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Delegated Monitoring, Institutional Ownership, and Corporate Misconduct Spillovers

Author

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  • Lel, Ugur
  • Martin, Gerald S.
  • Qin, Zhongling

Abstract

Upon the revelation of corporate misconduct by firms in their portfolios, institutional investors experience a significant discount in the market value of their portfolios, excluding misconduct firms, creating a short-term spillover that averages $92.7 billion losses per year. We examine an expansive set of channels under which this spillover to nontarget firms can occur, and find that it reflects the loss of the embedded value of monitoring by a common institutional owner, enforcement wave activity, and industry peer and business relationships. Institutional investors also experience a significant abnormal outflow of funds in the year following the misconduct event.

Suggested Citation

  • Lel, Ugur & Martin, Gerald S. & Qin, Zhongling, 2023. "Delegated Monitoring, Institutional Ownership, and Corporate Misconduct Spillovers," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 58(4), pages 1547-1581, June.
    • Handle: RePEc:cup:jfinqa:v:58:y:2023:i:4:p:1547-1581_5
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    Cited by:

    1. Changchun Tan & Leixin Liu & Huaqing Wu & Peng Zhou, 2024. "The real effect of CSRC's random inspections on corporate financial fraud," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(S1), pages 5009-5038, December.
    2. Qian Ding & Jinyu Chen & Wu Chen, 2026. "Can Common Institutional Ownership Govern CSR Decoupling? Evidence from China," Journal of Business Ethics, Springer, vol. 204(2), pages 309-334, March.

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