Internalizing Governance Externalities: The Role of Institutional Cross-Ownership

47 Pages Posted: 27 Mar 2017 Last revised: 15 Nov 2019

See all articles by Jie He

Jie He

University of Georgia - Department of Finance

Jiekun Huang

University of Illinois at Urbana-Champaign - Department of Finance

Shan Zhao

Grenoble Ecole de Management

Date Written: July 31, 2018

Abstract

We analyze the role of institutional cross-ownership in internalizing corporate governance externalities using granular mutual fund proxy voting data. Exploiting within-proposal and within-institution variation, we show that an institution’s holdings in peer firms are positively associated with the likelihood that the institution votes against management on shareholder-sponsored governance proposals. We further find that high aggregate cross-ownership positively predicts management losing a vote. Overall, our results provide evidence that cross-ownership incentivizes institutional investors to play a more active monitoring role, suggesting that institutional cross-ownership serves as a market-based mechanism to alleviate the inefficiency induced by governance externalities.

Keywords: Corporate governance, externalities, cross-ownership, proxy voting, institutional investors

JEL Classification: G23, G32, G34

Suggested Citation

He, Jie and Huang, Jiekun and Zhao, Shan, Internalizing Governance Externalities: The Role of Institutional Cross-Ownership (July 31, 2018). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2940227 or http://dx.doi.org/10.2139/ssrn.2940227

Jie He

University of Georgia - Department of Finance ( email )

B318 Amos Hall
Terry College of Business, University of Georgia
Athens, GA 30602-6253
United States

Jiekun Huang (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://www.huangjk.info

Shan Zhao

Grenoble Ecole de Management ( email )

Grenoble, 38003
France

HOME PAGE: http://sites.google.com/site/zhaoshan75/

Register to save articles to
your library

Register

Paper statistics

Downloads
831
Abstract Views
4,029
rank
28,970
PlumX Metrics