Institutional Monitoring: Evidence from the F‐Score

Abstract

The extant literature shows that institutional investors engage in corporate governance to enhance a firm's long-term value. Measuring firm performance using the F-Score, we examine the persistent monitoring role of institutional investors and identify the financial aspects of a firm that institutional monitoring improves. We find strong evidence that longterm institutions with large shareholdings consistently improve a firm's F-Score and that such activity occurs primarily through the enhancement of the firm's operating efficiency. Other institutions reduce a firm's F-Score. Moreover, we find evidence that, while monitoring institutions improve a firm's financial health, transient (followed by non-transient) institutions trade on this information.

CEO Overconfidence, Leadership Ethics, and Institutional Investors

“…However, we find that institutional monitoring's effect is only significant when considerably long-term and/or larger institutional investors hold the firms' shares. This result is consistent with the recent literature, wherein long-term institutions and/or institutional blockholders have substantial incentives to monitor management, and influence the governance structure, among heterogeneous institutions [22,23]. Additionally, we find that institutional monitoring's effect on overinvestments is significant, even after our empirical analysis controls for the internal monitoring effect by a firm's board of directors.…”

“…The last set of ownership measures, based on Chung et al's [23] work, considers the number of consecutive quarters in which an institution holds stock. Specifically, QH1 represents ownership by institutions that have continuously held at least 1% of a stock's shares outstanding in the past three years, including the current quarter.…”

“…The literature on institutional investors' roles in corporate governance reveals that institutions with long-term investment strategies are likely to engage in monitoring activities and exert influence, compared to those with short-term investment strategies [22,23,60,62]. Hence, we begin our empirical analysis by examining the relationship between LIO/SIO and the corporate investments related to CEO overconfidence.…”

Investment Horizons and Information

“…In particular, we use market cap, price, dividends, book-to-market, stock returns, sales, volatility, and illiquidity (Chichernea et al, 2015;Chung et al, 2015). In particular, we use market cap, price, dividends, book-to-market, stock returns, sales, volatility, and illiquidity (Chichernea et al, 2015;Chung et al, 2015).…”

“…Differences in Effects Around Information-Relevant Events In the first stage, we directly estimate the institutional ownership variables (SIO and LIO) using instrumental variables that have been used in the literature. In particular, we use market cap, price, dividends, book-to-market, stock returns, sales, volatility, and illiquidity (Chichernea et al, 2015;Chung et al, 2015). We also use the lagged changes in SIO and LIO as additional variables.…”