Getting on Board: The Monitoring Effect of Institutional Directors

62 Pages Posted: 27 Feb 2021

See all articles by George J. Jiang

George J. Jiang

Washington State University

Chang Liu

California State University, Sacramento

Date Written: December 29, 2020

Abstract

We identify a sample of firms with directors employed by institutional investors and examine the effect of a direct channel of institutional monitoring. Using difference-in-differences tests, we find weak evidence that institutional directors have a positive effect on informational efficiency. More importantly, institutional directors have a significantly positive impact on stock returns over the long run. Further analysis shows that the presence of institutional directors leads to a slight increase of managerial entrenchment. Consistent with the notion that entrenched managers reduce risk-taking, we also find significant decreases in R&D investments and financial leverage, and significant increases in payouts for firms with institutional directors. The findings suggest that aligning with the interest of long-term investors, institutional directors deter firms from pursuing potentially value-decreasing investment projects and influence firms to return value to investors through lower debts and higher payouts, mainly share repurchases.

Keywords: Institutional Investors, Board of Directors, Institutional Monitoring, Informational Efficiency, Firm Performance, Corporate Policies

JEL Classification: G30, G34, G20, G23, G14

Suggested Citation

Jiang, George and Liu, Chang, Getting on Board: The Monitoring Effect of Institutional Directors (December 29, 2020). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3757148

George Jiang

Washington State University ( email )

Department of Finance and Management Science
Carson College of Business
Pullman, WA 99-4746164
United States
509-3354474 (Phone)

HOME PAGE: http://directory.business.wsu.edu/bio.html?username=george.jiang

Chang Liu (Contact Author)

California State University, Sacramento ( email )

6000 J Street
Sacramento, CA 95819-6082
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
42
Abstract Views
214
PlumX Metrics