Does Management Quality Drive the Monitoring Effect of Institutional Investors? Evidence from Private Placements

Are institutional monitoring effects induced by the quality and reputation of a firm’s management? We hypothesize that better and more reputable managers can convey more information and give a certifying effect with regard to firm value to informed and potential investors, thus reducing information asymmetry. This study provides empirical evidence to illustrate the positive association between management quality and the institutional monitoring effect in private placements. Additionally, we find that the positive abnormal stock reaction is driven by the certification effect from management quality. Further, we show that only high management quality firms have a positive relationship between the extent of active involvement by independent and long-term institutions and post-placement performance.