Delegated Monitoring, Institutional Ownership, and Corporate Misconduct Spillovers
53 Pages Posted: 11 Apr 2019 Last revised: 6 Dec 2019
Date Written: March 21, 2019
Upon the revelation of corporate misconduct in their portfolios, institutional investors experience a significant discount in the total market value of their portfolios, creating a negative externality that averages $39.4 billion of losses per year. This negative spillover increases with stronger ownership links to fraud firms, when more long-term investors hold such firms’ shares, and when the institutional investor should provide higher common ownership incentives to such firms, all of which lend support to a failed monitor hypothesis. These institutional investors experience significant fund outflows in the quarter immediately following the fraud incidents, which increase with greater ex-ante monitoring incentives.
Keywords: corporate misconduct, spillovers, institutional investors, monitoring failures
JEL Classification: G3, G23, D62
Suggested Citation: Suggested Citation