Institutional Investor Monitoring and the Structure of Corporate Boards

Abstract

This study examines the effect of institutional investor influence on the structure of corporate boards. We focus on investor influences with respect to reducing board size and increasing board independence. Measures of institutional influence are negatively related to board size and positively related to board independence. To achieve these aims, institutions remove inside directors. This effect is enhanced when the firm has performed poorly - institutions take corrective action to improve firm performance by punishing those directors deemed responsible for contributing to poor firm performance. Institutional investors do not adjust their monitoring objectives with respect to board size and independence to reflect firm specific characteristics.

Keywords: Board of Directors, Monitoring, Institutional Investment Behavior

JEL Classification: G23, G32, J33