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Do exogenous changes in passive institutional ownership affect corporate governance and firm value?

Cornelius Schmidt and Ruediger Fahlenbrach

Journal of Financial Economics, 2017, vol. 124, issue 2, 285-306

Abstract: We investigate whether corporations and their executives react to an exogenous change in passive institutional ownership and alter their corporate governance structure. We find that exogenous increases in passive ownership lead to increases in CEO power and fewer new independent director appointments. Consistent with these changes not being beneficial for shareholders, we observe negative announcement returns to the appointments of new independent directors. We also show that firms carry out worse mergers and acquisitions after exogenous increases in passive ownership. These results suggest that the changed ownership structure causes higher agency costs.

Keywords: Corporate governance; Institutional ownership; Monitoring; Index reconstitutions (search for similar items in EconPapers)
JEL-codes: G34 G23 G32 (search for similar items in EconPapers)
Date: 2017
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