Institutional Ownership and Monitoring Effectiveness: It's Not Just How Much, But What Else You Own

Organization Science, 19(3): 419-440, 2008

22 Pages Posted: 25 Jan 2014

See all articles by Ravi Dharwadkar

Ravi Dharwadkar

Syracuse University - Whitman School of Management

Maria L. Goranova

University of Wisconsin - Milwaukee

Pamela M. Brandes

Syracuse University

Raihan H. Khan

SUNY at Oswego

Date Written: June 1, 2008

Abstract

Corporate governance research indicates that large owners provide effective monitoring. In this article, we expand firm-level notions of monitoring to include large institutional owners' investment portfolios and suggest that portfolio characteristics affect owners' motivation and capacity to monitor, which compromises the positive effects of monitoring at the firm level. Specifically, using data from 533 large firms over a 10-year period, we find that increases in the size of portfolio holdings, number of portfolio blockholdings, portfolio turnover, and the importance of a particular holding reduce monitoring effectiveness in the context of executive compensation. Overall, we provide preliminary evidence that the portfolio characteristics of the largest institutional owners contradict firm-level monitoring effects; therefore, we strongly recommend that future studies consider both firm- and portfolio-level effects simultaneously to understand monitoring effectiveness.

Keywords: large owners, institutional investors, executive compensation, ownership portfolios

JEL Classification: G3

Suggested Citation

Dharwadkar, Ravi and Goranova, Maria L. and Brandes, Pamela M. and Khan, Raihan H., Institutional Ownership and Monitoring Effectiveness: It's Not Just How Much, But What Else You Own (June 1, 2008). Organization Science, 19(3): 419-440, 2008, Available at SSRN: https://ssrn.com/abstract=2384644

Ravi Dharwadkar

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244-2130
United States

Maria L. Goranova (Contact Author)

University of Wisconsin - Milwaukee ( email )

P.O. Box 742
3202 N. Maryland Ave.
Milwaukee, WI 53201-0742
United States

Pamela M. Brandes

Syracuse University ( email )

900 S. Crouse Avenue
Syracuse, NY 13244-2130
United States

Raihan H. Khan

SUNY at Oswego ( email )

7060 Route 104
Oswego, NY 13126-3599
United States

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