Is an Investing Institution One Shareholder or a Collection of Separate Funds?

Manuscript TypeEmpirical

Research Question/IssueThe paper examines whether the fund managers in a given investing institution behave in a coordinated manner, in terms of their trading around the announcement of a major takeover by a company in which the institution has two or more separate holdings.

Research Findings/InsightsOur data show that many institutional holdings consist of subholdings managed by separate fund managers. We find that trading around takeover announcements is coordinated in a majority of cases, but there is material disagreement within institutions in a substantial minority of cases, depending on how disagreement is measured. This suggests that blocks, at the level of the institution, do not always exist in the sense of being controlled by a single agent. Institutional ownership is less concentrated than it might appear to be from lists of shareholders in annual reports and databases.

Theoretical/Academic ImplicationsResearch in corporate governance tends to assume implicitly that an institutional holding is a single block. Our findings indicate that it is not safe to make this assumption, especially in the case of larger blocks which are more likely to consist of several subholdings. Some types of research would benefit from using data at the level of the managed fund.

Practitioner/Policy ImplicationsThere is much discussion about the merits of coordinated shareholder action between investing institutions, for example in the Kay Review. The findings imply that there is scope for greater coordination within institutions as well as across institutions.