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Skill or effort? Institutional ownership and managerial efficiency

Version 2 2024-06-06, 10:12
Version 1 2018-08-09, 10:55
journal contribution
posted on 2018-06-01, 00:00 authored by G A Baghdadi, I M Bhatti, L H G Nguyen, Edward Podolski
Using a sample of U.S. firms during the 1989–2015 period, we study whether the efficiency with which managers generate revenue is sensitive to monitoring by institutional shareholders. We find that institutional ownership is positively related to managerial efficiency. Our identification relies on a discontinuity in ownership around the Russell 1000/2000 Index threshold and suggests that the positive effect of institutional ownership on managerial efficiency is causal. Furthermore, we document that monitoring by institutions helps improve managerial efficiency, and that an exogenous increase in institutional ownership leads to higher pay-for-performance sensitivity. Finally, we find consistent results after excluding from our sample forced CEO turnovers, suggesting that institutional shareholders force incumbent managers to exert greater effort rather than influence the replacement of less efficient CEOs. Taken together, our findings highlight the important role played by institutional shareholders in getting the most out of corporate executives.

History

Journal

Journal of banking and finance

Volume

91

Pagination

19 - 33

Publisher

Elsevier

Location

Amsterdam, The Netherlands

ISSN

0378-4266

Language

eng

Publication classification

C Journal article; C1 Refereed article in a scholarly journal

Copyright notice

2018, Elsevier