Institutional investors as shareholders: The case of pension funds

Institutional ownership in publicly listed companies has grown rapidly in recent decades. It is claimed that institutional investors are well-suited for active involvement in firms’ corporate governance, because they are managed by professional managers who can utilise information better than lay investors. However, efficient governance may not be in the best interest of asset managers employed by institutional investors. The final role of institutional investors in corporate governance therefore remains an empirical question. In this dissertation, I empirically investigate the role of public pension funds in firms’ governance, using the data from the Swedish pension system, which was reformed at the turn of the millennium. This data was chosen because Swedish public pension funds have the same history and mandates, and are expected to compete with each other. The thesis consists of four essays. In the first two, I investigate whether Swedish pension fund ownership is related to firms’ market valuation and corporate governance quality. In paper three, I analyse whether these funds prefer to impact or exit underperforming firms. In the final paper, I examine whether there are similarities in the composition of the Swedish public pension funds’ domestic equity portfolios, and whether these funds adopt similar strategies in selling and buying shares of Swedish listed companies. I find that there is a contemporaneous positive relationship between firms’ market valuation and public pension fund ownership. The evidence suggests that this relationship is a result of public pension funds’ preference for investing in firms the market values highly. My results show that public pension fund ownership in companies is not associated with better corporate governance. I find no evidence that these funds effect the diversification of boards by increasing the proportion of women, foreigners, or directors of various ages. Furthermore, Swedish public pension funds have not been successful in promoting independent directors, securing the non-re-election of an active CEO to the Board of Directors, and reducing the wedge between cash flow and voting rights in listed firms. The analysis indicates that public pension funds tend to sell their shares of underperforming companies, rather than facilitate the dismissal of the CEO or the Board of Directors. In the final paper, I find that there has been a relatively high degree of similarity in the domestic equity portfolios of the Swedish public pension funds. My analysis also shows that these funds have timed their purchases and sales of company shares in approximately the same way. These findings are probably the result of the constraints of a small and illiquid market for individual shares and the Swedish pension system’s stringent investment rules