Essays on institutional ownership.

Abstract

Both papers examine the impact of institutional ownership. The first addresses whether large institutional investors are effective monitors of corporate managers. In contrast to prior monitoring research, but consistent with wide-spread evidence of poor institutional investment performance, I find little empirical support for pervasive, value-maximizing institutional monitoring. In addition to documenting a negative contemporaneous association, I use causation tests to show that while higher quality firms attract institutional investment, institutions do not monitor and firm valuations subsequently decline. Further, I find a subset of institutions postulated to have stronger monitoring incentives do so; namely, institutions with the largest portfolios and institutions with focused, or concentrated, portfolios Granger-cause value increases at their portfolio companies. The second essay examines institutional impact on the informational environment in which stocks trade. Specifically, we examine cross-sectional and inter-temporal relationships between institutional ownership and bid-ask spreads. There is a negative association between contemporaneous levels of institutional ownership and spreads; further high institutional ownership leads to narrower spreads. These results are not attributable to institutional preferences for liquidity. The evidence suggests that higher institutional ownership reduces informational asymmetries. In contrast to academic and popular perceptions, there is no evidence that growing institutional investment is taxing the supply of liquidity in the equity markets.