Monitoring, Corporate Performance and Institutional Directors

Abstract

Our main objective is to study the effect of institutional directors on firm performance, distinguishing directors according to whether they maintain business relationships (pressure‐sensitive) or not (pressure‐resistant). Our results show that in weak regulatory and low investor protection environments, institutional directors have a negative impact on corporate performance. Our evidence shows that this negative effect is mainly driven by the role of pressure‐resistant directors and not for those directors representing mainly banks and other financial institutions with a long‐term investment horizon. These findings have implications for numerous parties, such as institutional investors, regulators, potential new board members and other corporate governance reform proponents, who frequently examine board characteristics to assess the effectiveness of boards in value‐creation policies.