Institutional Investors, Monitoring, and the Transformation of Underperforming Firms

56 Pages Posted: 30 Aug 2011 Last revised: 7 Jan 2012

See all articles by Grigori Erenburg

Grigori Erenburg

University of Western Ontario - King's University College

Janet Kiholm Smith

Claremont McKenna College - Robert Day School of Economics and Finance

Richard L. Smith

University of California, Riverside - Anderson Graduate School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: January 4, 2012

Abstract

We focus on chronically underperforming firms and assess the roles of institutional investors in either facilitating asset redeployment or entrenching managers. We find that, in aggregate, institutions exhibit a flight to quality, selling shares in firms that subsequently fail. For underperforming firms that survive, institutional holdings are associated with improved performance, but abnormal returns are still negative and return on assets and Tobin’s Q are still low. Our evidence suggests that many of the findings in previous research of positive relationships between institutional holdings and abnormal returns, return on assets, and Tobin’s Q may be entirely explained by flight to quality combined with the distressed firm anomaly. We find no evidence that holdings of traditional activist public pension funds lead to improved performance. Nor do performance results support positive roles for institutions with long-term holdings. However, activist hedge funds are different in that they significantly increase holdings in firms that are subsequently acquired. Also, short-term holdings by institutions are associated with positive subsequent performance. Results for institutional blockholders are mixed, reflecting their heterogeneity. The distinction between independent and non-independent (gray) institutions does not appear to matter. We contrast the results to those for consistently overperforming firms; the analysis points to a more limited governance role of institutions for firms that are performing well.

Keywords: institutional investors, monitoring, corporate governance, underperforming firms, activist pension funds, hedge funds, blockholders, acquisition, failure

JEL Classification: G3, L2, G20, G33, G34

Suggested Citation

Erenburg, Grigori and Smith, Janet Kiholm and Smith, Richard L., Institutional Investors, Monitoring, and the Transformation of Underperforming Firms (January 4, 2012). Claremont McKenna College Robert Day School of Economics and Finance Research Paper . Available at SSRN: https://ssrn.com/abstract=1919667 or http://dx.doi.org/10.2139/ssrn.1919667

Grigori Erenburg

University of Western Ontario - King's University College ( email )

266 Epworth Avenue
London, Ontario N6A 2M3
Canada

Janet Kiholm Smith

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
909-607-3276 (Phone)

Richard L. Smith (Contact Author)

University of California, Riverside - Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States
951-827-3554 (Phone)

HOME PAGE: http://www.agsm.ucr.edu/

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