Ownership Structure, Board Composition and Investors’ Protection : Evidence from S&P 500 Firms

Research Question/Issue: The level and effectiveness of investors' protection is considered to foster financial markets development and economic growth. While previous studies focused on the relationship between the institutional setting and investors' protection at country level, we investigate if ownership structure and board composition may significantly affect investors' protection at firm level. Research Findings/Insights: We collected data for S&P500 companies in the period between 2001 and 2006. Then we tested the impact of ownership structure and board composition on firm investors' protection. Our results show that the presence of institutional investors and of a large blockholder among shareholders has a positive impact on investors' protection. At the same time our results indicate that ratio of outside directors have a negative influence on the same variable. Theoretical/Academic Implications: Our study contributes to the development of corporate governance studies as it (i) indicates that some governance variables at firm level may influence investors' protection, (ii) shows that ownership structure is a complex variable that includes both the identity and the amount of shares owned, and (iii) questions the validity of some board recommendations founded on agency theory and encouraging a strong presence of outside directors. Practitioner/Policy Implications: Our results suggest policymakers to favor the presence and the activism of institutional investors as they may improve the investors' protection. At the same time, the study casts some doubts about the effectiveness of outside directors as good monitors and encourages both policymakers and companies to devote more attention to other governance variables