Abstract
Upon the revelation of corporate misconduct by firms in their portfolios, institutional investors experience a significant discount in the market value of their portfolios, creating a negative externality that averages $92.7 billion of losses per year. This negative spillover increases with stronger ownership links to misconduct firms, when more long-term investors hold such firms’ shares, and when the institutional investor should provide higher common ownership incentives, all of which lend support to a failed monitor hypothesis. These institutional investors experience significant fund outflows in the year immediately following the fraud incidents, which increase with misconduct severity and monitoring incentives.
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