Institutional Investor Cliques and Governance
58 Pages Posted: 22 Sep 2016 Last revised: 28 Jun 2017
Date Written: June 22, 2017
We examine the impact of investor coordination on governance. We identify coordinating groups of investors ("cliques") as those connected through the network of institutional holdings. Clique members vote together on proxy items: a one-standard-deviation increase in clique ownership more than doubles votes against low quality management proposals. We use the 2003 mutual fund trading scandal to show that this effect is causal. These findings suggest coordination strengthens governance via voice. Coordination, however, also weakens governance via threat of exit. Clique owners exit positions more slowly and firm value responds negatively to liquidity shocks when clique ownership is high.
Keywords: Institutional Investors, Governance, Coordination
JEL Classification: G20, G30
Suggested Citation: Suggested Citation