Lehman's and Lemons: A Study of Institutional Investment in U.S. Firms

Abstract

We examine the impact of institutional investment on Tobin’s Q for the period 2004 to 2008. We provide further evidence of the heterogeneity of various institutional owners’ willingness to monitor by examining their corporate holdings. We isolate a special role for the four failed banks: Lehman’s, Bear Stearns, Merrill Lynch, and Wachovia. We find that these banks pursued investment strategies that favored risky firms and entrenched management, although this is less certain for Merrill Lynch. We conclude that for the most part these banks pursued short-term profits and that failures in corporate governance were important in fueling the 2008 financial crisis.

Keywords: Financial Crisis, Lehman, governance, institutional investment

JEL Classification: G23, G32, G34