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When Financial Intermediaries are Corporate Owners: An Agency Model of Institutional Ownership

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  • Marguerite Schneider

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    Abstract

    Increasingly, the equity investments of individual investors are being channeled through financial institutions. This article posits that the role of institutional owners as financial intermediaries, and the resulting complexity that institutions bring to ownership, distinguish institutional ownership from individual ownership. I develop a model of institutional ownership, referred to as the nexus agency model (NAM), which reflects this complexity. The model provides a framework for identifying the potential additional agency costs to beneficial owners that are associated with owning via financial institutions. The degree to which owning via institutions benefits individual owners depends on the adequacy of the legal and regulatory environment and governance mechanisms in protecting individual owners' interests. The applicability of the nexus model to different institutional owner types is then demonstrated in a discussion of U.S. public and private pension plans and mutual funds, leading to the generation of a NAM-based research agenda for each type and across the types. The article ends with discussion of the model's applicability to non-U.S. institutional environments. Copyright Kluwer Academic Publishers 2000

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    Bibliographic Info

    Article provided by Springer in its journal Journal of Management and Governance.

    Volume (Year): 4 (2000)
    Issue (Month): 3 (September)
    Pages: 207-237

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    Handle: RePEc:kap:jmgtgv:v:4:y:2000:i:3:p:207-237

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    Web page: http://www.springerlink.com/link.asp?id=102940

    Related research

    Keywords: agency theory; governance; institutional ownership; mutual funds; pension plans;

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    1. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
    2. Henry G. Manne, 1965. "Mergers and the Market for Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 73, pages 110.
    3. David, Parthiban & Kochhar, Rahul, 1996. "Barriers to effective corporate governance by institutional investors: Implications for theory and practice," European Management Journal, Elsevier, vol. 14(5), pages 457-466, October.
    4. Douglas W. Diamond, 1996. "Financial intermediation as delegated monitoring: a simple example," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 51-66.
    5. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
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    7. Noorderhaven, N.G., 1992. "The problem of contract enforcement in economic organization theory," Open Access publications from Tilburg University urn:nbn:nl:ui:12-178465, Tilburg University.
    8. Chamberlain, Trevor W & Gordon, Myron J, 1991. "The Investment, Financing and Control of the Firm: A Long-Run Survival View," Cambridge Journal of Economics, Oxford University Press, vol. 15(4), pages 393-403, December.
    9. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-64, April.
    10. Zvi Bodie & John B. Shoven & David A. Wise, 1988. "Pensions in the U.S. Economy," NBER Books, National Bureau of Economic Research, Inc, number bodi88-1, July.
    11. Torben Pedersen & Steen Thomsen, 1997. "European Patterns of Corporate Ownership: A Twelve-Country Study," Journal of International Business Studies, Palgrave Macmillan, vol. 28(4), pages 759-778, December.
    12. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    13. Draper, Dennis W. & Hoag, James W., 1978. "Financial Intermediation and the Theory of Agency," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(04), pages 595-611, November.
    14. Michael C. Jensen, 1968. "The Performance Of Mutual Funds In The Period 1945–1964," Journal of Finance, American Finance Association, vol. 23(2), pages 389-416, 05.
    15. Henry G. Manne, 1965. "Mergers and the Market for Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 73, pages 351.
    16. Mitchell, Olivia S & Smith, Robert S, 1994. "Pension Funding in the Public Sector," The Review of Economics and Statistics, MIT Press, vol. 76(2), pages 278-90, May.
    17. Wahal, Sunil, 1996. "Pension Fund Activism and Firm Performance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 1-23, March.
    18. Guercio, Diane Del & Hawkins, Jennifer, 1999. "The motivation and impact of pension fund activism," Journal of Financial Economics, Elsevier, vol. 52(3), pages 293-340, June.
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    Cited by:
    1. Doris Neuberger, 2005. "What’s Common to Relationship Banking and Relationship Investing? Reflections within the Contractual Theory of the Firm," Finance 0510001, EconWPA.
    2. Andreani, Ettore & Neuberger, Doris, 2004. "Relationship finance by banks and non-bank institutional investors: A review within the theory of the firm," Thuenen-Series of Applied Economic Theory 46, University of Rostock, Institute of Economics.
    3. Doris Neuberger, 2005. "What’s Common to Relationship Banking and Relationship Investing? Reflections within the Contractual Theory of the Firm," Finance 0510003, EconWPA.
    4. Hsien-Chang Kuo & Lie-Huey Wang & Hui-Wen Liu, 2012. "Corporate Governance and Capital Structure:Evidence from Taiwan SMEs," Review of Economics & Finance, Better Advances Press, Canada, vol. 2, pages 43-58, August.
    5. Doris Neuberger, 2005. "What’s Common to Relationship Banking and Relationship Investing? Reflections within the Contractual Theory of the Firm," Finance 0503001, EconWPA.

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