Monitoring the Monitor: Distracted Institutional Investors and Board Governance

Monitoring the Monitor: Distracted Institutional Investors and Board Governance

Claire Yang Liu, Angie Low, Ronald Masulis, Le Zhang

Series number :

Serial Number: 
531/2017

Date posted :

October 10 2017

Last revised :

October 10 2017
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Keywords

  • board of directors • 
  • shareholder activism • 
  • institutional investors • 
  • Board monitoring • 
  • Shareholder voting • 
  • Corporate governance

Boards are crucial to shareholder wealth. Yet, little is known about how shareholder
oversight affects director incentives. Using exogenous industry shocks to institutional investor portfolios, we find that institutional investor distraction weakens board oversight.

Distracted institutions are less likely to discipline ineffective directors, while directors with poor proxy voting outcomes are less likely to depart. Consequently, independent directors face weaker monitoring incentives and exhibit poor performance. Also, ineffective independent directors are
more frequently appointed. Such firms exhibit more earnings management, high unexplained CEO pay, and lower valuation. Our findings suggest that institutional investor monitoring creates important director incentives to monitor.

Authors

Real name: 
Angie Low
Research Member
School of Banking and Finance, Australian School of Business
Real name:
Claire Yang Liu
Real name:
Le Zhang