Abstract
U.S. bank regulations weaken the incentives for market-based monitoring of bank CEOs, and bank assets are difficult for outside investors to value. Therefore, we analyzed factors that might influence institutional holdings of bank shares. Our primary expectation was that alignment of the economic interests of bank CEOs with those of bank shareholders would be particularly important in determining which banks attract institutional investment funds. Our results suggest that the sensitivity of a bank CEO's compensation to shareholder wealth does have a positive influence on the proportion of a bank's shares held by institutional investors. Additional evidence suggests that bank size is positively related to institutional ownership whereas capital adequacy and stock variance are negatively related to institutional ownership. In general, the evidence implies that when a company's quality is difficult for outside investors to determine, portfolio managers consider the economic incentives of company managers.
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