Abstract
We identify “ineffective” institutional monitors based on the prevalence of occurrences of securities class-action lawsuits in the investors’ overall portfolio. We find that firms with a higher representation of such institutional investors among the firms’ large shareholders have a greater likelihood of future litigation. These firms consistently exhibit other unfavorable governance outcomes including poorer acquisition outcomes and lower CEO turnover-performance sensitivity. Moreover, firms owned by “ineffective” institutional investors experience higher short interest, suggesting that the market anticipates underlying managerial agency issues. Overall, our results suggest that class-action lawsuits provide an opportunity to uncover the monitoring effectiveness of large institutional shareholders.
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