As institutional investors are the largest shareholders in most listed UK firms, one expects them to monitor the firms they invest in. However, there is mounting evidence suggesting that they do not perform any monitoring. In a recent TILEC discussion paper, Luc Renneboog (TILEC) and co-authors Marc Goergen (University of Sheffield) and Chendi Zhang (University of Warwick) provide a new test on whether UK institutional investors engage in monitoring. The test consists of an event study on directors' trades. If institutional shareholders act as monitors, their monitoring activities will convey new information about a firm's future value to other
outside shareholders and reduce the informational asymmetry between the managers and the market. As a result, directors' trades will convey less information to the market when institutional investors own large share blocks, and the stock price reaction will be weaker. However, the results show that the presence of institutional shareholders in the ownership structure does not have a significant impact on the stock price reaction to directors' trades. Thus, the shareholder monitoring aspect of the UK corporate governance model seems to fail, although some recent developments have put more pressure on institutional shareholders to take a more active stance.
