Relational Investing and Firm Performance

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