Institutional Investors and Corporate Governance: The Incentive to Be Engaged

Abstract

This paper studies institutional investors’ incentives to be engaged shareholders. We measure incentives as the increase in an institution’s cash flow (management fees) when a stockholding increases 1% in value, considering both the direct effect on assets under management and the indirect effect on subsequent fund flows. By 2015, the average institution gains roughly $143,100 in annual cash flow if a firm in its portfolio rises 1%. The estimates range from $22,300 for small institutions (who hold relatively concentrated portfolios) to $335,900 for the largest institutions (with more diffuse holdings). Institutional shareholders in one firm often gain when rival firms in the industry do well, by virtue of the institution’s holdings in those firms, but the effects are modest in the most concentrated industries. Our estimates suggest that institutional investors often have strong incentives to be active shareholders.

Keywords: Institutional Investors, Governance, Passive Investors

JEL Classification: G23, G30, G32