Delegated Blocks

Abstract

Will asset managers with large amounts of capital and high risk-bearing capacity hold large blocks and monitor aggressively? Both block size and monitoring intensity are governed by the contractual incentives of institutional investors, which themselves are endogenous. We show that when high risk-bearing capacity arises via optimal delegation, funds holds smaller blocks and monitor significantly less than proprietary investors with identical risk-bearing capacity. This is because the optimal contract enables the separation of risk sharing and monitoring incentives. Our findings rationalize characteristics of real world asset managers and imply that block sizes will be a poor predictor of monitoring intensity.

Keywords: corporate governance, blockholder monitoring, institutional investors, financial markets

JEL Classification: G34, G23