The Value of Undiversified Shareholder Engagement

This paper sheds new light on the impact of corporate monitoring by institutional investors. I show that investors with large proportions of their portfolio allocated to a firm, which I term high “portfolio-at-risk” (PAR) institutions, are effective monitors. Textual analysis of more than 200,000 corporate conference calls shows that higher PAR is associated with greater shareholder engagement and smaller institutional investors with high PAR engage as much, if not more, as blockholders with low PAR. Correspondingly, firms owned by high-PAR investors have higher profits and valuations relative to those owned by large, diversified shareholders. Highlighting the importance of high-PAR institutions for corporate monitoring, I document that a reduction in creditor monitoring entails lower profits and valuations only for firms with low-PAR institutional ownership. The results in this paper suggest a revisit of much extant academic and policy work concerning the drivers and implications of institutional shareholder engagement