Monitoring role of institutional investors and acquisition performance: Evidence from East Asian markets

This paper examines the monitoring role of institutional investors by investigating the market reactions and long-run stock performance of acquirers in East Asian markets. The market reacts positively to the announcement but underperforms in the long-run. Although institutional ownership does not associate with the announcement abnormal return, it correlates positively with long-run performance. This positive association is driven primarily by foreign institutional ownership. Further analysis shows that acquirers with higher independent, long-term, and passive foreign institutional ownership report better long-run performance. This result is consistent with the monitoring hypothesis that foreign institutional investors can improve the quality of managerial decisions. Finally, we investigate the impairment of goodwill postacquisition and find that acquirers with higher foreign institutional ownership suffer lower goodwill write-offs. Overall, our findings are consistent with the view that foreign institutional investors can provide effective monitoring of local firms in East Asian markets.