Monitoring: Which Institutions Matter?

46 Pages Posted: 17 Sep 2006

See all articles by Kai Li

Kai Li

University of British Columbia (UBC) - Sauder School of Business; China Academy of Financial Research (CAFR)

Jarrad Harford

University of Washington; European Corporate Governance Institute (ECGI)

Xia Chen

Singapore Management University


Within a cost-benefit framework, we hypothesize that independent institutions with long-term investments will specialize in monitoring and influencing efforts rather than trading. Other institutions will not monitor. Using acquisition decisions to reveal monitoring, we show that only concentrated holdings by independent long-term institutions are related to post-merger performance. Further, the presence of these institutions makes withdrawal of bad bids more likely. These institutions make long-term portfolio adjustments rather than trading for short-term gain and only sell in advance of very bad outcomes. We conclude that independent long-term institutions actively monitor and benefit from their efforts. This benefit has both private and shared components. Examining total institutional holdings or even concentrated holdings by other types of institutions masks important variation in the subset of monitoring institutions.

Keywords: corporate governance, institutional investors, mergers & acquisitions, monitoring, trading

JEL Classification: G34

Suggested Citation

Li, Kai and Harford, Jarrad and Chen, Xia, Monitoring: Which Institutions Matter?. Journal of Financial Economics, Forthcoming, Available at SSRN:

Kai Li (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
604-822-8353 (Phone)
604-822-4695 (Fax)


China Academy of Financial Research (CAFR)

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Shanghai P.R.China, 200030

Jarrad Harford

University of Washington ( email )

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Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)


European Corporate Governance Institute (ECGI) ( email )

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1000 Brussels

Xia Chen

Singapore Management University ( email )

60 Stamford Rd.
Singapore 178900

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