Stewardship, institutional investors monitoring, and firm value: Evidence from the United Kingdom

Stewardship encourages institutional investors to perform a monitoring function through cooperation and collective action. The United Kingdom was the first country to publish a Stewardship Code. This motivates us to investigate the monitoring role of institutional investors in the UK. We find that institutional ownership has a positive influence on a firm's one-year future valuation and improvements in corporate governance practices. The positive relationship identified is mainly driven by independent and long-term (ILT) institutional ownership. We additionally demonstrate that acquirers with higher ILT institutional ownership make better acquisition decisions. The performance of cross-border acquisition does not differ from the performance of domestic deals, suggesting that cross-border transactions do not create value for shareholders in the UK. Overall, the results are consistent with the view that ILT institutional investors contribute to monitoring and promoting corporate governance practices due to the long-term investment horizons and arm's-length relationship they hold with investee companies.