Internalizing Governance Externalities: The Role of Institutional Cross-ownership

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We analyze the role of institutional cross-ownership in internalizing corporate governance externalities using data on mutual fund proxy voting. Exploiting the variation in cross-ownership across institutions for the same firm at the same time as well as the variation in cross-ownership across firms within the same institution’s portfolio, we show that an institution’s holdings in peer firms increase the likelihood that the institution votes against management in shareholder-sponsored governance proposals. This relation is stronger for firms whose managers are likely to have more outside opportunities. Consistent with a causal interpretation of our results, we find that increases in cross-ownership induced by financial institution mergers lead to a higher likelihood that the acquirer institution votes against management. We further show that high aggregate cross-ownership positively predicts management losing a vote. Overall, our evidence suggests that institutional cross-ownership improves governance by alleviating the inefficiency resulting from corporate governance externalities.

Author(s):

Jie He    
Terry College of Business, University of Georgia
United States

Jiekun Huang    
University of Illinois at Urbana-Champaign
United States

Shan Zhao    
Grenoble Ecole de Management
France