Relational Investing and Firm Performance

51 Pages Posted: 2 Jun 2003  

Sanjai Bhagat

University of Colorado at Boulder - Department of Finance

Bernard S. Black

Northwestern University - Pritzker School of Law; Northwestern University - Kellogg School of Management; European Corporate Governance Institute (ECGI)

Margaret M. Blair

Vanderbilt University - Law School

Abstract

A substantial academic and popular literature argues that the performance of American corporations might improve if American corporations had long-term outside investors (relational investors) who would hold large stakes, actively monitor management performance, and engage with management in setting corporate policy. Institutional investors can perhaps play this role. We provide the first large-scale test of the hypothesis that relational investing can affect corporate performance. We consider ownership and performance data for more than 1,500 large U.S. companies over a thirteen-year period (1983-95). Our results provide a mixed answer to the question of whether relational investing affects corporate performance. Our data suggest that there was a period in the late 1980s - a period with a high level of hostile takeover activity - when the presence of a relational investor was associated with higher stock market returns. This cohort of relational investors may have been able to induce corporate restructuring, whose principal effect was to reduce growth rates while improving profitability. But this pattern was not found in the early 1980s, or repeated in the early 1990s.

JEL Classification: G2, K0

Suggested Citation

Bhagat, Sanjai and Black, Bernard S. and Blair, Margaret M., Relational Investing and Firm Performance. Journal of Financial Research, Vol. 27, pp. 1-30, 2004. Available at SSRN: https://ssrn.com/abstract=391262 or http://dx.doi.org/10.2139/ssrn.391262

Sanjai Bhagat (Contact Author)

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States
303-492-7821 (Phone)

Bernard S. Black

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
312-503-2784 (Phone)

Northwestern University - Kellogg School of Management

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-5049 (Phone)

European Corporate Governance Institute (ECGI)

Brussels
Belgium

Margaret M. Blair

Vanderbilt University - Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
United States
615-322-6087 (Phone)

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