Public pension funds as shareholders and firm performance

Public pension funds are important shareholders around the world. How these funds manage their holdings is of a considerable interest. Are public pension funds likely to 'vote with their feet', or do they instead try to have an impact when they become dissatisfied with the performance of companies in their portfolios? This study thus tests two competing hypotheses on data from the Swedish pension system restructured at the turn of the millennium: 'exit', that is, sell underperforming company shares, or 'direct impact', that is, contribute actively to securing the resignation of underperforming CEOs and boards of directors. The findings indicate that public pension funds tend to sell their shares in underperforming companies, instead of seeking to influence them through corporate governance mechanisms that would increase the likelihood that underperforming CEOs or the boards of directors be replaced.