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Study: Managers, Removed From Investor Pressure, Tend to Play it Safe

By:
Chris Gaetano
Published Date:
Jan 10, 2018
Vacation

A recent study has found that entrenched managers insulated from investor pressures tend to avoid making difficult decisions such as large investments, R&D, and business restructurings, according to the Harvard Business Review. To reach this conclusion, the researchers looked at Japanese companies with cross-shareholder ownership, which was used as a proxy variable for how much a manager is defended against "market disciplinary power." The researchers used this variable under the belief that "under interlocking shareholding, one firm would not demand, as a shareholder, that the other firm maximize its profit nor vote against the firm’s management even in a case of poor performance, because doing so would harm the business relationship between them."

Specifically, when looking at capital investment, M&A and R&D of firms with high cross-sharing versus those with low or moderate levels, it was found that such firms invest about 9 percent less, a significant difference. This is after controlling for  industry, firm size, profitability, growth opportunity, cash holding, and leverage. However, when managers are closely monitored by institutional investors and independent directors, they tend to be active in making difficult decisions. 

"Interlocking ownership with other firms in an industry might seem attractive for managers. However, such an arrangement might provide room for the managers to entrench themselves, and thus to enjoy the quiet life, at the expense of both shareholders and customers. Our study indicates that an appropriate degree of discipline from the market is an essential element for the future growth of corporations," said Kotaro Inoue, one of the researchers.