Ethics, Institutions, and Business Relations: A Study of Collusive Incentives for Institutional Shareholders to Monitor Firm Managers

Our theory asserts that at low levels of ownership institutions may support management to preserve other business relations. At higher levels of ownership, institutions more actively monitor management because the gains from equity ownership exceed the cost of management review and of possible lost business. Corporate performance first decreases and then increases with the institution's ownership. Furthermore, the institutional ownership‐performance relation, especially the critical ownership level that separates management aligned institutions from efficiently monitoring ones, varies with management specific parameters (managerial effort disutility), firm specific parameters (firm size) and whether or not the institutional owner is pressure sensitive.