Aggarwal, Reena, Erel, Isil, Ferreira, Miguel A. and Matos, Pedro P., Does Governance Travel around the World? Evidence from Institutional Investors (October 5, 2009) claims paper may be “the first to establish a direct link between international portfolio investment and the adoption of better corporate governance standards that promote corporate accountability and empower shareholders worldwide.”
The authors examine whether institutional investors affect corporate governance by analyzing institutional holdings in companies from 23 countries during the period 2003- 2008. They find that foreign institutional investors and institutions from countries with strong shareowner protection are the main promoters of good governance outside of the U.S., especially for firms located in civil-law countries.
The authors also provide evidence that institutional ownership has a direct effect on corporate governance outcomes, functioning as a disciplinary mechanism in terminating poorly performing CEOs. Furthermore, increases in institutional ownership lead to increases in firm valuation, suggesting that institutional investment not only affects governance mechanisms, but also has real effects on firm value and board decisions.
In light of the recent Supreme Court decision in Citizens United, I also found very interesting their finding that “a particular aspect of foreign institutions that seems to be important is their independence with respect to the local corporate management.” Will the voice of institutional investors still be heard as the political voice of management increases?