Institutional Investors and the Governance Spillovers of Financial Regulations: Evidence From a Natural Experiment

Abstract

We empirically study how financial regulations generate corporate governance spillovers through the institutional ownership network. Exploiting the Regulation SHO Pilot experiment, we find a significant removal of anti-takeover provisions by Non-Pilot firms when their motivated monitors are more exposed to Pilot firms. Besides, results across other corporate governance fronts such as board structure, opportunism, and innovation provide further support to a positive governance spillover. The results are consistent with the increase in market discipline in Pilot firms allowing motivated monitors to reallocate monitoring and promote investor engagement in Non-Pilot firms. Our findings provide novel insights for the evaluation of financial regulations.

We empirically study how financial regulations generate corporate governance spillovers through the institutional ownership network. Exploiting the Regulation SHO Pilot experiment, we find a significant removal of anti-takeover provisions by Non-Pilot firms when their motivated monitors are more exposed to Pilot firms. Besides, results across other corporate governance fronts such as board structure, opportunism, and innovation provide further support to a positive governance spillover. The results are consistent with the increase in market discipline in Pilot firms allowing motivated monitors to reallocate monitoring and promote investor engagement in Non-Pilot firms. Our findings provide novel insights for the evaluation of financial regulations.