Stewardship Code, Institutional Investors, and Firm Value: International Evidence

Abstract

This study investigates whether the introduction of stewardship codes mitigates the free-rider problem of institutional investors and increases the value of firms with high institutional ownership from a cross-county analysis. Using a difference-in-differences approach, we find robust evidence that the introduction of the code in a country increases the value of firms with high institutional ownership. Our findings support the view that stewardship codes encourage institutional investors, who typically hold a widely diversified portfolio, to monitor their portfolio firms. Although previous studies are skeptical about the role of institutional investors whose portfolios are extensively diversified given the free-rider problem, our results indicate that stewardship codes successfully mitigate the problem to a significant extent. Stewardship codes can be an effective mechanism for institutional investors to commit to the monitoring role.

Keywords: Corporate Governance, Institutional Investor, Stewardship Code

JEL Classification: G18, G23, G32, G34, G35