We survey institutional investors to better understand their role in the corporate governance of firms. Consistent with a number of theories, we document widespread behind-the-scenes intervention as ...well as governance-motivated exit. These governance mechanisms are viewed as complementary devices, with intervention typically occurring prior to a potential exit. We further find that long-term investors and investors that are less concerned about stock liquidity intervene more intensively. Finally, we find that most investors use proxy advisors and believe that the information provided by such advisors improves their own voting decisions.
Institutional Investors and ESG Preferences Lopez‐de‐Silanes, Florencio; McCahery, Joseph A.; Pudschedl, Paul C.
Corporate governance : an international review,
04/2024
Journal Article
Recenzirano
ABSTRACT Research Question/Issue We examine the effect of multiple environmental, social, and governance (ESG) scores on institutional investor ownership of firms and investor portfolio weightings. ...We are also the first to analyze the three individual components of ESG rankings to estimate the relative preferences of institutional investors. Research Findings/Insights Using a unique panel dataset covering US companies and institutional investor portfolios over the 2010–2019 period, we find that while investors are driven to add high‐quality ESG companies to their portfolios, there is a negative relationship with ESG when it comes to taking large ownership stakes. Furthermore, ESG scores are negatively related to the portfolio weightings of institutional investors, which raises concerns of greenwashing. Our analysis of individual ESG scores points to significantly larger effects of G scores in terms of holdings, and G is the only score with no negative impact on portfolio weightings. Finally, in support of systematic stewardship theory, top institutional investors allocate higher proportions of their portfolios to firms with high‐ESG ratings. Our results are robust to the use of a difference‐in‐differences analysis addressing endogeneity concerns. Theoretical/Academic Implications The findings in this paper offer important policy implications for institutional investors, managers, and policymakers. Given the ongoing debate on ESG scores, this paper shows the importance of examining greenwashing for investors who have a concern regarding the extent to which the valuation of assets might be influenced by unsupported sustainability claims. In addition, our study adds to the debate regarding ESG investing and stewardship theory.
Loan tranching allows banks to manage risk and facilitate firm financing, which may be essential for firms that cannot access investors from stock markets. We analyze the determinants and benefits of ...loan tranching by pooling the tranches of individual loans to create the largest cross-country sample of syndicated loans, covering more than 150,000 loans from multinational and domestic firms. We find that, in addition to market, deal, and borrower characteristics, legal and institutional differences impact loan tranching. Strong creditor protection and efficient debt collection increase the probability of tranching and reduce tranche spreads, ultimately promoting firms’ access to debt. We also find evidence that tranching facilitates the financing of multinational firms abroad due to the transfer of legal and cultural institutions to foreign subsidiaries. Overall, our results suggest that tranching plays an important role in reducing a country’s financial development gap and promotes firms’ access to debt.
In this article, we analyse the impact of business digitalisation on the principal-agent conflict. While there are several studies of impact of digitalization on corporate governance, the empirical ...evidence has so far been relatively scarce. We examine the principal-agent conflict from several angles: the number of shareholder-sponsored proposals submitted for the shareholder meetingsб the level of support for management-sponsored proposals and the frequency of proxy contests. As a proxy for the active digitalisation of a firm, we use the blockchain technology that has the potential to fundamentally change the distribution of power within an organisation, potentially mitigating the principal-agent conflict. We analyze a sample of 2813 NYSE, Nasdaq and AMEX-traded firms for the year 2018, during which rapid blockchain adoption was exhibited. Our results suggest that firms active in business digitalisation overall have a lower level of principal-agent conflict. We find that such firms generally have shareholders that are more active, which indicates an environment less prone to the principal-agent conflict. While on average, proposals submitted by the management receive less support during voting, the share of approved proposals does not change for the digitising firms. Proxy contests appear relatively rare among the firms active in digitalisation, however, there is not yet enough data to confirm this.
In a technology-driven, digital world, many of the largest and most successful businesses now operate as ‘platforms’. Such firms leverage networked technologies to facilitate economic exchange, ...transfer information, connect people, and make predictions. Platform companies are already disrupting multiple industries, including retail, hotels, taxis, and others, and are aggressively moving into new sectors, such as financial services. This paper examines the distinctive features of this new business model and its implications for regulation, notably corporate governance. In particular, the paper suggests that a tension exists between the incentives created by modern corporate governance and the business needs of today’s platforms. The current regulatory framework promotes an unhealthy ‘corporate’ attitude that is failing platforms, and a new direction (what we term ‘platform governance’) is urgently required. In identifying this new regulatory direction, the paper considers how firms might develop as successful platforms. Although there is no ‘one-size-fits-all’ solution, the paper describes three interconnected strategies: (1) leveraging current and near-future digital technologies to create more ‘community-driven’ forms of organization; (2) building an ‘open and accessible platform culture’; and (3) facilitating the creation, curation, and consumption of meaningful ‘content’. The paper concludes that jurisdictions that are the most successful in designing a new ‘platform governance’ based on the promotion of these strategies will be the primary beneficiaries of the digital transformation.
Coronavirus is the first global crisis of a digital age and the divergence in policy responses reflects the challenge of navigating an unprecedented global situation under conditions of enormous ...uncertainty. We ask what lessons can be learned from this experience and identify two, both of which push against mainstream interpretations of recent events. First, and contrary to the view that the crisis exposed social media and Big Tech as a source of dangerous misinformation that needs to be regulated more strictly, the paper argues that the less mediated spaces of the Internet—social media and Twitter, in particular—played an essential role in triggering a more effective policy response based around social distancing, lockdown, and containment. Second, and contrary to the view that things will go back to normal once the worst of the crisis has passed, the paper argues that, as a direct result of lockdown, the status quo has been shifted across multiple sectors of the economy. Three examples of this shift are introduced, notably the forced experimentation with digital technologies in education and health, the increased use of remote work in many companies, and a reduction in environmentally harmful behavior and decrease in pollution levels. The long-term effects of this ‘reset’ are impossible to predict, but a quick return to the ‘old normal’ seems unlikely. The paper concludes with the suggestion that this reset has created a unique historical opportunity for the reappraisal of regulatory approaches across multiple domains and exposed the need for regulatory models better aligned to a less mediated, more decentralized world. COVID-19 is a global tragedy, but—given that it has happened—it should be used as a learning experience to re-imagine a better, more socially, and environmentally responsible future.
We survey institutional investors to understand why they integrate environmental, social and governance (ESG) factors into their investment management processes. Using a unique data set, we find that ...limited partners (LPs) are motivated to incorporate ESG because they believe that ESG usage is more strongly correlated with financial performance. We find that general partners (GPs) are motivated to integrate ESG factors into their investment strategies in response to increased client demand for sustainable products. Furthermore, we find that private equity (PE) uses ESG factors more intensely than venture capital (VC) regardless of geography. We also find that PE firms use voice and exit strategies more extensively than VC funds in efforts to promote ESG activities in companies. When evaluating individual components of ESG scores, we find that the investors consider the governance score the most important component, followed by E, and then S.
While small and medium-sized enterprises (SMEs) are important for economic growth and employment, they face numerous obstacles in accessing external finance. In this article, we review recent ...developments in the availability of financing for SMEs in Brazil, focusing on the greater use of equity and debt for SMEs. In assessing the barriers to external financing, we focus on the role of bank characteristics, market structure and variations of interest rate spreads across banks and time. Moreover, as banks retreat from SME financing, we examine the potential for SMEs to seek new sources of financing from private equity and venture capital funds. We examine the changes in the availability of bank loans between 2014 and 2016. By considering demand, we estimate the SME loan gap based on Central Bank and publicly available data. Our results show that the loan gap in Brazil is substantial.
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