Internalizing governance externalities : The role of institutional cross-ownership

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

21 Scopus Citations
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Detail(s)

Original languageEnglish
Pages (from-to)400-418
Journal / PublicationJournal of Financial Economics
Volume134
Issue number2
Online published25 Mar 2019
Publication statusPublished - Nov 2019

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.

Research Area(s)

  • Corporate governance, Cross-ownership, Externalities, Institutional investors, Proxy voting