquisitions

Abstract

This paper shows that the presence of large public pension fund shareholders particularly reduces ex ante bad acquisitions. When firms with large public pension fund presence do acquire other firms, they perform relatively better in the long-run. Other institutional investors have either the opposite effect or no effect. To establish the direction of causality between institutional ownership and observed corporate merger and acquisition decisions, it is crucial to identify the sources of exogenous variations in institutional ownerships. This paper introduces two instrumental variables, one of which borrows the concept of a "Bartik" instrument from the labor economics literature.

Keywords: Corporate Governance, Institutional Investors, Mergers and Acquisitions

JEL Classification: G2, G34