Distance Matters! Shareholder Proximity and Corporate Policies

This paper investigates whether proximity to institutional shareholders influences corporate policies. We find that firms with high local institutional ownership are more profitable, less risky, and have a better governance structure. Specifically, these firms are less likely to engage in undesirable corporate activities such as aggressive earnings management or option back-dating and are therefore less likely to be a target of class action lawsuits. Further, firms with more local institutional shareholders are less likely to be a takeover target. We also find that both total and option-based executive compensation levels are lower for firms with more local institutional shareholders. In contrast, high local retail ownership does not have significant influence on corporate policies. Taken together, these results are consistent with our conjecture that local institutions serve as more effective monitors of corporate behavior because monitoring costs vary inversely with distance.