Voting with their feet or activism? Institutional investors’ impact on CEO turnover

We examine the relation between institutional investors and management discipline over the last several decades to better understand how CEO turnover has increased. Using a sample of forced and voluntary turnovers, we investigate the changing roles of activism and exit among institutional investors between 1982-1994 and 1995-2006. We find evidence of activist investors throughout the sample period and their impact is consistently significant in multivariate analysis. In contrast, voting with their feet has declined to the point where it no longer affects turnover outcomes. Nonetheless, activism is fairly uncommon and does not explain the higher turnover observed over time. Block holdings of known activists have increased and are linked to improving target firms. However, other blocks merely reflect the increasing size of institutional money managers. Going forward, the increasing size of institutional investors seems likely to inhibit voting with their feet while activism remains an important vehicle for change.     

Analysts' Forecasts Following Forced CEO Changes

This paper examines analysts' earnings forecasts during the period of uncertainty following a change of chief executive officer (CEO). It distinguishes between forced and non‐forced CEO changes, and examines whether analysts utilize their information advantage to reduce the heightened uncertainty of a forced change of CEO. Examining a sample of Australian companies followed by analysts between 1999 and 2009, we find that forecasting accuracy is lower and earnings forecasts are more optimistic for firms experiencing forced CEO turnover compared to firms not undergoing such a change. However, dispersion is not statistically different. The results suggest that forced CEO turnover events provide a challenge to the forecasting environment for analysts. During CEO changes, investors should be aware that forecasts are less accurate and have an optimistic bias.     

Institutional trading,information production,and forced CEO turnovers

We analyze transaction-level data on institutional trading and examine information flows around CEO turnovers. We find that institutional trading prior to a CEO turnover is positively related to the nature of a CEO turnover (forced versus voluntary). We further find that institutions produce information partly by analyzing insider trading prior to a CEO turnover, though they are able to produce additional information independently as well. Finally, we find that trading by institutions after a forced CEO turnover with an insider as successor CEO is positively related to subsequent long-run stock returns, and realizes significant abnormal trading profits. Overall, our results are consistent with the notion that information production by institutions, and their trading making use of this information, improves the information environment around CEO turnovers.     

Heterogeneous institutional investors and CEO compensation

This paper examines the relationship between institutional ownership and executive compensation by taking into account the heterogeneity of institutional investors. The paper finds that ownership by transient institutional investors, who have short investment horizons and active trading, is positively related to the performance sensitivity of option grants for CEOs. However, no significant relationship holds for other types of institutions, including those dedicated institutional investors, who have longer horizon and concentrated holdings. Further tests suggest that the positive relationship between transient institutional ownership and the CEO pay-for-performance sensitivity is not driven by the trading behavior of transient institutional investors when stock performance is good. Instead, the paper documents preference of transient institutional investors for greater performance sensitivity of option grants for CEOs. After using an instrument approach to control for preference and endogeneity, transient institutional ownership is no longer significantly related to the CEO pay-for-performance sensitivity. Additionally, the paper does not find dedicated institutional investors serve a monitoring role in correcting overcompensation paid to CEOs. After controlling for preference and endogeneity, neither the level of salary nor the level of total direct compensation for CEOs is significantly related to dedicated institutional ownership. The findings suggest that on average the influence of institutional investors on CEO compensation occurs indirectly through their preference in line with their different investment types.     

Disagreement-induced CEO turnover

We propose and test a new explanation for forced CEO turnover, and examine its implications for the impact of firm performance on CEO turnover. Investors may disagree with management on optimal decisions due to heterogeneous prior beliefs. Theory suggests that such disagreement may be persistent and costly to firms; we document that this induces them to sometimes replace CEOs who investors disagree with, controlling for firm performance. A lower level of CEO-investor disagreement serves to partially “protect” CEOs from being fired, thus reducing turnover-performance sensitivity, which we also document. We also show that firms are more likely to hire an external CEO as a successor if disagreement with the departing CEO is higher. Disagreement declines following forced CEO turnover. Using various empirical strategies, we rule out other confounding interpretations of our findings. We conclude that disagreement, independently of firm performance, affects forced CEO turnover.     

Managerial succession and firm performance

We examine CEO turnover and firm financial performance. Accounting measures of performance relative to other firms deteriorate prior to CEO turnover and improve thereafter. The degree of improvement is positively related to the level of institutional shareholdings, the presence of an outsider-dominated board, and the appointment of an outsider (rather than an insider) CEO. Turnover announcements are associated with significantly positive average abnormal stock returns, which are in turn significantly positively related to subsequent changes in accounting measures of performance. This suggests that investors view turnover announcements as good news presaging performance improvements.     

Do company visits by institutional investors mitigate managerial myopia in R&D investment? Evidence from China

This study investigates the effects of company visits by institutional investors on managerial myopia about investment in research and development (R&D) in China. We find that company visits increase R&D spending. We also find that this increase is more pronounced for companies that have an entrenched chief executive officer (CEO), as indicated by longer CEO tenure and CEO duality, and for companies that face less intense market competition. The results further show that the increase in R&D spending is more pronounced for companies that have larger institutional ownership, are invested by long-term oriented institutions, are in the high-tech industry, and are state owned. These findings attest to the governance role of institutional investors.     

CEO compensation,family control,and institutional investors in Continental Europe

This paper investigates the impact of family control and institutional investors on CEO pay packages in Continental Europe, using a dataset of 754 listed firms with 3731 firm-year observations from 14 countries during 2001–2008. We find that family control curbs the level of CEO total and cash compensation, and the fraction of equity-based compensation. Moreover, we do not observe a significant effect of family control on the excess level of total and cash compensation. This evidence indicates that controlling families do not use CEO compensation to expropriate wealth from minority shareholders. We show that institutional ownership is associated with higher levels of CEO cash and total compensation in Continental Europe, especially in family firms. Also, foreign institutional investors have a positive and significant impact on CEO compensation level. Finally, results indicate that institutional investors affect CEO pay structure: they increase the use of equity-based compensation in both family and non-family firms.     

Does foreign institutional ownership motivate firms in an emerging market to increase voluntary disclosure? Evidence from Taiwan

This study examines the relationship between foreign institutional ownership and voluntary disclosure in an emerging market. By exploiting a unique dataset of daily foreign investment flow and ownership data from Taiwan, this paper examines whether foreign ownership is associated with the likelihood of holding conference calls and investigates whether conference calls are informative to foreign market participants. After controlling for other characteristics of a firm??s information environment, we find that the decision to hold conference calls is positively associated with foreign institutional ownership. We also provide evidence that the trading turnover by foreign institutional investors immediately increases after the conference calls, indicating that conference calls are informative for foreign institutional investors. Our results are robust, after controlling for endogeneity.     

Executive turnover in UK firms: the impact of Cadbury

This study examines whether the Cadbury Committee recommendations regarding board structure have increased the power of boards to replace poorly performing CEOs. It also looks at whether institutional investors have become more proactive in this regard post-Cadbury. The study employs a comprehensive sample of UK listed firms between 1990 and 1995. Firm performance, CEO ownership and institutional ownership are found to be significantly related to the probability of non-routine top executive turnover. It appears that the managerial labour market is disciplining managers more quickly after Cadbury. However, there is no evidence that this is because boards have become more likely to remove CEOs following poor performance. Neither is any evidence found to support the assertions of institutional investors who claim to be more proactive since Cadbury. It is concluded that neither the Cadbury board structure reforms, nor the professed change in behaviour of institutional investors, has reduced the agency problem of managerial entrenchment in large UK firms.     

Institutional Monitoring and REIT CEO Compensation

Our objective in this paper is to investigate the relationship between institutional ownership and CEO compensation structure of REITs. Based on detailed analyses of data on institutional ownership, performance, CEO and board characteristics over the 10 year period 1998–2007, we find significant evidence that large institutions influence governance through CEO compensation—greater institutional ownership is associated with greater emphasis on incentive-based compensation (higher pay-performance sensitivity of CEO compensation), and higher cash and total compensation for CEOs. Further, we find that institutions are less active when managers are performing in a superior fashion. Two important conclusions emerge from the analysis. First, similar to unregulated firms, institutional owners do act as monitors in REITs. Broadly, this result suggests that governance is necessary for REITs. Second, institutional investors set a high pay-performance sensitivity for CEOs, but are willing to pay higher cash compensation to induce managers to take risk.     

Internal Monitoring Mechanisms and CEO Turnover: A Long-Term Perspective

We report evidence on chief executive officer (CEO) turnover during the 1971 to 1994 period. We find that the nature of CEO turnover activity has changed over time. The frequencies of forced CEO turnover and outside succession both increased. However, the relation between the likelihood of forced CEO turnover and firm performance did not change significantly from the beginning to the end of the period we examine, despite substantial changes in internal governance mechanisms. The evidence also indicates that changes in the intensity of the takeover market are not associated with changes in the sensitivity of CEO turnover to firm performance.     

Distribution of institutional ownership and corporate firm performance

We investigate the association between corporate firm performance and the level and stability of institutional ownership within a simultaneous equation model. Our main ownership stability measures include ownership persistence and the time-lengths over which investors hold non-zero shares or maintain their shareholding. We find that there is a positive relationship between firm performance and institutional ownership stability, accounting for the shareholding proportion. This relationship is robust to the employment of ownership turnover measures used in the literature and consistent with the view that stable institutional investors play an effective role in monitoring. When we disaggregate institutional investors into pressure-insensitive and pressure-sensitive categories, we find that stable shareholding of each group has a positive impact on performance, with the first group exerting a larger effect. The channels of the effect include, but are not limited to, decreased information asymmetry and increased incentive-based compensation.     

The diffusion of corporate governance to emerging markets: Evaluating two dimensions of investor heterogeneity

This study investigates whether foreign institutional investors can enhance shareholder value in emerging markets. We pay special attention to two dimensions of investor heterogeneity: whether investors declare themselves to be activists, and whether activists come from countries with strong traditions of investor activism (identified by the incidence of hostile takeovers in their respective home countries). First, using an event study approach with regard to announcements of block purchases by foreign institutional investors in Korea, we find that stock prices increase only when foreign institutional investors declare themselves to be activists (increasing on average by 3% over a 20-day window). Second, we find that positive stock price reactions are more pronounced when the activist investors come from source countries with strong traditions of investor activism (increasing on average by 7% over a 20-day window). Third, we find that target firms are more likely to reduce cash holdings, raise leverage ratios, and peg dividend payouts, stock repurchases, and CEO turnover more closely to changes in earnings, but only if foreign activists come from countries with strong traditions of activism. We address possible selection bias by propensity score matching.     

Investor Sophistication and the Mispricing of Accruals

This paper examines the role of institutional investors in the pricing of accruals. Using Bushee;s (1998) classification of institutional investors, we show that firms with a high level of institutional ownership and a minimum threshold level of active institutional traders have stock prices that more accurately reflect the persistence of accruals. This result holds after controlling for differences in the persistence of accruals between firms with high and low institutional ownership, and after controlling for other characteristics that are correlated with institutional ownership and future returns. Additionally, firms with low institutional ownership are smaller, less profitable, and have lower share turnover, suggesting that limits to arbitrage impede institutional investors from exploiting the seemingly large abnormal returns for these firms.     

Local institutional investors,information asymmetries,and equity returns

We examine the informational role of geographically proximate institutions in stock markets. We find that both the level of and change in local institutional ownership predict future stock returns, particularly for firms with high information asymmetry; in contrast, such predictive abilities are relatively weak for nonlocal institutional ownership. The local advantage is especially evident for local investment advisors, high local ownership institutions, and high local turnover institutions. We also find that the stocks that local institutional investors hold (trade) earn higher excess returns around future earnings announcements than those that nonlocal institutional investors hold (trade).     

Herding and Feedback Trading by Institutional and Individual Investors

We document strong positive correlation between changes in institutional ownership and returns measured over the same period. The result suggests that either institutional investors positive-feedback trade more than individual investors or institutional herding impacts prices more than herding by individual investors. We find evidence that both factors play a role in explaining the relation. We find no evidence, however, of return mean-reversion in the year following large changes in institutional ownership—stocks institutional investors purchase subsequently outperform those they sell. Moreover, institutional herding is positively correlated with lag returns and appears to be related to stock return momentum.     

Equity Issuance,CEO Turnover and Corporate Governance

There is substantial evidence on the effect of external market discipline on chief executive turnover decisions in poorly performing companies. In this study we present evidence on the role of institutional monitoring in these decisions through the equity issuance process. We find that firms which undertake equity offerings are associated with an increased rate of forced CEO turnover that is focused on the managers of poorly performing companies. At the same time, equity offerings increase the likelihood of a new CEO being appointed from outside the current management team. We also provide evidence that independent boards are more likely to forcibly remove CEOs from their position, although this is not conditional on poor performance.     

机构投资者能抑制上市公司商誉减值风险吗？——基于中国A股市场的经验证据

巨额商誉减值风险是资本市场系统性风险的重要诱因之一。本文以2011—2018年中国A股上市公司为样本,检验机构投资者持股对上市公司商誉减值风险的影响。研究发现,机构投资者持股能够显著抑制上市公司计提商誉减值的风险。分类来看,相比非独立机构投资者,以证券投资基金、社保基金及QFII为代表的独立性机构投资者持股对商誉减值风险的抑制作用更显著。机制检验发现,机构投资者通过提供并购前咨询服务和改善公司并购后绩效来抑制商誉减值风险。本文研究揭示了机构投资者发挥了有效的监督治理功能,对防范商誉减值风险具有一定的启示意义。     

Does governance travel around the world? Evidence from institutional investors

We examine whether institutional investors affect corporate governance by analyzing portfolio holdings of institutions in companies from 23 countries during the period 2003–2008. We find that firm-level governance is positively associated with international institutional investment. Changes in institutional ownership over time positively affect subsequent changes in firm-level governance, but the opposite is not true. Foreign institutions and institutions from countries with strong shareholder protection play a role in promoting governance improvements outside of the U.S. Institutional investors affect not only which corporate governance mechanisms are in place, but also outcomes. Firms with higher institutional ownership are more likely to terminate poorly performing Chief Executive Officers (CEOs) and exhibit improvements in valuation over time. Our results suggest that international portfolio investment by institutional investors promotes good corporate governance practices around the world.