2018 GCGC

1-2 June 2018

Monitoring the Monitor: Distracted Institutional Investors and Board Governance


Ronald Masulis

Scientia Professor in Finance,¬†University of New South Wales  



Boards are crucial to shareholder wealth. Yet, little is known about how shareholder oversight affects director incentives. Using exogenous industry shocks to institutional investor portfolios, we find that institutional investor distraction weakens board oversight. Distracted institutions use their votes to discipline ineffective directors less frequently, and directors with poor proxy voting outcomes are less likely to depart. As a result, independent directors face weaker monitoring incentives, miss more meetings, and their boards hold fewer meetings. Also, ineffective independent directors are more frequently appointed. Such firms exhibit more earnings management, high unexplained CEO pay, and lower valuation. Our findings suggest that institutional investor monitoring creates important director incentives to monitor.

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