Does Geographic Proximity Change the Passiveness of Institutional Investors?
41 Pages Posted: 16 May 2015
Date Written: May 1, 2015
We provide new evidence that highlights the effect of geographic proximity on the role institutional investors play by showing that, while bank trusts are passive with distant firms, they are non-passive with local firms and reduce their risk-taking. We find that concentrated local bank trust ownership is associated with (1) lower future firm equity beta and (2) less uncertain corporate policies. The negative relation between local bank trust ownership and future firm beta is both statistically and economically significant. The results are robust to various tests for endogeneity. This study also explores the channels through which local bank trusts could exert their influence, including their stabilizing function during crisis periods and joining force with local independent directors.
Keywords: institutional investor, bank trust, geography, passiveness, risk
JEL Classification: G30; G23; G32
Suggested Citation: Suggested Citation