The Role of Institutional Investors in the Governance of Firms: A Test of Competing Power and Agency Models

The rising voice of institutional investors in the governance of U.S. corporations has been widely cited in the popular and academic press. Implicit in much of this literature has been a power perspective on the role of institutions. In essence, the power perspective identifies increased governance by institutional investors as a necessary precursor to tighter internal firm governance. By contrast, positivist agency theory identifies institutional governance as a substitute for tighter internal firm governance. Irrespective of the underlying rationale, however, the likelihood that any given institutional investor would take a greater role in firm governance is expected to vary according to the type, size and ideology of the institution. This likelihood is expected to moderate any relationship between institutional governance and internal firm governance. A sample of 275 firms from the 1995 Fortune 800 is used to test the resulting hypotheses through the use of partial least squares structural equation modeling. The evidence provides support for the positivist agency theory logic of institutional governance as a substitute for internal governance. Moreover, institutions do vary in their propensity to provide governance. Mutual funds do appear to be the type of institution most likely to provide governance. Similarly, large institutions are also more likely to provide governance than smaller institutions. However, institutions with an 'activist' ideology are unlikely to provide governance in the form explored in this research. Thus, public forms of activism---such as those conducted through annual meetings and media releases---may actually substitute for less detectable means of governance. In general, the results suggest that the emphasis on an apparently 'inefficient' role played by institutional investors in firm governance (e.g., O'Barr & Conley, 1992; Davis & Thompson, 1994) may not be representative of all institutions. In general, efficiency seems to be the driver of increased governance by institutional investors.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Business Administration

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2015

Author dc:creator

• Bowden, Stephen Graeme

Contributors dc:contributor

• Anju Seth

• Business Administration, Management

Language dc:language

eng

Identifier

(MiAaPQ)AAI9955590

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/84608