Institutional Investor Cliques and Governance

58 Pages Posted: 22 Sep 2016 Last revised: 28 Jun 2017

See all articles by Alan D. Crane

Alan D. Crane

Rice University - Jesse H. Jones Graduate School of Business

Andrew Koch

University of Pittsburgh - Finance Group

Sebastien Michenaud

Kellstadt Graduate School of Business

Date Written: June 22, 2017

Abstract

We examine the impact of investor coordination on governance. We identify coordinating groups of investors ("cliques") as those connected through the network of institutional holdings. Clique members vote together on proxy items: a one-standard-deviation increase in clique ownership more than doubles votes against low quality management proposals. We use the 2003 mutual fund trading scandal to show that this effect is causal. These findings suggest coordination strengthens governance via voice. Coordination, however, also weakens governance via threat of exit. Clique owners exit positions more slowly and firm value responds negatively to liquidity shocks when clique ownership is high.

Keywords: Institutional Investors, Governance, Coordination

JEL Classification: G20, G30

Suggested Citation

Crane, Alan D. and Koch, Andrew and Michenaud, Sebastien, Institutional Investor Cliques and Governance (June 22, 2017). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2841444 or http://dx.doi.org/10.2139/ssrn.2841444

Alan D. Crane

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Andrew Koch (Contact Author)

University of Pittsburgh - Finance Group ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States

Sebastien Michenaud

Kellstadt Graduate School of Business ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States
(312)362-5001 (Phone)

HOME PAGE: http://www.sebastienmichenaud.com

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