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Variation in the Monitoring Incentives of Outside Stockholders

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  • Borokhovich, Kenneth A
  • Brunarski, Kelly
  • Harman, Yvette S
  • Parrino, Robert

Abstract

We examine abnormal returns around the announcement of antitakeover amendment proposals for evidence on variation in the effectiveness of monitoring by outside stockholders. The evidence suggests that the market views large stockholders who are outsiders but have potential business ties to a firm (affiliated blockholders) as less effective monitors than other outside blockholders (unaffiliated blockholders). Abnormal returns tend to be lower at firms where holdings of affiliated blockholders exceed holdings of unaffiliated blockholders than at firms where the reverse is true. The difference in the stock ownership of these two classes of blockholders explains more of the variation in abnormal returns than factors such as management stock ownership and board composition. The evidence for affiliated and unaffiliated blockholders is consistent when we focus on the relation between abnormal returns and institutional ownership. No evidence is found of systematic variation in the effectiveness of monitoring by institutional stockholders who are not blockholders.

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  • Borokhovich, Kenneth A & Brunarski, Kelly & Harman, Yvette S & Parrino, Robert, 2006. "Variation in the Monitoring Incentives of Outside Stockholders," Journal of Law and Economics, University of Chicago Press, vol. 49(2), pages 651-680, October.
  • Handle: RePEc:ucp:jlawec:y:2006:v:49:i:2:p:651-80
    DOI: 10.1086/505368
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    Cited by:

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    2. Renneboog, L.D.R. & Szilagyi, P.G., 2009. "Shareholder Activism through the Proxy Process," Other publications TiSEM cc25d736-2965-4511-b100-1, Tilburg University, School of Economics and Management.
    3. Chen, Xia & Harford, Jarrad & Li, Kai, 2007. "Monitoring: Which institutions matter?," Journal of Financial Economics, Elsevier, vol. 86(2), pages 279-305, November.
    4. Vishaal Baulkaran & Pawan Jain, 2023. "CDS contract initiations: REIT board monitoring and corporate decision outcomes," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 46(1), pages 217-246, February.
    5. Liu, Sun, 2019. "The impact of ownership structure on conditional and unconditional conservatism in China: Some new evidence," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 34(C), pages 49-68.
    6. Borokhovich, Kenneth A. & Boulton, Thomas J. & Brunarski, Kelly R. & Harman, Yvette S., 2014. "The incentives of grey directors: Evidence from unexpected executive and board chair turnover," Journal of Corporate Finance, Elsevier, vol. 28(C), pages 102-115.
    7. Vincent C. Ma & John S. Liu, 2016. "Exploring the research fronts and main paths of literature: a case study of shareholder activism research," Scientometrics, Springer;Akadémiai Kiadó, vol. 109(1), pages 33-52, October.
    8. Ashwini K. Agrawal, 2012. "Corporate Governance Objectives of Labor Union Shareholders: Evidence from Proxy Voting," The Review of Financial Studies, Society for Financial Studies, vol. 25(1), pages 187-226.
    9. Stuart L. Gillan & Laura T. Starks, 2007. "The Evolution of Shareholder Activism in the United States," Journal of Applied Corporate Finance, Morgan Stanley, vol. 19(1), pages 55-73, January.
    10. Abdioglu, Nida & Bamiatzi, Vassiliki & Cavusgil, S.Tamer & Khurshed, Arif & Stathopoulos, Konstantinos, 2015. "Information asymmetry, disclosure and foreign institutional investment: An empirical investigation of the impact of the Sarbanes-Oxley Act," International Business Review, Elsevier, vol. 24(5), pages 902-915.
    11. Renneboog, Luc & Szilagyi, Peter G., 2011. "The role of shareholder proposals in corporate governance," Journal of Corporate Finance, Elsevier, vol. 17(1), pages 167-188, February.
    12. Balachandran, Balasingham & Williams, Barry, 2018. "Effective governance, financial markets, financial institutions & crises," Pacific-Basin Finance Journal, Elsevier, vol. 50(C), pages 1-15.
    13. Liu, Sun, 2015. "Corporate governance and forward-looking disclosure: Evidence from China," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 25(C), pages 16-30.
    14. Devos, Erik & Dhillon, Upinder & Jagannathan, Murali & Krishnamurthy, Srinivasan, 2012. "Why are firms unlevered?," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 664-682.
    15. Huang, Haozhi & Li, Mingsheng & Shi, Jing, 2016. "Which matters: “Paying to play” or stable business relationship? Evidence on analyst recommendation and mutual fund commission fee payment," Pacific-Basin Finance Journal, Elsevier, vol. 40(PB), pages 403-423.
    16. Anderson, Christopher W. & Huang, Jian, 2017. "Institutional investment in IPOs and post-IPO M&A activity," Journal of Empirical Finance, Elsevier, vol. 41(C), pages 1-18.
    17. Ruiz-Mallorquí, María Victoria & Santana-Martín, Domingo J., 2011. "Dominant institutional owners and firm value," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 118-129, January.
    18. Bi, XiaoGang & Wang, Danni, 2015. "Role of single largest investors: Examples of mutual funds and acquisitions," Finance Research Letters, Elsevier, vol. 14(C), pages 104-110.
    19. Nain, Amrita & Yao, Tong, 2013. "Mutual fund skill and the performance of corporate acquirers," Journal of Financial Economics, Elsevier, vol. 110(2), pages 437-456.
    20. Challoner A. Matero & Hsien-Li Lee, 2024. "Impact of Outside Blockholders on Related Party Transactions and Book-tax Conformity Link," International Journal of Research and Scientific Innovation, International Journal of Research and Scientific Innovation (IJRSI), vol. 11(7), pages 1053-1064, July.
    21. Knill, April M. & Lee, Bong Soo & Mauck, Nathan, 2012. "Sovereign wealth fund investment and the return-to-risk performance of target firms," Journal of Financial Intermediation, Elsevier, vol. 21(2), pages 315-340.
    22. María Consuelo Pucheta‐Martínez & Blanca López‐Zamora, 2018. "Engagement of directors representing institutional investors on environmental disclosure," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 25(6), pages 1108-1120, November.
    23. Szilagyi, P.G., 2007. "Corporate governance and the agency costs of debt and outside equity," Other publications TiSEM 9520d40a-224f-43a8-9bf9-b, Tilburg University, School of Economics and Management.

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