Relational Investing And Firm Performance


  • Sanjai Bhagat,

  • Bernard Black,

  • Margaret Blair

  • We thank Michael Klausner, Dale Oesterle, and seminar participants at Northwestern University and the U.S. Department of Justice for comments on a previous draft of this paper. We gratefully acknowledge financial support of the Alfred P. Sloan Foundation, Association of Investment Management and Research, TIAA-CREF, and the Institutional Investor Project of Columbia University.


A substantial academic and popular literature argues that the performance of American corporations might improve if American corporations had long-term outside investors (relational investors) who would hold large stakes, actively monitor management performance, and engage with management in setting corporate policy. Institutional investors can perhaps play this role. We provide the first large-scale test of the hypothesis that relational investing can affect corporate performance. We consider ownership and performance data for more than 1,500 large U.S. companies over a thirteen-year period (1983–1995). Our results provide a mixed answer to the question of whether relational investing affects corporate performance. Our data suggest that there was a period in the late 1980s—a period with a uniquely high level of hostile takeover activity—when the presence of a relational investor was associated with higher stock market returns. This cohort of relational investors may have been able to induce corporate restructuring, whose principal effect was to reduce growth rates while improving profitability. But this pattern was not found in the early 1980s or repeated in the early 1990s.