Institutional Trader Monitoring and Firm Performance

Abstract

Although recent research show that institutional informed trading can spur CEOs to work harder and reduce agency costs even for firms with dispersed ownership structure, it leaves unaddressed the ultimate impact of informed trading on firm value. This paper provides empirical evidence and finds that firm value indeed increases in institutional trader monitoring. In particular, the results confirm that the positive effect of institutional trader monitoring on firm value outweighs the negative effect of potentially increasing agency costs due to the reduced use of equity-based compensation to CEOs, revealed by Chen and Swan (2010). The results are robust to various measures of performance (stock returns, Tobin’s Q, and ROA) as well as to different specifications dealing with the issue of endogeneity.

Keywords: Wall Street Rule, Institutional investor monitoring, Firm performance, Corporate governance