Motivated Monitors: The Importance of Institutional Investors’ Portfolio Weights

62 Pages Posted: 9 Jul 2014 Last revised: 16 Feb 2015

See all articles by Eliezer M. Fich

Eliezer M. Fich

Drexel University - Department of Finance

Jarrad Harford

University of Washington; European Corporate Governance Institute (ECGI)

Anh L. Tran

Cass Business School, City University London

Date Written: February 11, 2015

Abstract

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

Fich, Eliezer M. and Harford, Jarrad and Tran, Anh L., Motivated Monitors: The Importance of Institutional Investors’ Portfolio Weights (February 11, 2015). Journal of Financial Economics (JFE), 2015, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2463718 or http://dx.doi.org/10.2139/ssrn.2463718

Eliezer M. Fich

Drexel University - Department of Finance ( email )

LeBow College of Business
3220 Market Street – 11th Floor
Philadelphia, PA 19104
(215) 895-2304 (Phone)

Jarrad Harford (Contact Author)

University of Washington ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)

HOME PAGE: http://faculty.washington.edu/jarrad/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Anh L. Tran

Cass Business School, City University London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44-207-040-5109 (Phone)
+44-207-040-8881 (Fax)

HOME PAGE: http://https://www.cass.city.ac.uk/faculties-and-research/experts/anh-tran

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