TY - JOUR
T1 - Internalizing governance externalities
T2 - The role of institutional cross-ownership
AU - He, Jie (Jack)
AU - Huang, Jiekun
AU - Zhao, Shan
N1 - Funding Information:
☆ We are grateful for helpful comments from an anonymous referee, Heitor Almeida, Matt Billet, Jie Cai, David Dicks, Rüdiger Fahlenbrach, Paul Gao, Stu Gillan, Edith Ginglinger, Itay Goldstein, Todd Gormley, Simon Gueguen, Jarrad Harford, Harald Hau, Gerard Hoberg, John Hund, Peter Iliev, Tim Johnson, Sehoon Kim, Mathias Kronlund, Ugur Lel, Kai Li, Tao Li, Pedro Matos, Harold Mulherin, Jeff Netter, Annette Poulsen, Anjana Rajamani, Edward Rice, Laura Starks, David Stolin, Yuehua Tang, Stijn Van Nieuwerburgh, Scott Weisbenner, Josh White, Moqi Xu, Jun Yang, Xiaoyun Yu, and seminar participants at the 2018 European Finance Association meetings, the 2018 Washington University Corporate Finance conference, the 2018 Financial Management Association meetings, the 2017 Western Finance Association meetings, the 2017 China International Conference in Finance, the 2017 Wabash River conference, the 2018 SGF Conference, Second French Workshop on Corporate Governance, University of Georgia, Toulouse School of Economics, University of Warwick, Southwestern University of Finance and Economics, EDHEC, and ESSEC. We are solely responsible for any remaining errors.
Publisher Copyright:
© 2019 Elsevier B.V.
PY - 2019/11
Y1 - 2019/11
N2 - 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.
AB - 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.
KW - Corporate governance
KW - Cross-ownership
KW - Externalities
KW - Institutional investors
KW - Proxy voting
UR - http://www.scopus.com/inward/record.url?scp=85063496958&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85063496958&partnerID=8YFLogxK
U2 - 10.1016/j.jfineco.2018.07.019
DO - 10.1016/j.jfineco.2018.07.019
M3 - Article
AN - SCOPUS:85063496958
SN - 0304-405X
VL - 134
SP - 400
EP - 418
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 2
ER -