Monitoring the Monitor: Distracted Institutional Investors and Board Governance

71 Pages Posted: 20 Mar 2017 Last revised: 16 Apr 2020

See all articles by Claire Liu

Claire Liu

University of Technology Sydney (UTS)

Angie Low

Nanyang Technological University - Division of Banking & Finance

Ronald W. Masulis

University of New South Wales, Sydney; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Le Zhang

Australian National University (ANU) - College of Business and Economics

Date Written: November 15, 2019

Abstract

Boards are crucial to shareholder wealth. Yet, little is known about how shareholder oversight affects director incentives. Using exogenous industry shocks to institutional investor portfolios, we find that institutional investor distraction weakens board oversight. Distracted institutions are less likely to discipline ineffective directors. Consequently, independent directors face weaker monitoring incentives and exhibit poor board performance; ineffective independent directors are also more frequently appointed. Moreover, we find that the adverse effects of investor distraction on various corporate governance outcomes are stronger among firms with problematic directors. Our findings suggest that institutional investor monitoring creates important director incentives to monitor.

Keywords: Board of directors, Shareholder activism, Institutional investors, Board monitoring, Shareholder voting, Corporate governance

JEL Classification: G23, G34

Suggested Citation

Liu, Claire and Low, Angie and Masulis, Ronald W. and Zhang, Le, Monitoring the Monitor: Distracted Institutional Investors and Board Governance (November 15, 2019). Forthcoming, Review of Financial Studies. Available at SSRN: https://ssrn.com/abstract=2934755 or http://dx.doi.org/10.2139/ssrn.2934755

Claire Liu

University of Technology Sydney (UTS) ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia

Angie Low

Nanyang Technological University - Division of Banking & Finance ( email )

Singapore, 639798
Singapore

Ronald W. Masulis (Contact Author)

University of New South Wales, Sydney ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

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

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Le Zhang

Australian National University (ANU) - College of Business and Economics ( email )

Canberra
Australia

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