Institutional Ownership and Monitoring Effectiveness: It's Not Just How Much but What Else You Own

Corporate governance research indicates that large owners provide effective monitoring. In this article, we expand firm-level notions of monitoring to include large institutional owners’ investment portfolios and suggest that portfolio characteristics affect owners’ motivation and capacity to monitor, which compromises the positive effects of monitoring at the firm level. Specifically, using data from 533 large firms over a 10-year period, we find that increases in the size of portfolio holdings, number of portfolio blockholdings, portfolio turnover, and the importance of a particular holding reduce monitoring effectiveness in the context of executive compensation. Overall, we provide preliminary evidence that the portfolio characteristics of the largest institutional owners contradict firm-level monitoring effects; therefore, we strongly recommend that future studies consider both firmand portfolio-level effects simultaneously to understand monitoring effectiveness.