When Financial Institutions Are Large Shareholders: The Role of Macro Corporate Governance Environments


  • The authors are from the School of Banking and Finance, University of New South Wales, Sydney, Australia. We would like to acknowledge valuable comments made by Rebel Cole, Ruoshan Li, Ronald Masulis, Ike Mathur, Arie Melnik, Toan Pham, Robert Stambaugh (the editor), Qian Sun, Peter Swan, Lihui Tian, Terry Walter, Steven Wei, Wuxiang Zhu, an anonymous referee, and an associate editor, as well as seminar participants from Fudan University, Hong Kong Polytechnic University, Monash University, Nan Yang Technological University, Peking University, Tsinghua University, University of New South Wales, and University of Queensland. All remaining errors are our own.


While financial institutions' aggregate investments have grown substantially worldwide, the size of their individual shareholdings, and ultimately their incentive to monitor, may be limited by the free-rider problem, regulations, and a preference for diversification and liquidity. We compare institutions' shareholding patterns across countries and find vast differences in the extent to which they are large shareholders. These variations are largely determined by macro corporate governance factors such as shareholder protection, law enforcement, and corporate disclosure requirements. This suggests that strong governance environments act to strengthen monitoring ability such that more institutions are encouraged to hold concentrated equity positions.