Motivated Monitors: The Importance of Institutional Investors’ Portfolio Weights
62 Pages Posted: 9 Jul 2014 Last revised: 16 Feb 2015
Date Written: February 11, 2015
Studies of institutional monitoring focus on the fraction of the firm held by institutions. We focus on the fraction of the institution’s portfolio represented by the firm. In the context of acquisitions, we hypothesize that institutional monitoring will be greatest when the target firm represents a significant allocation of funds in the institution’s portfolio. We show that this measure is important in reconciling mixed findings for total institutional ownership in the prior literature. The results indicate that our measure of institutional holdings leads to greater bid completion rates, higher premiums and lower acquirer returns. This empirical evidence provides support for theories predicting a beneficial effect of blockholders in monitoring the firm in general and in enhancing the gains to takeover targets in particular.
Keywords: Monitoring, Institutional investors, Mergers and acquisitions, Takeover premiums
JEL Classification: G30, G34
Suggested Citation: Suggested Citation