The Agency Problems of Institutional Investors: Presentation Slides

25 Pages Posted: 2 Jun 2020

See all articles by Lucian A. Bebchuk

Lucian A. Bebchuk

Harvard Law School; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Alma Cohen

Harvard Law School; Tel Aviv University - Eitan Berglas School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Scott Hirst

Boston University - School of Law; Harvard Law School Program on Corporate Governance

Date Written: 2017

Abstract

The presentation slides in this document provide an overview of our study The Agency Problems of Institutional Investors, which was published in the Journal of Economic Perspectives in its summer 2007 issue. The slides build on our presentations at the 2017 ALEA annual meeting.

Our study focuses on how the rise of institutional investors has transformed the governance landscape. The study analyzes the agency problems that the investment managers of institutional investors have vis-à-vis their own investors. We develop an analytical framework for examining these agency problems and apply it to study several key types of investment managers.

We analyze how the investment managers of mutual funds - both index funds and actively managed funds - have incentives to under-spend on stewardship and to side excessively with managers of corporations. We show that these incentives are especially acute for managers of index funds, and that the rise of such funds has system-wide adverse consequences for corporate governance. Activist hedge funds have substantially better incentives than managers of index funds or active mutual funds, but their activities do not provide a complete solution for the agency problems of institutional investors.

Our analysis provides a framework for future work on institutional investors and their agency problems, and generates insights on a wide range of policy questions. We discuss implications for disclosure by institutional investors; regulation of their fees; stewardship codes; the rise of index investing; proxy advisors; hedge funds; wolf pack activism; and the allocation of power between corporate managers and shareholders.

Our study is part of a larger project on the incentives of investment managers that also includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy and The Specter of the Giant Three.

Keywords: institutional investors, investment managers, mutual funds, index funds, hedge fund activism

JEL Classification: G23, G34, K22

Suggested Citation

Bebchuk, Lucian A. and Cohen, Alma and Hirst, Scott, The Agency Problems of Institutional Investors: Presentation Slides (2017). Available at SSRN: https://ssrn.com/abstract=3592507 or http://dx.doi.org/10.2139/ssrn.3592507

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)

HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alma Cohen

Harvard Law School ( email )

Cambridge, MA 02138
United States
(617) 496-4099 (Phone)
(617) 812-0554 (Fax)

Tel Aviv University - Eitan Berglas School of Economics ( email )

Ramat Aviv, Tel Aviv, 69978
Israel

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Scott Hirst

Boston University - School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

Harvard Law School Program on Corporate Governance ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

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