Institutional Blockholders Research Articles

Corporate governance, blockholders, and financial distress: Global evidence

AbstractThis study examines the impact of corporate governance mechanisms and ownership structure on financial distress for 23 developed and 27 emerging countries across different markets and legal systems and during the crisis period. In developed markets, CEO duality increases distress, which can be mitigated through independent boards and majority blockholders. Independent boards, specifically in common‐law countries, alleviate distress, yet, may escalate the adverse impact of blockholders as independent boards may not be effective monitors. In emerging markets (EM), independent boards increase distress, potentially reflecting political appointments. Institutional blockholders hurt firm financial health, though, strategic blockholders may substitute for board monitoring in weak governance environments. During the crisis period, a larger and independent board has the potential to decrease financial distress.

Institutional blockholder monitoring and stock price crash risk

We examine whether institutional investors can reduce the risk of stock price crashes caused by managers’ intentional withholding of bad news. Specifically, we focus on the effect of institutional blockholder monitoring on stock price crash risk. The empirical results show negative relationships between institutional blockholdings and various crash risk variables, which suggests that institutional blockholder monitoring of nontransparent managerial behaviors can decrease crash risk. Furthermore, we find that the influence of monitors is more pronounced in firms with high information asymmetry, thereby corroborating the institutional blockholder monitoring role. This study validates the monitoring role of dedicated institutional investors in agency-motivated managerial behaviors.

Mapping the influence: Institutional blockholder coordination and climate change risk disclosure

This study investigates the relationship between institutional blockholder coordination, proxied by geographic proximity, and climate change risk disclosure. Using a sample of 2,887 firm-year observations for S&P 500 companies from 2010 to 2022, we reveal that a firm's climate change risk disclosure decreases when its institutional blockholders are more coordinated. In addition, we find that the negative relationship between institutional blockholder coordination and climate change risk disclosure manifests more in firms with less diversified institutional blockholders, a smaller number of institutional blockholders, a prominent position to their blockholders, and more dedicated institutional blockholder ownership. Moreover, we find that the negative association between institutional blockholder coordination and climate change risk disclosure is more pronounced in firms with corporate general counsels, a non-concentrated customer base, higher asset tangibility, and those that are environmentally sensitive. Our main conclusion still holds after using an alternative measure for climate change risk disclosure as well as a battery of endogeneity tests. Finally, we propose that institutional blockholder coordination lessens climate change risk disclosure through the channel of increased performance-induced CEO dismissal. Collectively, this study provides insightful implications for academics, financial statement users, regulators, and policymakers.

Stewardship code adoption and firms’ decisions on treasury shares: Evidence from South Korea

This study examines the relationship between institutional blockholders’ stewardship code adoption (the stewardship code adoption) and firms’ treasury-share-related decisions. Using the data of firms listed on the Korea Exchange from 2017 to 2019, this study finds that the stewardship code adoption has a negative relationship with share repurchase and a positive relationship with treasury share cancellation, and that the negative relationship between the stewardship code adoption and share repurchase is more pronounced for institutional blockholders with long-term investment stance. In addition, this study further finds that the stewardship code adoption can affect the timing of firms’ decisions on treasury share cancellation, reducing the risk from long-term holding or opportunistic disposition of treasury shares. The results from this study implies that the increase in shareholder activism triggered by the stewardship code adoption is to enhance shareholder value.

Governance through exit: Pension fund reform impact on real earnings management of portfolio companies

Theoretical models predict that the threat of outside blockholder exit can mitigate agency problems and force managers to undertake actions that would maximize firm value in the long run. We examine whether the institutional blockholder exit threat curbs managerial misbehavior and short-termism reflected in real earnings management. Our study exploits a natural experiment—the Polish pension fund reform of 2013 that encouraged pension funds to trade more actively and imposed a real threat of exit on their portfolio companies. Using a difference-in-differences approach, we provide evidence that the reform significantly decreased the level of real earnings management in “treated” companies, that is, companies with open-ended pension funds (OFEs) playing the role of blockholders. The effect was more significant for firms in a multiple blockholder setting, firms under common ownership, and firms with higher insider’s stakes. Moreover, we confirmed that treated companies that decreased real earnings management in the post-reform period experienced the increased long-term operating performance.

Multiple large shareholders and audit fees: Demand‐side evidence from China

AbstractThis paper provides evidence on the role of multiple large shareholders (MLSs) in the determination of audit pricing from a new demand‐side perspective, rather than the typical supply‐side perspective. We find that for Chinese A‐share listed firms, the presence of MLS is associated with significantly higher audit fees. The results are robust after we address endogeneity concerns and use auditor choice as an alternative proxy to capture demand for auditing. Further tests show that audit fees increase with the number and relative power of noncontrolling large shareholders. The positive impact of MLS on audit fees is more pronounced for state‐owned enterprises (SOE) than in family‐owned enterprises. Moreover, this positive impact of MLS is more pronounced for SOEs with foreign blockholders and non‐SOEs with independent institutional blockholders. This positive impact is also more pronounced for firms with higher information asymmetry, severe agency problems and higher litigation risk. Overall, our results provide consistent evidence that firms with MLS are likely to demand high‐quality auditing, leading to higher audit fees.

Stock price crash risk, liquidity and institutional blockholders: evidence from Vietnam

PurposeThis study examines the influence of stock liquidity on stock price crash risk and the moderating role of institutional blockholders in Vietnam’s stock market.Design/methodology/approachCrash risk is measured by the negative coefficient of skewness of firm-specific weekly returns (NCSKEW) and the down-to-up volatility of firm-specific weekly stock returns (DUVOL). Liquidity is measured by adjusted Amihud illiquidity. The two-stage least squares method is used to address endogeneity issues.FindingsUsing firm-level data from Vietnam, we find that crash risk increases with stock liquidity. The relationship is stronger in firms owned by institutional blockholders. Moreover, intensive selling by institutional blockholders in the future will positively moderate the relationship between liquidity and crash risk.Practical implicationsSince stock liquidity could exacerbate crash risk through institutional blockholder trading, firm managers should avoid bad news accumulation and practice timely information disclosures. Investors should be mindful of the risk associated with liquidity and blockholder trading.Originality/valueWe contribute to the literature by showing that the activities of blockholders could partly explain the relationship between liquidity and crash risk. High liquidity encourages blockholders to exit upon receiving private bad news.

The social cost of investor distraction: Evidence from institutional cross-blockholding

Institutional investors routinely hold blocks of stocks in multiple firms within an industry. While such cross-blockholding boosts a portfolio firm’s financial performance, could it distract investors from attending to firm activities in a nonfinancial domain, hurting its performance in that domain? The authors answer this question in the context of corporate social responsibility (CSR). They first document that cross-held firms perform worse on social responsibility than non-cross-held firms do. A quasi-natural experiment based on mergers between institutional blockholders helps establish causality. Next and as their primary contribution, the authors demonstrate investor distraction as the mechanism. Using two proxies of distraction—EDGAR search volume and shareholder proposals on socially responsible investment—they show that the negative impact of institutional cross-blockholding on CSR mainly comes from investor distraction when investors hold multiple blocks simultaneously. By highlighting the social cost of institutional cross-blockholding, this article finds a distraction effect of institutional cross-ownership, which extends our understanding of this unique ownership structure.

Government Ownership and Managers’ Role: Effect to Acquisition Return Among High-Technology Companies

This study investigates the effect of high-technology (high-tech) company acquisitions and GLIC ownership on shareholders’ value creation. Study samples for empirical analyses were carried out using the market-model event-study and multivariate analysis on studies published between 2011 and 2018. The findings indicate that; (i) The CAR for high-tech acquiring firms for the three-day event window (–1,1), five-day event window (–2, +2) and 11-day event window led to significant positive returns, with at least at 10% level, signifying that investors have a favourable reaction towards short-term high-tech acquisitions; (ii) The relationship between the GLICs’ Institutional Blockholders (BPSVGLIC) and executive director (FRACEXEC) was found to affect the abnormal returns significantly negatively at a minimum 5% significance level. These results provide two practical implications; firstly, investors gain abnormal returns from their investment in high-tech acquiring companies, and secondly, firms with greater ownership stakes in GLICs could experience value destruction.

The Study of Corporate Social Responsibility and Ownership Structure on Bank’s Financial Performance in Taiwan

Abstract This study investigates the relationship between corporate social responsibility (CSR), ownership structure, and financial performance in a sample of 14 domestic financial holding companies in Taiwan. The empirical data gathered clearly indicate that banks recognized with CSR awards demonstrate superior financial performance across all models compared to those without awards. Notably, the bank’s practice of CSR, which signifies drawing from and contributing back to society, correlates with superior financial returns. In terms of large external shareholders, the institutional block-holders has a more pronounced impact as a monitoring mechanism compared to individual block-holders. Moreover, the study also supports the convergence-of-interest hypothesis, indicating that the alignment of interests between the managerial insiders and the shareholders through equity ownership can bolster a company’s financial performance. JEL classification numbers: G32. Keywords: Corporate Social Responsibility (CSR), Ownership Structure, Financial Performance.

Does better firm information disclosure enhance institutional blockholder monitoring on information asymmetry? Evidence from 10-K readability

Using the Plain Writing Act of October 2010 as a source of exogenous variation in 10-K readability, we examine whether improvements in 10-K reports enhance institutional investor monitoring of firms' information environments. This study reveals that the negative association between institutional monitoring and information asymmetry is more robust when firms provide 10-K reports with enhanced readability. Since the implementation of the Act, the impact of improved readability on the relationship between institutional monitoring and information asymmetry has become increasingly pronounced. This finding confirms our hypothesis that improved readability provides better firm information for institutional investor monitoring of firms, thus decreasing information asymmetry.

The effect of corporate annual report quality on the relationship between institutional blockholder monitoring and firm's information environment

AbstractExpanding on current research, this study finds that firms with better financial report readability demonstrate a stronger relationship between institutional blockholder monitoring and information asymmetry. This result supports our hypothesis that enhanced readability improves firm information and aids the institutional investor monitoring of firms, reducing information asymmetry. By demonstrating that readability amplifies the marginal effect of institutional blockholder monitoring, we highlight the significance and policy implications of better corporate disclosure readability.

Institutional Blockholder Networks and Corporate Acquisition Performance

Institutional Blockholder Networks and Corporate Acquisition Performance

Common Institutional Blockholders and Reporting Practices: Evidence from Accounting Comparability

SYNOPSIS This study investigates whether common institutional blockholders (common owners) affect the accounting comparability of their portfolio firms. We document that accounting comparability between a pair of industry peers increases with common ownership presence and intensity. Common owners’ demand for comparability is more pronounced (1) when the firm pairs have higher operating uncertainty, (2) when their information environment is opaque, and (3) when they weigh more within the common owners’ portfolio. To address endogeneity concerns, we exploit financial institutions mergers as quasiexogenous shocks to common ownership. Difference-in-differences tests confirm the positive association between common ownership and accounting comparability. We conclude that common owners are important capital-market participants that create a demand for and have a significant impact on accounting comparability. To the extent that achieving higher comparability is an important goal in standard setting, our study has implications for standard setters and regulators evaluating the determining factors of accounting comparability. JEL Classifications: M41; G23; G32; G34.

On The Impact Of Family Versus Institutional Block-Holders on Accrual-Based Earnings Management and Firm Performance: Evidence from an Emerging Market

On The Impact Of Family Versus Institutional Block-Holders on Accrual-Based Earnings Management and Firm Performance: Evidence from an Emerging Market

Innovation beyond firm boundaries: Strategic alliances and corporate innovation

In this paper, we empirically analyze how strategic alliances affect the innovation output of the firms forming the alliance. We find a positive effect of R&D-related strategic alliances on corporate innovation, as measured by the quantity and quality of patents filed. This effect is stronger for firms led by CEOs with higher general managerial skills, firms with greater experience from earlier alliances, and firms operating in R&D-intensive industries. Furthermore, the innovation-fostering effect of strategic alliances is more pronounced if alliance partnering firms share a common institutional blockholder or have a higher degree of technological proximity. We also document, for the first time in the literature, a unique contractual mechanism through which firms share the benefits of innovation with their alliance partners, namely, “co-patenting.”

Financial institutional blockholders and earnings quality: Do blockholders contestability and countries' institutions matter?

We examine the relationship between financial earnings quality and block ownership by institutional investors. This relation is vital given the tremendous growth of institutional ownership and the significant influence of large institutional blockholders on financial earnings quality. Our findings indicate that the presence of institutional blockholders drives higher financial earnings quality. Results from an instrumental variable (IV) approach suggest our documented effects are directional. Next, cross-sectional tests prove that the relationship is more pronounced among firms adopting IFRS and those in countries with minority shareholder protection. Moreover, our results reveal that property rights and the lack of contestability partially mitigate the positive association between institutional ownership and earnings quality. Our findings inform the ongoing debate on the influence of institutional ownership on earnings, which institutional and regulatory dimensions affect earnings, and through what channels these effects run. Overall, our results suggest that beyond corporate governance practices that enhance financial earnings quality, different countries' institutions and regulations settings influence the relation of institutional ownership to earnings quality.

Tacit vigilance in an emerging economy: An institution-based perspective of passive blockholder monitoring

We argue that the relative effectiveness of active and passive blockholder monitoring is driven by the institutional context of the Korean financial market, characterized by the dominance of chaebols and the pressure sensitivity of institutional blockholders. We believe that the extensive business ties between chaebols and blockholders effectively increase the cost of shareholder activism in Korea, making passive monitoring a more applicable governance mechanism for blockholders. We test whether passive monitoring affects a firm’s earnings quality, represented by earnings persistence, value relevance, and timeliness. Furthermore, we decompose institutional shareholding by portfolio turnover and nationality and then determine the monitoring channel that influences earnings quality. We find that passive monitoring by domestic blockholders is most effective in improving earnings quality in Korea. In addition, our findings highlight that the difference between the institutional context of developed economies and that of Korea results in different outcomes related to blockholder monitoring.

Unlocking Strategic Alliances: The Role of Common Institutional Blockholders in Promoting Collaboration and Trust

Unlocking Strategic Alliances: The Role of Common Institutional Blockholders in Promoting Collaboration and Trust

Accounting conservatism and common ownership by dedicated institutional blockholders

AbstractWe examine the peer effects of accounting conservatism in a common dedicated institutional blockholder (CDIB) setting. We find a positive correlation in accounting conservatism between focal firms and their CDIB peers. To corroborate our main findings, we document that the peer effect is stronger for firms connected through CDIBs that are activists or that have more active shares, for firms with larger CDIB ownership and for firms with weaker corporate governance mechanisms and higher information asymmetry. The results suggest that managers view following peer firms’ conservatism as a way of pleasing CDIBs. We also find that in proxy voting, firms receive less support from their investors when their conservatism deviates more from their CDIB peers. Finally, we find that the CDIB peer effect remains significant after controlling for the effect of industry and local peers. Overall, our paper presents evidence consistent with firms adapting their accounting conservatism in response to their incumbent dedicated institutional investors’ preference.