Geographic Concentration of Institutional Investors and the Market for Corporate Control

Abstract

This paper examines the relation between the geographic concentration of institutional shareholders and shareholder gains in corporate control transactions. I find that target firms with a greater geographic concentration of institutional shareholders experience significantly higher abnormal returns around the takeover announcement. In a similar vein, acquirer firms with a greater geographic concentration of institutional shareholders are associated with higher acquisition announcement returns. Using the 1999 free communication rule as a shock to shareholder coordination, I find that firms with a greater geographic concentration of institutional shareholders are more positively impacted by the reform. Further, I find evidence suggesting that geographic concentration facilitates coordinated voting against merger proposals that are not in the shareholders' best interests. These findings are consistent with the hypothesis that geographic concentration promotes coordination among institutional shareholders and enhances their monitoring role in corporate control transactions.

Keywords: Coordination; Institutional investors; Mergers and acquisitions; Shareholder monitoring; Proxy reform

JEL Classification: G23, G34