The Institutional Appetite for Quack Corporate Governance

This Article offers evidence that higher quality internal corporate governance is associated with higher levels of ownership by institutional investors. This finding is consistent with the idea that institutions have greater reason than individual investors to prefer well-governed firms, but surprising given the substantial empirical evidence that casts doubt on the efficacy of internal governance mechanisms. The study described in this Article also finds that higher quality external governance is associated with lower proportions of ownership by certain types of institutional investors, also a somewhat surprising result given available empirical evidence on the positive relationship between external governance and firm performance. After largely dismissing competing explanations for these findings, I conclude that institutional investors, as a group, generally prefer internal governance mechanisms over external governance mechanisms or have a higher tolerance for low-quality external governance than for low-quality internal governance. I argue that these preferences are reasonable and suggest that when debating the efficacy of governance mechanisms, the preferences of informed, sophisticated investors be afforded greater weight than is currently the case