The Firms’ Reaction to Changes in the Governance Preferences of Active Institutional Owners

The Firms’ Reaction to Changes in the Governance Preferences of Active Institutional Owners

Ruth V. Aguilera, Vicente J. Bermejo, Javier Capapé, Vicente Cuñat

Series number :

Serial Number: 
625/2019

Date posted :

August 28 2019

Last revised :

August 28 2019
SSRN Share

Keywords

  • Corporate governance • 
  • Institutional ownership • 
  • sovereign wealth funds

In November 2012, Norway’s sovereign wealth fund (NBIM) unexpectedly announced that it would foster better corporate governance practices in its portfolio firms by articulating specific governance expectations. We use this sudden change in governance preferences as a natural experiment to understand shareholder influence among active ownership investors.

We first document how the fund re-balanced its portfolio to achieve this governance objective believed to be aligned with investment objectives. We then show how firms for which the fund is an important investor and also firms that are very important to the fund reacted by aligning their corporate governance following NBIM expectations. Marginal investment changes and governance changes become more correlated in the new equilibrium. We also examine the heterogenous response of firms to institutional pressures. This paper advances existing research on active owners’ influence on firms, and particularly on firm governance practices.

Authors

Real name:
Javier Capapé
Dr
Real name:
Research Member
Department of Finance, London School of Economics
Real name:
Vicente J. Bermejo
Real name:
Ruth V. Aguilera