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The Influence of Pension Funds on Corporate Governance

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    Abstract

    Although pension funds have gained importance in the last two decades, their role has not been described in detail by economic models. This paper focusses on the scope of these institutional investors when they are not satisfied with a management team of a company in which the pension fund holds a block of shares. Stock holdings by pension funds are largely dispersed. Therefore, any intervention by pension funds in corporate governance requires the formation of a coalition of pension funds. The realization of a coordinated intervention, in turn, is subject to the problems related to the provision of public goods, such as free-riding. We find that stock dispersion among pension funds, the amount of noise traders, coordination costs and the attractiveness of the exit option are relevant factors for successful interventions. The overall probability for a successful intervention, however, is quite low.

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    Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 07/63.

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    Length: 26 pages
    Date of creation: Jan 2007
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    Handle: RePEc:eth:wpswif:07-63

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    Keywords: Pension Funds; Public Goods; Coase Theorem;

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    1. Palfrey, Thomas R. & Rosenthal, Howard, 1984. "Participation and the provision of discrete public goods: a strategic analysis," Journal of Public Economics, Elsevier, Elsevier, vol. 24(2), pages 171-193, July.
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    3. Guercio, Diane Del & Hawkins, Jennifer, 1999. "The motivation and impact of pension fund activism," Journal of Financial Economics, Elsevier, Elsevier, vol. 52(3), pages 293-340, June.
    4. Crespi, R. & Renneboog, L.D.R., 2000. "United we stand: Corporate Monitoring by Shareholder Coalitions in the UK," Discussion Paper, Tilburg University, Center for Economic Research 2000-18, Tilburg University, Center for Economic Research.
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    7. Shleifer, Andrei & Vishny, Robert W., 1986. "Large Shareholders and Corporate Control," Scholarly Articles 3606237, Harvard University Department of Economics.
    8. Prevost, Andrew K & Rao, Ramesh P, 2000. "Of What Value Are Shareholder Proposals Sponsored by Public Pension Funds?," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 73(2), pages 177-204, April.
    9. Faccio, Mara & Lasfer, M. Ameziane, 2000. "Do occupational pension funds monitor companies in which they hold large stakes?," Journal of Corporate Finance, Elsevier, Elsevier, vol. 6(1), pages 71-110, March.
    10. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 323-29, May.
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