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The Agency Problems of Institutional Investors

The Journal of economic perspectives, 2017-07, Vol.31 (3), p.89-112 [Peer Reviewed Journal]

Copyright © 2017 American Economic Association ;Copyright American Economic Association Summer 2017 ;ISSN: 0895-3309 ;EISSN: 1944-7965 ;DOI: 10.1257/jep.31.3.89

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  • Title:
    The Agency Problems of Institutional Investors
  • Author: Bebchuk, Lucian A. ; Cohen, Alma ; Hirst, Scott
  • Subjects: Activists ; Corporate governance ; Corporations ; Financial investments ; Financial portfolios ; Hedge funds ; Incentives ; Index funds ; Institutional investments ; Investment advisors ; Investment funds ; Investment management companies ; Investment portfolios ; Investment strategies ; Investors ; Management ; Mutual funds ; Ownership ; Portfolio management ; Public enterprise ; Stockholders ; Symposium: The Modern Corporation
  • Is Part Of: The Journal of economic perspectives, 2017-07, Vol.31 (3), p.89-112
  • Description: Financial economics and corporate governance have long focused on the agency problems between corporate managers and shareholders that result from the dispersion of ownership in large publicly traded corporations. In this paper, we focus on how the rise of institutional investors over the past several decades has transformed the corporate landscape and, in turn, the governance problems of the modern corporation. The rise of institutional investors has led to increased concentration of equity ownership, with most public corporations now having a substantial proportion of their shares held by a small number of institutional investors. At the same time, these institutions are controlled by investment managers, which have their own agency problems vis-à-vis their own beneficial investors. We develop an analytical framework for understanding the agency problems of institutional investors, and apply it to examine the agency problems and behavior of several key types of investment managers, including those that manage mutual funds—both index funds and actively managed funds—and activist hedge funds. We show that index funds have especially poor incentives to engage in stewardship activities that could improve governance and increase value. Activist hedge funds have substantially better incentives than managers of index funds or active mutual funds. While their activities may partially compensate, we show that they do not provide a complete solution for the agency problems of other institutional investors.
  • Publisher: Nashville: American Economic Association
  • Language: English
  • Identifier: ISSN: 0895-3309
    EISSN: 1944-7965
    DOI: 10.1257/jep.31.3.89
  • Source: ProQuest Central
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