Working Paper: CEPR ID: DP7934
Authors: Assaf Hamdani; Yishay Yafeh
Abstract: We shed new light on the corporate governance role of institutional investors in markets where concentrated ownership and business groups are prevalent. When companies have controlling shareholders, institutional investors, as minority shareholders, can play only a limited role in corporate governance. Moreover, the presence of powerful families who control many public companies through business groups creates new potential sources of conflicts of interests for institutional investors. Using hand-collected data on voting patterns of institutional investors in Israel, we establish four main stylized facts: (1) Legal intervention plays an important role in shaping voting behavior; (2) Voting against company proposals is more likely in compensation-related proposals, even when institutional investors are unlikely to influence outcomes; (3) Institutional investors with certain other business activities (e.g. underwriting) and those affiliated with a public company or business group are more likely to support insider-sponsored proposals than "pure-play," stand-alone investors; and (4) Large firms tend to enjoy a more favorable treatment from institutional investors, whereas firm performance has virtually no impact on voting. One possible implication of these results is that, in order for institutions to play a role in corporate governance, what matters most is not the legal power granted to minority shareholders but rather the absence of conflicts of interest.
Keywords: business groups; corporate governance; corporate law; emerging markets; institutional investors; minority shareholders; mutual funds; shareholder activism
JEL Codes: G20; G30; K20; K22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Legal intervention (K41) | Voting behavior (D72) |
| Voting behavior (D72) | Institutional investor activism (G34) |
| Nature of the proposal (Y20) | Voting patterns (D72) |
| Business ties (L14) | Voting behavior (D72) |
| Firm size (L25) | Institutional support (I23) |
| Firm performance (L25) | Voting behavior (D72) |