Motives and Strategies of the Largest Investors: Influence on Corporate Governance

Concentration of corporate ownership has increased worldwide during recent years, especially in the holdings of the largest investors. The paper examines this trend in order to understand how changes in the stakes of the largest shareholders affect corporate governance and performance. In order to take into account the different goals and motives among institutional investors, the effects on corporate governance and performance attributable to the largest ownership stakes by traditional investment managers and by hedge funds are studied separately. A sample of non-financial companies from the Russell 3000 index indicates that the influence of the largest shareholders on corporate governance and performance depends on shareholders' motives and strategies. The authors employ regression analysis of panel data to construct an index of the quality of corporate governance, which then shows that traditional investment managers prefer to invest in companies that already have superior corporate governance and that these investors bring about further improvements in governance, which also benefit performance. The influence of hedge funds as the largest owners is the opposite. Hedge funds with large holdings tend to degrade corporate governance and have no effect on performance. This paper concludes that the different motives of large investors in a company become quite significant as ownership becomes increasingly concentrated.