When Financial Institutions are Large Shareholder : The Role of Macro Corporate Governance Environments

While financial institutions' aggregate investments have grown substantially across world equity markets, the size of their individual shareholdings, and ultimately their incentive to monitor, can be limited by the free-rider problem, investment regulations and a preference for diversification and liquidity. We compare institutional shareholding patterns across countries and find vast differences in the extent to which institutions are large shareholders. More importantly, we find that after controlling for regulations and characteristics of the institutional investment industry, these variations are determined by macro corporate governance factors such as shareholder protection, law enforcement and corporate disclosure requirements. Our results suggest that strong macro governance environments act to strengthen intervention ability and reduce monitoring costs such that more institutions are encouraged to hold concentrated equity positions. Overall, our results highlight a link between the 'Law and Finance' and 'Institutional Activism' streams of literature