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Institutional Investors, Corporate Governance and the Performance
of the Corporate Sector

E Philip Davis


Proportions of equity held by institutional investors are rising across all
OECD countries. Paradigms of corporate governance involving a key role
for institutions are market control via equity (the takeover sanction), market
control via debt (LBOs) and direct control via equity (corporate governance
activism). Even in countries where institutions are currently unimportant to
corporate governance (where relationship banking or direct control via debt
prevails) there are tendencies to switch towards these "Anglo Saxon"
approaches, inter alia due to pension reform and EMU. Existing evidence at a
micro level for favourable effects of the three Anglo-Saxon mechanisms on
corporate performance is mixed, but on balance positive. We contend that
these micro studies face a difficulty that they cannot capture effects of
governance initiatives going wider than "target firms". A better measure of
institutions' overall effect is analysis at a macro level. Accordingly, we present
results for the empirical relationship between institutional share holding and
corporate sector performance at an economy wide level. These are consistent
with marked effects, which often differ between "Anglo Saxon" and "relationship
banking" countries. For example, institutions appear to restrain investment and
boost dividends in the former.