Delegated Monitoring, Institutional Ownership, and Corporate Misconduct Spillovers
67 Pages Posted: 11 Apr 2019 Last revised: 1 Jul 2021
Date Written: March 21, 2019
Abstract
Upon the revelation of corporate misconduct by firms in their portfolios, in- stitutional investors
experience a significant discount in the market value of their portfolios excluding held firms
engaged in misconduct, creating a short-term neg- ative externality that averages $92.7
billion of losses per year. We examine an expansive set of channels under which this
spillover to non-fraudulent firms can occur, finding that it reflects the loss of the embedded value
of monitoring by a common owner, enforcement wave activity, and industry peer and business
re- lationships. Misconduct linked institutional investors also experience significant abnormal
outflow of funds in the year following the misconduct event, which
increase with legal severity and monitoring incentives.
Keywords: corporate misconduct, spillovers, institutional investors, monitoring failures
JEL Classification: G3, G23, D62
Suggested Citation: Suggested Citation