This paper aims to provide a summarize review of recent empirical research, in the field of corporate governance and its relation to performance of firms. Specifically, the focus is on the role of institutional owners in the conflict between controlling shareholders and minority owners. The paper also contributes to the literature on corporate governance and performance by providing some discussion on the statistical methods used in most empirical investigations. Summing up recent studies in the evaluation of firms’ investment performance has shown significant differences in the valuation of firms, depending on the market expectations and industry affiliation. Focusing on the role of institutional owners in relation to firms’ investment performance, the existing empirical evidence suggest that institutional owners have a positive influence on firms’ investment performance. Studies that looks at the role of institutional owners from the perspective of dividend policy has shown that institutional owners demand higher dividends to compensate for aggravated agency conflicts due to vote-differentiated shares. A large body of research investigates the performance of firms from a long run perspective. These studies demonstrate that profits converge over time, but the convergence is incomplete. Investment in R&D is often put forward as an explanation for persistent profits above the norm. Looking at individual mutual funds, and specifically how to measure risk-adjusted performance, investigations generally show that mutual funds underperform in relation to their market benchmark, even when risk-adjusted to the same level of risk.
Introduction: During recent decades the world’s financial markets have seen an ongoing increase in institutional ownership of capital. Do these institutional owners behave differently from other owners, and what are the consequences on firm performance? Do research in corporate governance provide the answers? These issues, and specifically how the increasing institutional ownership has affected investment performance in listed firms, are dealt with in this paper. The role of the financial market is to transfer savings to investors, and establish relative prices that serve as signals to guide the allocation of capital. The efficiency of this allocation is anessential force in the creation of wealth and economic growth. At the same time, this allocation mechanism is the result of decisions taken by individuals or by people appointed to act on their behalf. Of particular interest therefore are the formal and informal rules that surround and affect this allocation process, that is, the corporate governance system.
Author: Daniel Wiberg
Source: Royal Institute of Technology
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