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Institutional Investors on Boards: Does Their Behavior Influence Corporate Finance?

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Abstract

We examine whether the behavior of institutional investors representatives on boards leads to observable differences in corporate finance. We find that directors representing pressure-sensitive investors (i.e., banks and insurance companies) prefer lower financial leverage whereas pressure-resistant directors (i.e., mutual funds and pension funds) show no particular preference. When analyzed separately, directors appointed by banks and insurance firms have different attitudes. Bank representatives on boards increase both the financial leverage and the banking debt. This result suggests that some types of institutional directors provide financial resources to the firms on whose board they sit, supporting the view that boards manage the uncertainty associated with strategic decision making and provide firms with preferential access to resources and financial expertise. This research has interesting academic and policy implications for the debate over the proper degree of institutional involvement in corporate governance. Different institutional investors have different agendas and incentives for corporate governance, and, therefore, both researchers and policy makers should no longer consider institutional investors as a whole. In addition, our paper calls for new research on the causes and implications of institutional investor involvement in the corporate governance of nonfinancial firms. This new research could require new insights on the dynamics within the boards and on the interplay among the knowledge, incentives and attitudes of quite different directors.

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Notes

  1. On 5 April 2011, the European Commission adopted a Green Paper and launched a wide-ranging public consultation on the EU corporate governance framework. Among other questions, the European Commission asked about the incentive structure of asset managers managing long-term institutional investors´ portfolios and about more effective monitoring by institutional investors. The results of this consultation were published on 15 November 2011 (European Commission 2011).

  2. The Unified Code of Corporate Governance in Spain distinguishes three types of directors: executive directors, independent directors, and gray directors. Gray directors are nonexecutive directors representing block-holders, most commonly banking and insurance companies or investment funds.

  3. Amadeus is a product of Bureau van Dijk Electronic Publishing and provides comparable standardized financial information for companies across Europe.

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Acknowledgments

We acknowledge the financial support from the Spanish Ministry of Economy and Competitiveness (Projects ECO2014-56102-P and ECO2011-29144-C03-01). This paper was prepared also within the framework of the Basic Research Program at the National Research University Higher School of Economics (HSE) and supported within the framework of a subsidy granted to the HSE by the Government of the Russian Federation for the implementation of the Global Competitiveness Program. The authors are grateful to two anonymous referees, Alex Michalos (Editor), Nieves Lidia Díaz Díaz, Alisa Larson, and all participants in the CGIR Conference on Corporate Governance Bundles held in Cambridge, the IX Workshop on Empirical Research in Financial Accounting held in Las Palmas, and the XXIII ACEDE Conference held in Málaga for their helpful comments. All the remaining errors are only our responsibility.

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  1. Accounting and Finance Department, Business Faculty, Technical University of Cartagena, Cartagena, Spain

    Emma García-Meca

  2. Accounting and Finance Department, Business Faculty, University of Valladolid, Valladolid, Spain

    Felix López-Iturriaga & Fernando Tejerina-Gaite

  3. Laboratory of Intangible-Driven Economy, NRU Higher School of Economics, Moscow, Russia

    Felix López-Iturriaga

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  1. Emma García-Meca
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García-Meca, E., López-Iturriaga, F. & Tejerina-Gaite, F. Institutional Investors on Boards: Does Their Behavior Influence Corporate Finance?. J Bus Ethics 146, 365–382 (2017). https://doi.org/10.1007/s10551-015-2882-z

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