Independent Boards and the Institutional Investors That Prefer Them : Drivers of Institutional Investor Heterogeneity in Governance Preferences

Institutional investors report that they prefer to invest in firms with greater board independencedespite the fact that researchers have been unable to demonstrate a link between boardindependence and firm performance. We investigate whether differences among institutionalinvestors affect these preferences. We find that trading strategies have some effect but that mutual funds — facing the strongest institutional pressures — have significantly stronger preferences for firms with greater board independence than do other types of institutional investors. This suggests that institutional investor preferences for independent boards are at least partially driven by institutional pressures rather than anticipated reductions in agency costs