Monitoring: Which Institutions Matter?

TLDR

The study hypothesizes that independent long‑term investors specialize in monitoring and influencing rather than trading. The study finds that only concentrated holdings by independent long‑term institutions are linked to better post‑merger performance, that their presence increases the likelihood of withdrawing bad bids, that they adjust portfolios long‑term rather than trade short‑term, and that their monitoring yields both private and shared benefits, while aggregate holdings obscure this effect.

Abstract

Within a cost-benefit framework, we hypothesize that independent institutions with long-term investments will specialize in monitoring and influencing efforts rather than trading. Other institutions will not monitor. Using acquisition decisions to reveal monitoring, we show that only concentrated holdings by independent long-term institutions are related to post-merger performance. Further, the presence of these institutions makes withdrawal of bad bids more likely. These institutions make long-term portfolio adjustments rather than trading for short-term gain and only sell in advance of very bad outcomes. We conclude that independent long-term institutions actively monitor and benefit from their efforts. This benefit has both private and shared components. Examining total institutional holdings or even concentrated holdings by other types of institutions masks important variation in the subset of monitoring institutions.