Monitoring by Transient Investors? Institutions and Corporate Control

Abstract

Do institutions monitor management? This paper argues that even if institutions do not actively monitor, monitoring results via the takeover market. Using 139 hostile attempts from 1985-1994, I show that higher levels of institutional ownership, primarily by mutual funds, increases bid probability. The level rather than the concentration of institutional ownership is the important factor. Also, successful acquisitions are more likely when institutions sell their shares. Further, institutions are not predicting likely targets; in fact, they are net sellers prior to the announcement. Even if institutions do not take an active role in corporate governance, institutional ownership results in increased monitoring, albeit through the market for corporate control.