Public Pension Fund Ownership and Firm Performance

Abstract

Equity ownership by public pension funds (PPFs) has been widely used in the existing literature (see, among others, Cremers and Nair, 2005; and Dittmar and Mahrt-Smith, 2007) to measure the strength of shareholder monitoring/governance. This paper raises caution about such practices by illustrating that there is an inverted-U shape relationship between PPF ownership and firms' future performance, as measured by short-term and long-term stock returns and operating performance: during 1985 to 2005, future performance first increases, then declines in aggregate equity ownership by PPFs. These results suggest: First, shareholder value considerations and political interests/pressures co-exist for PPF managers. Second, PPFs' presence is consistent with shareholders value maximization when they have moderate influence on firm management, whereas excessive PPF ownership facilitates PPF managers' pursuits for political interests and destroys shareholder value. Finally, it is necessary to impose an upper bound to PPF ownership in using it to proxy for the strength of shareholder monitoring/governance.