Institutional Investors on Boards: Do They Influence Corporate Finance?

Abstract

In this paper we examine whether the presence of institutional investors representatives on boards leads to observable differences in corporate finance. We use a panel of 162 quoted Spanish nonfinancial firms from 2004 to 2010. We find that institutional directors have diverse incentives to engage in the corporate governance. Specifically, we find that directors representing pressure-sensitive investors (i.e., banks and insurance companies) prefer lower financial leverage whereas pressure-resistant directors (i.e., mutual funds and pension funds) show no particular preference. In addition, when analyzed separately, we find that directors appointed by banks and insurance firms have different attitudes and that bank representatives on boards increase both the financial leverage and the banking debt, which is consistent with resource dependence theory. We also find risk aversion among directors representing banks: the higher the fraction of shares they own, the more resistant the companies are to both financial leverage and banking debt. Taken together, our results support the broad literature that emphasizes the strategic role of board members in addition to their monitoring role.