GLOBAL - The growing dominance of equity holdings by institutional investors, both domestic and international, is casting a sharp focus on their activities and owners and monitors of firms, according to a pensions academic in a new paper.
E Philip Davis of Brunel University says proportions of equity held by institutional investors are rising across all OECD countries.
In a paper, ‘Institutional investors, corporate governance and the performance of the corporate sector’, Davis argues that theory and empirical work on corporate governance suggests that institutions’ typical stakes of up to 5% are precisely those needed to encourage an improvement in company performance.
Davis says: “The Anglo-Saxon countries are showing an increase in direct influence of institutions in place of the previous reliance on the takeover mechanism to discipline managers.
“Whereas the systems in Continental Europe and Japan remain more firmly in the bank-relationship based governance paradigm, such differences should not be exaggerated, and some convergence is discernible on a modified form of the Anglo Saxon paradigm where institutions are the primary actors in corporate governance generally. In Europe, EMU will provide a major spur to such convergence.”
Davis concludes that by improving corporate governance, institutions could boost not only the share price and performance of the companies they invest in, but also elements of corporate sector performance detectable at a macroeconomic level.
He adds that empirical results link the development of institutional investors to important indicators of corporate sector performance, suggesting increased dividend distribution, less fixed investment and higher productivity growth.
“Results suggest that life insurers and pension funds are most influential. The fact that we include conventional determinants of the variables in question underpins our results,” Davis said.
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