Selection or Influence? Institutional Investors and Acquisition Targets

Firms with high levels of institutional ownership are more likely to be acquired. This paper shows that this positive correlation is due to ownership endogeneity. Institutional investors are better informed investors and buy acquisition targets (“selection”). After controlling for this ownership endogeneity, the presence of institutional investors reduces the probability of being acquired. Evidence also shows that mutual funds or funds with high turnover rates are more likely to benefit from selective disclosure prior to Regulation Fair Disclosure. The presence of public pension funds increases the announcement premiums that targets receive, which indicates a monitoring effect.