Skill or Effort? Institutional Ownership and Managerial Efficiency

49 Pages Posted: 6 Jul 2017 Last revised: 19 Apr 2018

See all articles by Ghasan Baghdadi

Ghasan Baghdadi

La Trobe University - La Trobe Business School - Department of Finance

M. Ishaq Bhatti

Sultan Qaboos University; La Trobe University - Business School

Lily Nguyen

The University of Queensland - UQ Business School

Edward Podolski

Deakin University; Financial Research Network (FIRN)

Date Written: March 2018

Abstract

Using a sample of U.S. firms during the 1989–2015 period, we study whether the efficiency with which managers generate revenue is sensitive to monitoring by institutional shareholders. We find that institutional ownership is positively related to managerial efficiency. Our identification relies on a discontinuity in ownership around the Russell 1000/2000 Index threshold and suggests that the positive effect of institutional ownership on managerial efficiency is causal. Furthermore, we find consistent results after excluding from our sample forced CEO turnovers, suggesting that institutional shareholders force incumbent managers to exert greater effort rather than influence the replacement of less efficient CEOs. Finally, we document that monitoring by institutions helps improve managerial efficiency, and that an exogenous increase in institutional ownership leads to higher pay-for-performance sensitivity. Taken together, our findings highlight the important role played by institutional shareholders in getting the most out of corporate executives.

Keywords: Managerial efficiency, Managerial ability, Institutional investors, Agency conflict

JEL Classification: G23, G30, M12

Suggested Citation

Baghdadi, Ghasan and Bhatti, M. Ishaq and Nguyen, Lily and Podolski, Edward, Skill or Effort? Institutional Ownership and Managerial Efficiency (March 2018). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2996392 or http://dx.doi.org/10.2139/ssrn.2996392

Ghasan Baghdadi

La Trobe University - La Trobe Business School - Department of Finance ( email )

Department of Economics and Finance
Victoria 3552, 3086
Australia

M. Ishaq Bhatti

Sultan Qaboos University

PO Box 20
Al-khod SQU 123
Muscat
Oman

La Trobe University - Business School

La Trobe University
Bundoora, Victoria, Victoria 3083
Australia

Lily Nguyen (Contact Author)

The University of Queensland - UQ Business School ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Edward Podolski

Deakin University ( email )

221 Burwood Highway
Burwood, Victoria 3125
Australia

Financial Research Network (FIRN) ( email )

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

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