Internalizing governance externalities: The role of institutional cross-ownership

By Jie He, Jiekun Huang, Shan Zhao. Journal of Financial Economics, 2019

342 citations recorded by the source corpus.

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.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/8b5d5fc25b561f38c3835aa005830e75b37004c7

Citations in the corpus

• Common ownership and competition in product markets (2021, neutral): “Given that the analyses in He and Huang (2017) and Semov (2017) are at the firm-pair level, the implications of the observed relations between cross-holdings, market-share growth, and PCMs for the overall level of competition and profits in the industry are not apparent as these relations are entire”
• Institutional Cross-Ownership and Corporate Strategy: The Case of Mergers and Acquisitions (2018, neutral): “Furthermore, institutional cross-owners may benefit from internalizing the corporate governance externality among peer firms held in their portfolios (He et al., 2017), that is, an improvement in a firm’s governance leads to an improvement in governance in the firms within the same industry.”