Corporate Governance Investment Research Articles

Corporate Governance and Shareholder Activism in India—Theoretical Perspective

The origin of division of powers between Board of Directors and Shareholders has been subject of different judicial interpretations. Company law is a standard federal law. Hence, it envisages a clear division of powers between Shareholders and Board of Directors. The purpose of this paper is to analyse the methods and role envisaged for shareholders in corporate governance, given the little incentives and limited means available to them to perform any supervisory function over Board of Directors. The study reports, that it is difficult to tie down any definite role for investors in corporate governance. Corporate governance ought to shift from being a procedural requirement when it comes to addressing the issue of shareholder activism. An implication of the study is to put emphasis for enforcement of shareholder rights through civil proceedings. This can be achieved by introducing substantive provisions codifying duty of care, fiduciary role-playing requirements for Board of Directors.

Trade, Technologies, and the Evolution of Corporate Governance

Do international trade and technological change influence how firms create incentives for human capital? I present a model that incorporates agency problems into a framework with firm heterogeneity and human capital. My model indicates that trade liberalizations and skill-biased technological change alter the way how the largest firms in an economy incentivize their managers. Increases in managerial reservation wages lead to a reduction in corporate governance investments and a rise in performance compensation since monitoring managers becomes less efficient. Using data on CEO compensation and entrenchment opportunities in public industrial firms in the U.S., I document strong empirical regularities in support of the model predictions. Firms allow for more managerial entrenchment and offer larger CEO compensation when their industries become more open to trade or when production becomes more I.T. intensive.

Return Predictability of a Corporate Governance Neural Networks Trading System

This article examines whether a corporate governance investment strategy, within the context of a full-fledged trading system, can generate economically significant returns. Using artificial neural networks to design buy/sell rules, we address the limitation in corporate governance literature by incorporating money management and risk control strategies in the trading system. In addition, the simulation considers realistic constraints which we observed also lacking in the literature, namely capital restriction, round lot, short selling and transaction costs. The trading system is developed in sample for out of sample forecasting, and we measure its performance using several performance metrics including the Sharpe and Sortino ratios. The overall results indicate superior performance of the corporate governance trading system compared to the benchmark buy-and-hold strategy, with significantly better returns and much greater Sharpe and Sortino ratios. This suggests that the market is inefficient at the semi-strong form. Consequently, this study has implications for public policy and the accuracy of previous studies.

Institutional Investors as Minority Shareholders

We examine the role of institutional investors in corporate governance in an environment where ownership is concentrated. The presence of dominant shareholders alters the role of institutional investors by limiting their voting influence; by shifting the focus from shareholder-manager conflicts (when ownership is dispersed) to conflicts between controlling and minority shareholders (when ownership is concentrated); and by creating new potential conflicts of interest when business groups are present. Using hand-collected data on voting by institutional investors in Israel, which adopted far-reaching measures to empower minority shareholders, we find that: (1) Institutional investors rarely vote against insider-sponsored proposals even when the law grants them special voting power; (2) Institutional investors are more likely to vote against compensation-related proposals than against other related party transactions even when minority shareholders lack the power to influence outcomes; and (3) Institutional investors with potential ownership and business-related conflicts of interest are less likely to vote against insider-sponsored proposals than stand-alone institutional investors, both when minority shareholders have power and when they do not. One interpretation of these findings is that the power granted to the minority plays a role only in the selection of proposals brought to a vote but not in voting on existing proposals; another is that, in order for institutions to play a valuable role in corporate governance, granting voting power to minority shareholders is unlikely to be effective unless conflicts of interest are addressed.

The Impact of Institutional Investors on Corporate Governance: A View of Swiss Pension Funds in a Changing Financial Environment

Theories on corporate governance have developed in line with the development of the financial markets and the increasing power of institutional investors. Indeed, the financial markets' power can be measured by the ability of shareholders, and of institutional investors in particular, to influence businesses and their managers. A number of reforms have been implemented in several countries, Switzerland included, in order to strengthen shareholders' powers. Making specific reference to Swiss case studies, this paper aims to create a better understanding of the role of institutional investors in corporate governance. Indeed, Switzerland is paradoxical in that it is generally considered Rhenish, with banks and families taking a leading role in controlling big business (David et al. 2004; Windolf & Nollert 2001), whilst developing a pension fund system which, since the mid-1980s, has attracted considerable funds and is still experiencing strong growth. How do these two approaches, traditionally at opposite ends of the spectrum as far as the subject's literature is concerned, reconcile themselves in the Swiss market?

The US Corporate Elephant

Drawn from a speech at the opening convocation at two notarial schools in Italy, this is a story of modern US corporate law. Unlike the statist nature of the corporation in many other countries, the nature of the US corporation is essentially private. It is based on state corporate law, chosen by the parties. Federal law, though regulating disclosure to public investors, mostly avoids a role in the management of the corporation. The corporation rules of state law are largely enabling, not mandatory. The parties have a wide latitude in choosing their own structures. The preeminent provider of state law is Delaware, whose preeminence comes from offering a balanced package of legislative responsiveness, legal expertise, judicial expertise and efficiency, comprehensive case law, and assurances of being non-political. Corporate law in the United States provides only basic creditor protections, assuming that most protections will come through markets and contracts. Significant emphasis is placed on fiduciary duties of corporate directors - to the corporation and shareholders. Fiduciary duties are dynamic, adapting to new governance and market circumstances. Also dynamic are other aspects of corporate law, as illustrated by the legislative, administrative and judicial responses to recent corporate and accounting scandals. Some aspects of corporate law, fundamental to the legitimacy of the corporation, remain unaddressed. The role of the corporation in politics, the place of institutional investors in corporate governance, the responsibility of the corporation for social and environmental practices not mandated by law - these are the current questions for corporate law. Will the corporation be up to the task?

The Role of Institutional Investors in Corporate Governance and Their Performance as Stock Portfolio Managers in Brazil

The aim of this paper is to analyze the influence of institutional investors (funds, banks, insurance companies, etc.) in corporate governance through stock valuation, and analyze their own performance as stock portfolio managers. The study includes 161 companies listed in BOVESPA (Sao Paulo Stock Exchange) from December/1994 to March/2000. The companies were classified according to the level of equity share held by institutional investors, and these were classified in 9 classes. The parameters used to evaluate stocks and institutional investors performance are based on CAPM (Capital Asset Pricing Model).

Interview: The Role of Institutional Investors in Corporate Governance: the case of Standard Life Investments

Interview: The Role of Institutional Investors in Corporate Governance: the case of Standard Life Investments

Institutional Investor Heterogeneity: Implications for Strategic Decisions

There has been much attention given to the growing activism of institutional investors in corporate governance. However, past research has been unable to establish a consistent relationship between institutional investors and firm behavior. This may have occurred because institutional investors have been assumed to be a homogenous group possessing the same objectives and behaviors. For a sample of 271 U.S. Fortune 500 firms for the years 1990 to 1992, we categorized the firms' institutional investors into four distinct types: pension funds, mutual funds, banks, and insurance companies. We found significantly different relationships between these categories of institutional investors and firms' strategic investments.

The Role of Institutional Investors in Corporate Governance: An Empirical Investigation

The Role of Institutional Investors in Corporate Governance: An Empirical Investigation

Shark repellents and the role of institutional investors in corporate governance

AbstractThis paper examines the role of institutional shareholders in monitoring managers when they propose antitakeover charter amendments (shark repellents). These proposals provide a rare opportunity to examine this issue since they can be adopted only by shareholder approval. We document a positive relationship between the ownership of institutional shareholders and the stock market reaction to the announcement of antitakeover amendments. This finding is consistent with the Demsetz (1983) and Shleifer and Vishny (1986) proposition that large blockholders reduce the free‐rider problem associated with monitoring managers.