Monitoring: Which Institutions Matter?

46 Pages Posted: 17 Sep 2006  

Kai Li

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

Jarrad Harford

University of Washington

Xia Chen

Singapore Management University

Abstract

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: https://ssrn.com/abstract=930185

Kai Li (Contact Author)

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

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

HOME PAGE: http://finance.sauder.ubc.ca/~kaili

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Jarrad Harford

University of Washington ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)

HOME PAGE: http://faculty.washington.edu/jarrad/

Xia Chen

Singapore Management University ( email )

60 Stamford Rd.
Singapore 178900
Singapore

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