Institutional investors’ response to improved corporate governance: Evidence from the brazilian capital market

Resumen

This study examines whether normative pressures from stock market regulators to improve the governance quality of Brazilian listed firms influence the participation and activism of institutional investors. More specifically, we investigate the association between institutional investor’s ownership and firm’s voluntary adhesion to the São Paulo Stock Exchange (B3) differentiated levels of corporate governance quality. Empirical testing is performed on a ten-year (2002–2011) panel data set from a sample of 439 firms listed on the B3. Our findings suggest that firms in differentiated corporate governance levels, that is, with better level of transparency and commitment to monitoring, are more attractive to institutional investors. We interpret this result as evidence supporting the shareholder activism movement, attributed by several scholars to institutional shareholders. Our study contributes to the governance literature on the firm’s response to normative pressures and the ability of internal governance mechanisms to signal lower agency cost to capital market. Our evidence also contributes to the ongoing discussion about the role and influence of institutional investors in the functioning of capital markets, and more specific in emerging market like Brazil.