XXVI Edition

14-15-16 December 2017"

Monitoring for Learning by Institutional Investors: Theory and Evidence

Zhang Jingyu, Imperial College London

This paper revisits information acquisition theory from a corporate governance perspective and enriches the set of feasible empirical tests for information acquisition theory. I provide a simplified model, joining theoretical frameworks of external governance and information acquisition, to understand the intrinsic link between monitoring and learning activities of institutional investors. Institutional investors can enhance firm fundamental values through costly monitoring, while their portfolio decisions are determined by endogenous information acquisition. Both within-firm complementarity and cross-firm substitutability between monitoring and information acquisition are developed through the “monitoring-for-learning” mechanism. Compared with the baseline case, within-firm complementarity suggests investors optimally re-allocate monitoring effort from firms with low value of information acquisition to those with high value of information acquisition. Accordingly, the model predicts that institutional investors tend to acquire more precise information about the firms they can more effectively engage with and about those they initially hold larger stakes in. Consistent with recent empirical findings about distracted investor attention, cross-firm substitutability suggests that monitoring attention to certain firms be squeezed out when attention for information acquisition has been substantially attracted to other firms. Suggestive empirical evidence is provided to support these predictions.

Area: Young Economists Session (YES award)

Keywords: Institutional Investors, Corporate Governance, Information Acquisition

Paper file

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