Monitoring: Which Institutions Matter?

By Xia Chen, Jarrad Harford, Kai Li. 2007

1,827 citations recorded by the source corpus.

Within a cost-benefit framework, we hypothesize that independent institutions with long-term investments will specialize in monitoring and influencing efforts rather than trading. Other institutions will not monitor. Using acquisition decisions to reveal monitoring, we show that only concentrated holdings by independent long-term institutions are related to post-merger performance. Further, the presence of these institutions makes withdrawal of bad bids more likely. These institutions make long-term portfolio adjustments rather than trading for short-term gain and only sell in advance of very bad outcomes. We conclude that independent long-term institutions actively monitor and benefit from their efforts. This benefit has both private and shared components. Examining total institutional holdings or even concentrated holdings by other types of institutions masks important variation in the subset of monitoring institutions.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/d81ba11c189070ddd08f948a7c11e8255725f070

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Citations in the corpus

Organization Capital and Mergers and Acquisitions (2017, positive): “BHAR1 (BHAR3) is the 1-year (3-year) buyand-hold abnormal stock return (in percentage points) of the acquirer after deal completion controlling for the size, book-to-market (BM), and momentum effects (Chen et al. (2007), p. 287).”
Financial Statement Comparability and the Efficiency of Acquisition Decisions (2018, neutral): “2 Post-acquisition operating performance In addition to market-based results, we explore the relation between financial statement comparability and the change in operating performance after acquisitions (Healy et al., 1992; Chen et al., 2007; Francis and Martin, 2010; Harford et al., 2012).”
The effect of corporate tax avoidance on the cost of equity (2013, methodology): “…according to Bushee (1998) and as used in Atkins, Ng, and Verdi (2012).20 Prior work suggests that dedicated institutional investors are long-term oriented, often hold large stakes in the firm and hence are likely to be more effective monitors (e.g. Bushee 1998; Chen, Hartford, and Li 2007).”
Institutional Cross-Ownership and Corporate Strategy: The Case of Mergers and Acquisitions (2018, positive): “These results are consistent with Almazan et al. (2005) and Chen et al. (2007) that independent institutional investors are more likely to play a monitoring role in corporate governance.”
Distribution of institutional ownership and corporate firm performance (2010, methodology): “…institutional investors into three groups according to whether they have potential business relationships with the investee firms and, hence, their sensitivity to management pressure (Brickley et al., 1988; Del Guercio, 1996; Almazan et al., 2005; Chen et al., 2007; and Cornett et al., 2007).”