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Delegated Monitoring, Institutional Ownership, and Corporate Misconduct Spillovers

Published online by Cambridge University Press:  12 August 2022

Ugur Lel Open the ORCID record for Ugur Lel [Opens in a new window] ,
Gerald S. Martin Open the ORCID record for Gerald S. Martin [Opens in a new window]  and
Zhongling Qin Open the ORCID record for Zhongling Qin [Opens in a new window]
Ugur Lel*
Affiliation:
University of Georgia Terry School of Business
Gerald S. Martin
Affiliation:
American University Kogod School of Business gmartin@american.edu
Zhongling Qin
Affiliation:
Auburn University Harbert School of Business zzq0018@auburn.edu
*
ulel@uga.edu (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

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Upon the revelation of corporate misconduct by firms in their portfolios, institutional investors experience a significant discount in the market value of their portfolios, excluding misconduct firms, creating a short-term spillover that averages $92.7 billion losses per year. We examine an expansive set of channels under which this spillover to nontarget firms can occur, and find that it reflects the loss of the embedded value of monitoring by a common institutional owner, enforcement wave activity, and industry peer and business relationships. Institutional investors also experience a significant abnormal outflow of funds in the year following the misconduct event.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 4 , June 2023 , pp. 1547 - 1581
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We acknowledge helpful comments from Jie (Jack) He, Mariesa Ho, Jonathan Karpoff, Steve Malliaris, Jeff Netter, Mattias Nilsson, Annette Poulsen, Albert Wang, and participants at the University of Georgia, 2020 Financial Management Association Meeting, and the 2018 US SEC Doctoral Student Symposium.

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