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Motivated monitors: The importance of institutional investors׳ portfolio weights

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  • Fich, Eliezer M.
  • Harford, Jarrad
  • Tran, Anh L.

Abstract

Studies of institutional monitoring focus on the fraction of the firm held by institutions. We focus on the fraction of the institution׳s portfolio represented by the firm. In the context of acquisitions, we hypothesize that institutional monitoring will be greatest when the target firm represents a significant allocation of funds in the institution׳s portfolio. We show that this measure is important in reconciling mixed findings for total institutional ownership in the prior literature. The results indicate that our measure of institutional holdings leads to greater bid completion rates, higher premiums, and lower acquirer returns. This empirical evidence provides support for theories predicting a beneficial effect of blockholders in monitoring the firm in general and in enhancing the gains to takeover targets in particular.

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  • Fich, Eliezer M. & Harford, Jarrad & Tran, Anh L., 2015. "Motivated monitors: The importance of institutional investors׳ portfolio weights," Journal of Financial Economics, Elsevier, vol. 118(1), pages 21-48.
    • Handle: RePEc:eee:jfinec:v:118:y:2015:i:1:p:21-48
    DOI: 10.1016/j.jfineco.2015.06.014
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    Keywords

    Monitoring; Institutional investors; Mergers and acquisitions; Takeover premiums;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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