Monitoring the Monitor: Distracted Institutional Investors and Board Governance

Claire Liu, Angie Low, Ronald Masulis, Le Zhang and Wei Jiang

The Review of Financial Studies, 2020, vol. 33, issue 10, 4489-4531

Abstract: Boards are crucial to shareholder wealth. Yet little is known about how shareholder oversight affects director incentives. Using exogenous shocks to institutional investor portfolios, we find that institutional investor distraction weakens board oversight. Distracted institutions are less likely to discipline ineffective directors with negative votes. Consequently, independent directors face weaker monitoring incentives and exhibit poor board performance; ineffective independent directors are also more frequently appointed. Moreover, we find that the adverse effects of investor distraction on various corporate governance outcomes are stronger among firms with problematic directors. Our findings suggest that institutional investor monitoring creates important director incentives to monitor.

JEL-codes: G23 G34 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (27)

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