Are There Monitoring Benefits to Institutional Ownership? Evidence from Seasoned Equity Offerings

47 Pages Posted: 6 Aug 2010 Last revised: 17 Feb 2011

See all articles by Ranjan D'Mello

Ranjan D'Mello

Wayne State University - Department of Finance

Ilhan Demiralp

University of Wisconsin - Madison

Venkat Subramaniam

Tulane University

Frederik P. Schlingemann

University of Pittsburgh - Finance Group; European Corporate Governance Institute (ECGI)

Date Written: August 5, 2010

Abstract

We provide new evidence on the monitoring benefits from institutional ownership by analyzing the impact of institutional ownership on stock price and operating performance following seasoned equity offerings, a setting where the effects of monitoring are likely to be especially important. We find that announcement returns are positively and significantly related to total and active institutional ownership levels and concentration. Post-issue stock returns are positively and significantly related to the contemporaneous post-issue changes in total and active institutional ownership and the concentration of their shareholdings. Operating performance improvements are also related to institutional monitoring in the one, two, and three years following the equity issue. Our results continue to hold even after accounting for the possibility that institutional investors have an informational advantage that enables them to identify and invest in subsequently better performing firms. In addition, we find that the monitoring benefits are unchanged pre- and post-Regulation FD, consistent with the view that these benefits are incremental to the observed value changes attributable to the informational advantage of institutions. We also empirically reject the possibility that our findings are driven by institutions buying past winners and selling past losers as a way to window-dress their portfolio holdings.

Keywords: Equity Offerings, Institutional Investors, Agency Problems, Monitoring, Information Asymmetry

JEL Classification: F32, G34

Suggested Citation

D'Mello, Ranjan and Demiralp, Ilhan and Subramaniam, Venkat R. and Schlingemann, Frederik Paul, Are There Monitoring Benefits to Institutional Ownership? Evidence from Seasoned Equity Offerings (August 5, 2010). Available at SSRN: https://ssrn.com/abstract=1653857 or http://dx.doi.org/10.2139/ssrn.1653857

Ranjan D'Mello

Wayne State University - Department of Finance ( email )

2771 Woodward Ave
Mike Ilitch School of Business
Detroit, MI 48201
United States
313-577-7828 (Phone)

Ilhan Demiralp

University of Wisconsin - Madison ( email )

975 University Avenue
Madison, WI 53706
United States

Venkat R. Subramaniam

Tulane University ( email )

A.B. Freeman School of Business
New Orleans, LA 70118
United States
504-865-5493 (Phone)
504-862-8327 (Fax)

HOME PAGE: http://www.tulane.edu/~vencat

Frederik Paul Schlingemann (Contact Author)

University of Pittsburgh - Finance Group ( email )

368A Mervis Hall
Pittsburgh, PA 15260
United States
(412) 648 1847 (Phone)
(412) 648 1693 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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