INSTITUTIONAL INVESTING WHEN SHAREHOLDERS ARE NOT SUPREME

Christopher Geczy, Jessica Jeffers, David Musto, Anne Tucker
unpublished
Institutional investors, with trillions of dollars in assets under management, hold increasingly important stakes in public companies and fund individual retirement for many Americans, making institutional investors' behaviors and preferences paramount determinants of capital allocation. In this paper, we examine high fiduciary duty institutions' (HFDIs') response to decreased profit maximiza-tion pressure as measured by the effect of constituency statutes on HFDI investment. We ask this
more » ... We ask this question, in part, to anticipate HFDIs' response to alternative purpose firms, like benefit corporations. Only with access to institutional inves-tors' capital can alternative purpose firms gain economic significance to rival the purely for-profit corporation. In our empirical study, we ask whether decreased profit maximization pressure, as evidenced by expanded director discretion to pursue nonshareholder interests, affected HFDIs' decision to invest (or remain invested) in firms incorporated in constituency statute states because of a conflict, or perceived conflict, between fiduciary duties owed to beneficiaries and shareholders and the "other" serving interests. HFDIs, as agency investors for their shareholders and beneficiaries, are subject to strict fiduciary duties, which, among other things, explicitly disallow sacrificing monetary returns for other goals. We focus on HFDIs under the theory that any impact of fiduciary duties on investment behavior would be strongest among those subject to the strictest duties. In other words, if we were to see an effect at all between expanded duties and investment behavior, it would be most easily observable in HFDIs. Our findings also answer questions raised in earlier scholarship regarding the scope and impact of constituency statutes. In addition, our findings connect constituency statutes to the current academic debate on alternative purpose firms by identifying potential litigants and theories of recovery under the new statutes. Finally, we observe that HFDIs did not meaningfully change investment behavior in response to constituency statutes' expansion of director duties. Our empirical observations are evidence against fiduciary concerns that impede alternative purpose firms' access to public capital.
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