On Local Investors and Corporate Governance
By Professor Dr. Alexandra Niessen-Ruenzi, Associate Professor of Finance at the University of Mannheim, member of the Council on Business & Society
Our key conjecture is that in an economic setting where monitoring costs vary inversely with distance, firms with high local institutional ownership would have better governance characteristics.
In particular, firms with more proximate shareholders would exhibit a lower propensity to engage in undesirable corporate behavior like option backdating or aggressive earnings management.
As a result of better monitoring, firms with high local institutional ownership would have a lower propensity to be a target of class action lawsuits.
Because of geographical proximity, local institutions are more likely to attend shareholder meetings and introduce shareholder proposals, facilitate CEO turnover, or limit excess CEO pay.
This form of local activism could also have an indirect influence on the selection of board members and the structure of compensation contracts.
Read the full paper: “Local Investors and Corporate Governance” at the Social Science Research Network