Do Investors Follow Directors?
55 Pages Posted: 30 Mar 2017 Last revised: 13 Jan 2020
Date Written: November 21, 2017
Using more than 30 million quarterly observations on investment funds, firms, and directors, we show that equity-ownership relationships between funds and directors comove when new firms appoint these directors. Funds follow directors from high operating performance and high valuation firms to low valuation firms, and these funds make larger new equity investments when they follow these directors. Relative to their other new equity investments, these funds earn abnormal returns the quarter after they follow directors. However, there is little evidence of long-term improvements at these firms. The strategy of following directors is profitable only in the short run.
Keywords: boards of directors, institutional investors, corporate governance
JEL Classification: G30, G34, G23
Suggested Citation: Suggested Citation