Institutional investors,corporate governance and the performance of the corporate sector

Proportions of equity held by institutional investors—pension funds, insurance companies and mutual funds—are rising across all OECD countries. Meanwhile institutions are becoming more influential in corporate governance, even in bank-dominated countries, inter alia due to international investment, pension reform and EMU. We provide two forms of evidence on the effects of institutional corporate governance on corporate performance. First we offer a literature survey on micro evidence, the outcome of which is mixed, but on balance suggesting a positive effect on equity returns. We contend that these micro studies face a difficulty that they cannot capture effects of governance initiatives whose effects go wider than “target firms”. Accordingly, we present results for the reduced form empirical relationship between institutional share holding and corporate sector performance at an economy-wide level. These are consistent with significant effects which differ between “Anglo-Saxon” and “relationship banking” countries. For example, institutions appear to accompany lower investment and higher dividends in the former.