Delegated Monitoring, Institutional Ownership, and Corporate Misconduct Spillovers

67 Pages Posted: 11 Apr 2019 Last revised: 1 Jul 2021

See all articles by Ugur Lel

Ugur Lel

University of Georgia - Department of Banking and Finance

Gerald S. Martin

American University - Kogod School of Business

Zhongling Qin

Auburn University - Department of Finance

Date Written: March 21, 2019

Abstract

Upon the revelation of corporate misconduct by firms in their portfolios, in- stitutional investors
experience a significant discount in the market value of their portfolios excluding held firms
engaged in misconduct, creating a short-term neg- ative externality that averages $92.7
billion of losses per year. We examine an expansive set of channels under which this
spillover to non-fraudulent firms can occur, finding that it reflects the loss of the embedded value
of monitoring by a common owner, enforcement wave activity, and industry peer and business
re- lationships. Misconduct linked institutional investors also experience significant abnormal
outflow of funds in the year following the misconduct event, which
increase with legal severity and monitoring incentives.

Keywords: corporate misconduct, spillovers, institutional investors, monitoring failures

JEL Classification: G3, G23, D62

Suggested Citation

Lel, Ugur and Martin, Gerald S. and Qin, Zhongling, Delegated Monitoring, Institutional Ownership, and Corporate Misconduct Spillovers (March 21, 2019). Available at SSRN: https://ssrn.com/abstract=3358068 or http://dx.doi.org/10.2139/ssrn.3358068

Ugur Lel (Contact Author)

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

Gerald S. Martin

American University - Kogod School of Business ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-3914 (Phone)

Zhongling Qin

Auburn University - Department of Finance ( email )

Harbert College of Business
Auburn, AL 36849
United States

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