Hail Britannia?: Institutional Investor Behavior Under Limited Regulation

Abstract

We explore the role that legal restrictions and path dependence play in determining a country's corporate governance and finance through a case study of institutional investors in the United Kingdom. The U.K. has the same array of institutional investors as the U.S., much looser regulation of these investors, and a strong securities market (much like the U.S.). On the whole, British institutional investors are moderately more active than their U.S. counterparts. They intervene in companies to change management a few times per year. But they are still often passive, absent a crisis, and often prefer to sell their shares rather than press for a change in management or company strategy. Non-legal considerations, including fear that their activism may benefit their institutional rivals, inhibit their desire to participate in corporate governance. If Japan and Germany show how American corporate governance might have developed differently under different legal rules, Britain shows how American corporate governance might look rather similar under more limited regulation.