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Internalizing governance externalities: The role of institutional cross-ownership

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  • He, Jie (Jack)
  • Huang, Jiekun
  • Zhao, Shan

Abstract

We analyze the role of institutional cross-ownership in internalizing corporate governance externalities using granular mutual fund proxy voting data. Exploiting within-proposal and within-institution variation, we show that an institution's holdings in peer firms are positively associated with the likelihood that the institution votes against management on shareholder-sponsored governance proposals. We further find that high aggregate cross-ownership positively predicts management losing a vote. Overall, our results provide evidence that cross-ownership incentivizes institutional investors to play a more active monitoring role, suggesting that institutional cross-ownership serves as a market-based mechanism to alleviate the inefficiency induced by governance externalities.

Suggested Citation

  • He, Jie (Jack) & Huang, Jiekun & Zhao, Shan, 2019. "Internalizing governance externalities: The role of institutional cross-ownership," Journal of Financial Economics, Elsevier, vol. 134(2), pages 400-418.
    • Handle: RePEc:eee:jfinec:v:134:y:2019:i:2:p:400-418
    DOI: 10.1016/j.jfineco.2018.07.019
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    More about this item

    Keywords

    Corporate governance; Externalities; Cross-ownership; Proxy voting; Institutional investors;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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