Institutional Investors and Crash Risk: Monitoring or Expropriation?

Posted: 11 Apr 2011 Last revised: 29 Sep 2011

See all articles by Jeffrey L. Callen

Jeffrey L. Callen

University of Toronto - Rotman School of Management

Xiaohua Fang

Florida Atlantic University

Date Written: April 1, 2011

Abstract

This study tests two opposing views of institutional investors – monitoring versus expropriation – by investigating whether institutional ownership is positively or negatively related to future firm-specific stock price crash risk. We present robust evidence that institutional ownership is positively associated with future stock price crash risk. After further classifying institutional investors into transient, dedicated, and quasi-indexer types, we show that the overall positive relation between institutional ownership and future stock price crash risk is driven primarily by transient institutions, with dedicated institutions serving a monitoring role in reducing future stock price crash risk. We also find that institutional ownership by public pension funds (bank trusts, investment companies, and independent investment advisors) is significantly negatively (positively) associated with future crash risk. We also find that opaque financial reporting exacerbates the impact of institutional investors on future stock price crash risk. The findings in this study are shown inter alia to be robust to endogeneity concerns and alternative institutional investment metrics.

Keywords: institutional investors, crash risk, monitoring, expropriation

JEL Classification: G20, G32, G34

Suggested Citation

Callen, Jeffrey L. and Fang, Xiaohua, Institutional Investors and Crash Risk: Monitoring or Expropriation? (April 1, 2011). Rotman School of Management Working Paper No. 1804697, Available at SSRN: https://ssrn.com/abstract=1804697

Jeffrey L. Callen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-5641 (Phone)
416-971-3048 (Fax)

Xiaohua Fang (Contact Author)

Florida Atlantic University ( email )

United States

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