Smart Investors or Myopic Traders? Governance Role of Institutional Investors at a M&A Wave

• Main Author: KIM, Changhyun
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2014
• Subjects: Business; Portfolio and Security Analysis; Strategic Management Policy
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research_smu/215; https://doi.org/10.5465/ambpp.2014.14500abstract
• Institution: Singapore Management University

Corporate governance scholars have emphasized monitoring by institutional investors as a primary mechanism for resolving agency problems. However, the shareholders of acquiring firms experienced substantial wealth destruction during the M&A wave in the late 1990s in spite of increasing institutional ownership. I hypothesize that this paradox is due to behavioral difference in two categories of institutional investors (transient vs. dedicated). Empirically, I find that transient institutional investors encouraged M&A activities even during the unproductive, value- destroying M&A wave in the late 1990s. Furthermore, the level of transient institutional investors’ ownership was negatively related to M&A performance measured by cumulative abnormal returns. By contrast, dedicated institutional investors did not significantly impact M&A performance. Overall, results suggest that during merger waves the monitoring by transient institutional investors fails to prevent shareholder value destruction and may actually encourage it.