Can Institutional Investors Fix the Corporate Governance Problem? Some Danish Evidence

It has been advocated within corporate governance that institutional investors may discipline management in listed firms and thereby alleviate the free rider problem associated with dispersed ownership. This article tests this hypothesis using a sample of Danish listed firms during 1998-2001 seeking to determine, whether ownership by institutional investors impacts performance, measured by Tobin's q. Using three stage least squares, it is shown that aggregate ownership byinstitutional investors does not influence firm performance. However, when decomposing the results, it is found that joint ownership by the largest two Danish institutional investors, has a significant negative impact on firm performance. Ownership by banks, and to a lesser, extent insurance companies significantly influences firm performance positively. The results somehow challenge the conventional wisdom, arguing that the black box view of institutional investors should be abandoned. Therefore, it is suggested that a more careful analysis should be devoted to each institutional investor'sown legal environment. JEL Classification: L25, G2 and G3Keywords: Corporate governance, institutional investors, concentrated ownership, agency costs