Active Institutional Investors Research Articles

The new European shareholder rights directive: removing barriers and creating opportunities for more shareholder activism and democracy

Shareholder activism has increased within the last years. Traditionally, minority shareholders voted by their feet if they disagreed with managements actions. However, this has certainly changed due to the development of Internet based technologies as well as the emergence of hedge funds and other active institutional investors. As a consequence, listed firms’ costs of communicating with investors globally have increased, specifically the budget of investor relation departments. The EU Commission has recently issued a Directive on shareholders rights which will become part of European Law next year recognizing that cross-border voting should be solved as a matter of urgency. This article analyses the nature of shareholder activism in the light of the new Directive arguing that the Directive is only the first step in a legal process that is expected to substantially increase shareholders′ rights in the coming years. The article also presents the notion of shareholder democracy that is crucially dependent on active minority shareholders. It is argued that the notion of shareholder democracy may serve as guidance for how future legislation should be designed.

Institutional Investors and Firm Efficiency of Real Estate Investment Trusts

This study investigates the effect of institutional ownership on improving firm efficiency of equity Real Estate Investment Trusts (REITs), using a stochastic frontier approach. Firm inefficiency is estimated by comparing a benchmark Tobin’s Q of a hypothetical value-maximizing firm to the firm’s actual Q. We find that the average inefficiency of equity REITs is around 45.5%, and that institutional ownership can improve the firm’s corporate governance, and hence reduce firm inefficiency. Moreover, we highlight the importance of heterogeneity in institutional investors—certain types of institutional investors such as long-term, active, and top-five institutional investors, and investment advisors are more effective institutional investors in reducing firm inefficiency; whereas hedge funds and pension funds seem to aggravate the problem. In sub-sample analysis, we find that these effective institutional investors can reduce inefficiency more effectively for distressed REITs, and for REITs with high information asymmetry, and with longer term lease contracts. Lastly, we find that the negative impact of institutional ownership (except for long-term institutional investors) on firm inefficiency reduces over time, possibly due to strengthened corporate governance and regulatory environment in the REIT industry.

Institutional investors: the vote as a tool of governance

Institutional investors are increasingly expected to engage with their investee companies to try to help ensure that the investee companies have an appropriate corporate governance structure and that they operate according to corporate governance best practice. There are a number of ‘tools of governance’ which institutional investors might utilise including constructive dialogue and voting. In this paper, the growth of institutional investors is discussed together with the development of the vote as one of the most powerful means that institutional investors have at their disposal. The cases of two of the UK’s largest and most active institutional investors are discussed to show how the vote is used in practice. The resolutions which tend to be the most contentious are those relating to the appointment/re-election of directors and board composition; remuneration packages and incentive schemes; and strategic issues that may impact on shareholders’ rights/ownership interests. The paper also contains an analysis of the resolutions which occur most frequently together with the average levels of dissent on such issues in various European countries: Austria, Belgium, France, the UK, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden and Switzerland. The barriers to voting that may arise are examined; such barriers include control enhancing mechanisms which are prevalent in many European countries as well as on a wider global basis.

Active institutional investors and the board of directors

The present research examines the role of activist institutional investors in the formation of the board of directors. Activist institutional investors, such as pension funds, have a long term investment perspective and are independent of the firms in which they hold significant stakes. This study finds that pension fund ownership is associated with boards that are more independent of management and have more balanced compositions. The strongest results pertain to an overall board quality index reflecting board efficiency, board leadership, board independence and balance. The finding that activist institutional investors influence the board vindicates the efforts of regulators to encourage institutional investors to be active in terms of corporate governance.

Multiple Large Shareholders, Audit Committee Activity and Audit Fees

We examine the impact of ownership structure on audit pricing, using number of Multiple Large Shareholders (MLS), in order to understand their monitoring and oversight function. Previous studies have focused exclusively on percentage holding as a measure of ownership structure with less than convincing outcomes. We responded to the call in Edman and Manso (2009) to explore the monitoring roles of MLS. We found that majority of listed firms in the UK have multiple large shareholders. The results of our one way analysis of variance (one way-ANOVA) showed that there are statistically significant differences in the audit fees, firm size and audit committee activities of these firms when they are categorised into “widely held”, “concentrated” and “highly concentrated” firms. We found that widely held firms are bigger in size, tend to pay more in audit fees and have more active audit committees. Results from our multiple regression models confirm a significant negative relationship between audit fees and number of MLS. We also found a positive relationship between audit fees and audit committee activities. Our findings are important for policy makers and market regulators who are interested in enhancing market confidence through transparent reporting and improved audit quality. It also confirms the likely beneficial effects of more active institutional investors monitoring as proposed in the recent Walkers report in the form of a Stewardship Code for institutional investors in the UK.

Strong or Weak Owners? The Effects of Ownership on Corporate Governance Noncompliance

Using detailed data on non-compliance behavior, collected from the annual reports of the largest 130 publicly listed firms, in the U.K., Germany and Spain in 2007, we show that greater ownership concentration at a focal firm creates a potential agency problem between majority and minority shareholders that does not fit into the traditional regulatory enactments. It is because regulatory provisions generate negative byproducts such as exacerbated compliance costs or under monitoring of managerial behavior. Therefore, differences in the amount of equity from families, corporate owners, and active and passive institutional investors, determine their influence on the board of directors when deciding on managerial monitoring strategies

Corporate Governance and M&A in Australia: An Overview for Assessing Japan and the 'Americanisation' Thesis

This paper sketches a roadmap of key features and directions in Australian corporate governance, generally (Part 1) and specifically regarding takeovers law and practice (Part 2). In particular, it introduces highlights from a growing corpus of empirical studies, and identifies points that may be of special interest to those familiar with major changes or debates underway in many parts of the Asia-Pacific, particularly in Japan. Part 1.A begins with the insight that Australia may not be so Anglo-American after all, because traditionally it has more blockholders (concentrated shareholdings) and less active institutional investors. This may help explain still limited changes to law and/or practice regarding derivative shareholder suits, as well as more arm's-length market-based monitoring mechanisms such as disclosure, independent directors, and executive remuneration packages (Part 1.B). On the other hand, Australia is experiencing a new boom in M&A (Part 2.A), and its levels of hostile takeovers and success rates even in the 1990s appear close to those in the UK (2.B), although success rates in both countries are much higher than the US. This arm's-length control mechanism may have become more prevalent due to broader economic changes, such as liberalisation of financial markets to allow easier financing of takeovers. But another factor seems to have been the historical legacy of following the law in England, despite the latter's less concentrated shareholding patterns (2.C). The environment is likely to have become even more conducive to hostile takeovers from 2000, when disputes were largely diverted from the courts to a full-scale Takeovers Panel (2.D), similar to that introduced along with the UK City Code on Takeovers in 1968. However, Australia's version is somewhat more formalised, and was recently challenged for unconstitutionally usurping judicial power. Overall (Part 3), this analysis suggests a more complex picture of corporate governance transformations. They do not necessarily pull all in the same direction (as the takeovers market shows), and there remain some important differences from developments in the UK and especially the US.

The Persistence of the Accruals Anomaly*

AbstractThe accruals anomaly — the negative relationship between accounting accruals and subsequent stock returns — has been well documented in the academic and practitioner literatures for almost a decade. To the extent that this anomaly represents market inefficiency, one would expect sophisticated investors to learn about it and arbitrage the anomaly away. We show that the accruals anomaly still persists and, even more strikingly, its magnitude has not declined over time. How can this be explained? We show that the accruals anomaly is recognized and, indeed, exploited by certain active institutional investors, but the magnitude of this accruals‐related trading is rather small. By and large, institutions shy away from extreme‐accruals firms because their attributes, such as small size, low profitability, and high risk stand in stark contrast to those preferred by most institutions. Individual investors are also, by and large, unable to profit from trading on accruals information due to the high information and transaction costs associated with implementing a consistently profitable accruals strategy. Consequently, the accruals anomaly persists and will probably endure.

Developments in Remuneration Policy

In this article, the former chairman of the International Corporate Governance Network (ICGN) begins by summarizing the guidelines on “Executive Remuneration” that were published by the ICGN in July 2002. Among other changes, the guidelines called for independent remuneration committees, full disclosure of remuneration packages in an annual report, reduced reliance on stock options, elimination of executive loans and CEO bonuses for making acquisitions, better-informed and more active institutional investors, and a “clear mechanism by which shareholders are given the opportunity—possibly through an advisory vote at the annual shareholder meeting—to review and influence remuneration proposals.” Thanks in part to the efforts of the ICGN and growing investor activism, U.K. companies have made “a reasonably swift transition to a position where the majority of their boards are totally independent of management, and free of other potential conflicts of interest.” U.S. boards, by contrast, remain “dominated by the imperial CEO” and “have failed to rein in the ambitions and appetites of their CEOs in such circumstances.” What's more, U.S. institutional investment managers have failed to hold boards accountable for escalating remuneration. The solution to this problem lies, as suggested above, in “greater transparency, better analysis, and more shareholder monitoring.”

The Use of Derivatives by Investment Managers and Implications for Portfolio Performance and Risk

This study provides an empirical examination of derivative instruments used by institutional investors. Our analysis provides a unique insight into the role of derivative securities within portfolios, and the potential benefits from their use. We contribute to the literature using a database that comprises the periodic portfolio holdings and daily trades of active equity managers. The consequence of derivative use is analyzed using a number of performance and risk measures. Overall, we find the use of derivatives have a negligible impact on fund returns. This finding is attributed to low levels of derivative exposure relative to total fund size. We also evaluate how derivatives are used by considering the trading strategies executed by investment managers. The option trading patterns of active institutional investors are shown to be consistent with the execution of momentum trading strategies. The study also documents that active investment managers prefer not to use options markets to engage in informed trading.

Pension reform, savings behavior, and capital market performance

This paper shows that the capital market effects of population aging and pension reform are particularly strong in continental European economies such as France, Germany, and Italy. Reasons are threefold: these countries have large and ailing pay-as-you-go public pension systems, relatively thin capital markets and less than benchmark capital performance. The aging process will force the younger generations in these countries to provide more retirement income through own private saving. Capital markets will therefore grow in size and active institutional investors will become more important as intermediaries. The aim of this paper is to show that these changes are likely to generate beneficial side effects in terms of improved productivity and aggregate growth.

Mutual Funds Activism (?) in Corporate Governance

American mutual funds industry has been characterised, in the last 20 years, by a wide growth, which led mutual funds to become, as a whole, the biggest American institutional investors. Notwithstanding their dimensions, mutual funds can not be considered active institutional investors: they rarely conduct proxy fights or bring class action against management. There are many reasons to explain mutual funds' passivity in corporate governance, some depending on mutual funds' federal regulations, other depending on the characteristics of American mutual funds' industry. Is this paper I will describe the principal developments of mutual funds' industry, and 1 try to examine the principal reasons of mutual funds' passivity.

Honey, CalPERS Shrunk the Board

This paper attempts specifically to answer the question: whether there is any influence of shareholder activism on changes in board structure. I have used 8 years of directors data from 1988 through 1995 of the Forbes 500 corporations of 1987. I document that board sizes decreased during 1991-1995, that the inside directors decreased over time, and that the emergence of active institutional investors, at least CalPERS, seems to be associated with the increased tendency of firms to reduce their board sizes, primarily the number of inside directors. This conclusion is based on 4 documented facts: (1) In 8 of 61 cases in which at least 3 directors were removed, CalPERS seems to be associated with the increased tendency of firms to reduce their board sizes. (2) Based on the SUR estimates, changes from firms not targeted by CalPERS to firms targeted by CalPERS are associated with changes of board sizes from 1.25% to ?6.9% and changes from firms not targeted by CalPERS to firms targeted by CalPERS are associated with changes of insiders from 5.47% to ?6.14%. (3) The inside directors serve at the request of the CEOs and would never withdraw voluntarily unless they were leaving the companies or the CEOs asked them to withdraw. In the Forbes 500 corporations targeted by CalPERS, the fractions of replaced inside directors who remained as employees are larger than those of the Forbes 500 corporations not targeted by CalPERS (the fractions of replaced inside directors who remained as employees are 43% and 8%, respectively). (4) In the two constructed samples consisting of firms that might be free from being targeted by CalPERS, the variation in the board sizes does not follow the patterns suggested by CalPERS' corporate governance movements.

Corporate Governance in Italy After the 1998 Reform: What Role for Institutional Investors?

In February 1998 the Italian Government passed an Act reforming the law on financial services, stock exchanges and listed companies. With regard to listed companies, the reform was intended to strengthen minority shareholders' rights. The idea behind the new rules on corporate governance was that active institutional investors would make use, if necessary, of these rights in their monitoring of listed companies. A reduction of the agency costs stemming from the separation between ownership and control in listed companies would follow, with beneficial effects for shareholders' wealth and for the Italian economy as a whole. This paper tries to answer two questions: first, whether the changes in the law resulting from the 1998 reform encourage institutional investor activism in Italy; and second, whether, legal rules aside, it is reasonable to expect significant institutional investor activism in Italy. We provide, then, both an empirical analysis of the factors affecting institutional investor activism in Italy and a legal analysis of the most relevant changes in the Italian mutual funds and corporate laws, following the 1998 reform. The former analysis shows that institutional shareholdings and investment strategies are compatible with the hypothesis that institutional investors can play a significant role in the corporate governance of Italian listed companies. However, a curb to their playing such an active role may derive from the predominance of mutual fund managers belonging to banking groups (giving rise to conflicts of interest) and from the prevailing ownership structure of listed companies, which are still dominated by controlling shareholders holding stakes higher than, or close to, the majority of the capital (implying a weaker bargaining power of institutions vis-a-vis controllers). The analysis of the legal changes prompted by the 1998 financial markets and corporate law reform indicates that the legal environment is now definitely more favorable to institutional investor activism than before. However, the Italian legal environment proves still to be little favorable to institutional investor activism, when compared to that of the U.S. or the U.K.

Institutional ownership and firm performance: The case of bidder returns

We employ corporate takeover decisions to investigate the impact of institutional ownership on corporate performance. The OLS regressions of bidder gains on institutional ownership indicate a positive relation between the two. However, we find institutional ownership to be significantly determined by firm size, insider ownership and the firm's presence in the S&P 500 index. Thus, when bidder gains are regressed on the predicted values of institutional ownership in two-stage regressions, the recursive estimates do not confirm the relationship shown by the OLS regressions. Furthermore, we do not find any evidence that active institutional investors (e.g., CalPERS) as a group enhance efficiency in the market for corporate control. These findings cast doubt on the superior selection/monitoring abilities of institutional investors.