Abstract
It has been advocated within corporate governance that institutional investors may discipline management in listed firms and thereby alleviate the free rider problem associated with dispersed ownership. This article tests this hypothesis using a sample of Danish listed firms during 1998–2001 determining, whether ownership by institutional investors impacts performance, measured by Tobin’s q. Using three stage least squares, it is shown that aggregate ownership by institutional investors does not influence firm performance. However, when decomposing the results, it is found that joint ownership by the largest two Danish institutional investors, has a significant negative impact firm performance. Ownership by banks and to a lesser extent insurance companies significantly influences firm performance positively. The results somehow challenge the conventional wisdom, arguing that the black box view of institutional investors should be abandon. Therefore it is suggested that a more careful analysis should be devoted to each institutional investors own legal environment.
Similar content being viewed by others
References
Ackert, L. F., & Athanassakos, G. (2001). Visibility, institutional preferences and agency considerations. Journal of Psychology and Financial Markets, 2, 201–209.
Admati, A. R., Pfleiderer, P., & Zechner, J. (1994). Large shareholder activism, risk sharing and financial markets equilibrium. Journal of Political Economy, 102, 1097–1130.
Augilera, R. V., & Jackson, G. (2003). The cross-national diversity of corporate governance: Dimensions and determinants. Academy of Management Review, 28(3), 447–465.
Blair, M. (1995). Ownership and control. Rethinking corporate governance for the twenty first century. Washington, D.C.: The Bookings Institution.
Bhagat, S., Black, B., & Blair, M. (2004). Relational investing and firm performance. Journal of Financial Research, 27, 1–30.
Burkart, M., Gromb, D., & Panunzi, F. (1997). Large shareholders, monitoring and the value of the firm. Quarterly Journal of Economics, 112, 693–728.
Davis, G. F. (1991). Agents without principals? The spread of the poison pill through the intercorporate network. Administrative Science Quarterly, 36, 583–613.
Davis, E. P. (2002). Institutional investors, corporate governance and the performance of the corporate sector. Economic Systems, 26, 202–229.
Duggal, R., & Millar, J. A. (1999). Institutional ownership and firm performance: The case of bidder returns. Journal of Corporate Finance, 5, 103–117.
Fama, E. (1983). Agency problems and residual claims. Journal of Law and Economics, 26, 327–349.
Gompers, P. A., & Metrick, A. (2001). Institutional investors and equity prices. Quarterly Journal of Economics, 21, 4–40.
Grandori, A. (Ed.). (2004). Corporate governance and firm organization–Mircrofoundations and structural forms. Oxford: Oxford University Press.
Grossman, S. J., & Hart, O. D. (1980). An analysis of the principal agent problems. Econometrica, 51, 7–45.
Hausman, J. A. (1978). Specification tests in econometrics. Econometrica, 46, 1251–1271.
Hausmann, J. A. (1983). Specification and estimation of simultaneous equation models. In Z. Griliches & M. D. Intriligator (Eds.), Handbook of econometrics (Vol. 1, pp. 391–448). North Holland: Amsterdam.
Hartzell, J. C., & Starks, L. T. (2003). Institutional investors and executive compensation. Journal of Finance, 58, 2351–2374.
Himmelberg, C. P., Glenn Hubbard R., & Palia, D. (1999). Understanding the determinants of managerial ownership and the link between ownership and performance. Journal of Financial Economics, 53, 353–384.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3, 305–360.
Kahn, C., & Winton, A. (1998). Ownership structure, speculation, and shareholder intervention. Journal of Finance, 53, 99–129.
La Porta, R., de-Silanes, L., Schleifer, A., & Vishny, R. W. (1997). Legal determinants of external finance. Journal of Finance, 52, 1131–1150.
Louis, K., Chan, C., & Lokonishok, J. (1993). Institutional trades and intraday stock price behavior. Journal of Financial Economics, 33, 173–199.
Maug, E. (1998). Large shareholders as monitors: Is there a trade-off between liquidity and control? Journal of Finance, 53(1), 65–98.
Monks, R. A. G., & Minow, N. (2002). Corporate governance (2nd ed.) Blackwell Business.
Neumann, R., & Neumann, T. (2003). Does ownership matter in the presence of strict antiactivism legislation? Evidence from equity transactions in Denmark. International Review of Financial Analysts, 12, 157–171.
Prevost, A. K., & Rao, R. P. (2000). Of what value are shareholder proposals sponsored by public pension funds? Journal of Business, 73, 177–204.
Rose, C. (2002a). Takeover defenses impact on corporate financial performance. European Journal of Law and Economics, 13, 91–112.
Rose, C. (2002b). Stakeholder orientation vs. shareholder value. A matter of contractual failures. European Journal of Law and Economics, 18, 77–97.
Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. Journal of Finance, 52, 737–783.
Sias, R. W., & Starks, L. T. (1997). Return autocorrelation and institutional investors. Journal of Financial Economics, 46, 103–130.
Thomsen, S., & Rose, C. (2004). Do companies need owners? Foundation ownership and firm performance. European Journal of Law and Economics, 18(3), 343–364.
Wahal, S., & McConell, J. J. (2000). Do institutional investors exacerbate managerial myopia? Journal of Corporate Finance, 6, 307–329.
Woidtke, T. (2002). Agents watching agents? Evidence from pension fund ownership and firm value. Journal of Financial Economics, 63, 99–131.
Wooldridge, J. M. (2002). Econometric analysis of cross section and panel data. Massachusetts Institute of Technology.
Acknowledgements
I am grateful for useful comments by two anonymous referees. I am grateful to Anders Larsen for excellent research assistance as well as to Hans Kurt Kvist for useful comments. The paper also benefited from presentation at the Annual workshop in Corporate Governance, April 8, 2005 at the Copenhagen Business School. I am grateful for useful comments from anonymous referees.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Rose, C. Can institutional investors fix the corporate governance problem? Some Danish evidence. J Manage Governance 11, 405–428 (2007). https://doi.org/10.1007/s10997-007-9038-1
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10997-007-9038-1