Institutional Investors, Corporate Ownership, and Corporate Governance: Global Perspectives

Institutional investors, Corporate ownership, Corporate governance

Mutual Fund Tax Clienteles

Mutual funds are pooled investment vehicles with diverse tax clienteles. Whereas many mutual funds are held primarily by taxable investors, a significant fraction of mutual fund assets are held in tax-qualified retirement accounts. Our paper investigates whether the characteristics, investment strategies, and performance of mutual funds held by diverse tax clienteles differ. Examining both mutual fund income distributions and mutual fund holdings, we find that funds held primarily by taxable investors tend to be more tax-efficient than funds held primarily in tax-deferred retirement accounts. Despite these differences, we find no evidence that any investment constraints that may arise from the funds that pursue tax efficient management strategies result in performance differences between funds held by different tax clienteles.

Institutional Investors and Executive Compensation

Due to institutional investors' increasing ownership and interest in corporate governance, we hypothesize that the presence of institutional investors is associated with certain executive compensation structures. We find a significantly negative relation between the level of compensation and the concentration of institutional ownership, suggesting that institutions serve a monitoring role in the shareholder-manager agency problem. We further find a significantly positive relation between the pay-for-performance sensitivity of executive compensation and both the level and concentration of institutional ownership. These results suggest that the institutions act as a complement rather than a substitute to incentive compensation in mitigating the agency problem

Estimation risk and incentive contracts for portfolio managers

Includes bibliographical references (p. 30)

The importance of climate risks for institutional investors

According to our survey about climate risk perceptions, institutional investors believe climate risks have financial implications for their portfolio firms and that these risks, particularly regulatory risks, already have begun to materialize. Many of the investors, especially the long-term, larger, and ESG-oriented ones, consider risk management and engagement, rather than divestment, to be the better approach for addressing climate risks. Although surveyed investors believe that some equity valuations do not fully reflect climate risks, their perceived overvaluations are not large

Indexing and active fund management: International evidence

Author's pre-printWe examine the relation between indexing and active management in the mutual fund industry worldwide. Explicit indexing and closet indexing by active funds are associated with countries’ regulatory and financial market environments. We find that actively managed funds are more active and charge lower fees when they face more competitive pressure from low-cost explicitly indexed funds. A quasi-natural experiment using the exogenous variation in indexed funds generated by the passage of pension laws supports a causal interpretation of the results. Moreover, the average alpha generated by active management is higher in countries with more explicit indexing and lower in countries with more closet indexing. Overall, our evidence suggests that explicit indexing improves competition in the mutual fund industry.Inquire Europe, European Research Counci

ESG Shareholder Engagement and Downside Risk

We show that engagement on environmental, social, and governance issues can benefit shareholders by reducing firms’ downside risks. We find that the risk reductions (measured using value at risk and lower partial moments) vary across engagement types and success rates. Engagement is most effective in lowering downside risk when addressing environmental topics (primarily climate change). Further, targets with large downside risk reductions exhibit a decrease in environmental incidents after the engagement. We estimate that the value at risk of engagement targets decreases by 9% of the standard deviation after successful engagements, relative to control firms

Intensification differentially affects the delivery of multiple ecosystem services in subtropical and temperate grasslands

Intensification, the process of intensifying land management to enhance agricultural goods, results in “intensive” pastures that are planted with productive grasses and fertilized. These intensive pastures provide essential ecosystem services, including forage production for livestock. Understanding the synergies and tradeoffs of pasture intensification on the delivery of services across climatic regions is crucial to shape policies and incentives for better management of natural resources. Here, we investigated how grassland intensification affects key components of provisioning (forage productivity and quality), supporting (plant diversity) and regulating services (CO2 and CH4 fluxes) by comparing these services between intensive versus extensive pastures in subtropical and temperate pastures in the USDA Long-term Agroecosystem Research (LTAR) Network sites in Florida and Oklahoma, USA over multiple years. Our results suggest that grassland intensification led to a decrease in measured supporting and regulating services, but increased forage productivity in temperate pastures and forage digestibility in subtropical pastures. Intensification decreased the net CO2 sink of subtropical pastures while it did not affect the sink capacity of temperate pastures; and it also increased environmental CH4 emissions from subtropical pastures and reduced CH4 uptake in temperate pastures. Intensification enhanced the global warming potential associated with C fluxes of pastures in both ecoregions. Our study demonstrates that comparisons of agroecosystems in contrasting ecoregions can reveal important drivers of ecosystem services and general or region-specific opportunities and solutions to maintaining agricultural production and reducing environmental footprints. Further LTAR network-scale comparisons of multiple ecosystem services across croplands and grazinglands intensively vs extensively managed are warranted to inform the sustainable intensification of agriculture within US and beyond. Our results highlight that achieving both food security and environmental stewardship will involve the conservation of less intensively managed pastures while adopting sustainable strategies in intensively managed pastures

Conflicts of Interest in Sell-side Research and The Moderating Role of Institutional Investors

Because sell-side analysts are dependent on institutional investors for performance ratings and trading commissions, we argue that analysts are less likely to succumb to investment banking or brokerage pressure in stocks highly visible to institutional investors. Examining a comprehensive sample of analyst recommendations over the 1994-2000 period, we find that analysts’ recommendations relative to consensus are positively associated with investment banking relationships and brokerage pressure, but negatively associated with the presence of institutional investor owners. The presence of institutional investors is also associated with more accurate earnings forecasts and more timely re-ratings following severe share price falls