Selection of influence? Institutional investors and corporate acquisitions

Abstract

This paper shows that the presence of large public pension fund shareholders particularly reduces ex ante bad acquisitions. When firms with large public pension fund presence do acquire other firms, they perform relatively better in the long-run. Other institutional investors have either the opposite effect or no effect. Identifying the sources of exogenous variation in institutional ownership is crucial to establish the direction of causality between institutional ownership and observed corporate merger and acquisition decisions. This paper introduces two new approaches. First, I decompose the institutional ownership into one component which is correlated with future M&A shocks, and the noise component which is not. I instrument for the various ownerships using this noise term. Second, I instrument for institutional ownership using exogenous shocks to their portfolio sizes interacted with their propensities to invest in each corporation.