Institutional Investor Cliques and Governance

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: 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