Institutional Investors and the Governance Spillovers of Financial Regulations: Evidence From a Natural Experiment

Abstract

We empirically study how financial regulations generate corporate governance spillovers through the institutional ownership network. Exploiting the Regulation SHO Pilot experiment, we find a significant removal of anti-takeover provisions by Non-Pilot firms when their motivated monitors are more exposed to Pilot firms. Besides, results across other corporate governance fronts such as board structure, opportunism, and innovation provide further support to a positive governance spillover. The results are consistent with the increase in market discipline in Pilot firms allowing motivated monitors to reallocate monitoring and promote investor engagement in Non-Pilot firms. Our findings provide novel insights for the evaluation of financial regulations.

Keywords: institutional ownership, short-selling constrains, corporate governance

JEL Classification: G23, G30, G32