Do Exogenous Changes in Passive Institutional Ownership Affect Corporate Governance and Firm Value?

53 Pages Posted: 20 Nov 2012 Last revised: 18 Jul 2016

Cornelius Schmidt

Norwegian School of Economics (NHH) - Department of Finance

Rüdiger Fahlenbrach

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Date Written: June 30, 2016

Abstract

We investigate whether corporations and their executives react to an exogenous change in passive institutional ownership and alter their corporate governance structure. We find that exogenous increases in passive ownership lead to increases in CEO power and fewer new independent director appointments. Consistent with these changes not being beneficial for shareholders, we observe negative announcement returns to the appointments of new independent directors. We also show that firms carry out worse mergers and acquisitions after exogenous increases in passive ownership. These results suggest that the changed ownership structure causes higher agency costs.

Keywords: Corporate Governance; Institutional Ownership; Monitoring; Index Reconstitutions

JEL Classification: G34, G23, G32

Suggested Citation

Schmidt, Cornelius and Fahlenbrach, Rüdiger, Do Exogenous Changes in Passive Institutional Ownership Affect Corporate Governance and Firm Value? (June 30, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2177699 or http://dx.doi.org/10.2139/ssrn.2177699

Cornelius Schmidt (Contact Author)

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

Rüdiger Fahlenbrach

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny
Extranef 211
1015 Lausanne, CH-1015
Switzerland
++41-21-693-0098 (Phone)
++41-21-693-3010 (Fax)

HOME PAGE: http://sfi.epfl.ch/fahlenbrach.html

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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