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Skill or effort? Institutional ownership and managerial efficiency

Ghasan A. Baghdadi, Muhammad Bhatti (), Lily H.G. Nguyen and Edward J. Podolski

Journal of Banking & Finance, 2018, vol. 91, issue C, 19-33

Abstract: Using a sample of U.S. firms during the 1989–2015 period, we study whether the efficiency with which managers generate revenue is sensitive to monitoring by institutional shareholders. We find that institutional ownership is positively related to managerial efficiency. Our identification relies on a discontinuity in ownership around the Russell 1000/2000 Index threshold and suggests that the positive effect of institutional ownership on managerial efficiency is causal. Furthermore, we document that monitoring by institutions helps improve managerial efficiency, and that an exogenous increase in institutional ownership leads to higher pay-for-performance sensitivity. Finally, we find consistent results after excluding from our sample forced CEO turnovers, suggesting that institutional shareholders force incumbent managers to exert greater effort rather than influence the replacement of less efficient CEOs. Taken together, our findings highlight the important role played by institutional shareholders in getting the most out of corporate executives.

Keywords: Managerial efficiency; Managerial ability; Institutional investors; Agency conflict (search for similar items in EconPapers)
JEL-codes: G23 G30 M12 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:jbfina:v:91:y:2018:i:c:p:19-33