The Trading Competition among Multiple Short-term Institutional Blockholders for Corporate Governance Mechanism
MetadataShow full item record
Short-term institutions are the institutions that exhibit particularly high portfolio turnover rate. Guided by the theory in Edmans and Manso (2011), we hypothesize that the efficient price brought about by the trading competition among short-term institutional blockholders can serve as a corporate governance device. Three supportive empirical findings are presented. First, using industry-adjusted Tobin's q to proxy for the market valuation of the firm, we document a positive association between firm valuation and the number of short-term blockholders. Such positive relationship is robust to different model specifications, alternative classification method of short-term institutions, and econometrics treatments to endogeneity problems. Second, we provide evidence that stock prices of firms with more short-term blockholders are more efficient. Stock returns of firms with more short-term blockholders exhibit smaller magnitudes of autocorrelations and reflect more information about future earnings. Lastly, we show that price efficiency indeed is the channel through which the number of short-term blockholders improves firm valuation. In contrast to previous studies documenting unfavorable roles of short-term institutions in corporate governance, we show a balanced ownership structure among short-term institutional blockholders can add values to the invested firms.