Hail Britannia?: Institutional Investor Behavior under Limited Regulation

Abstract

A central puzzle in understanding the governance of large American public firms is why most institutional shareholders are passive. Why would they rather sell than fight? Until recently, the Berle-Means paradigm – the belief that separation of ownership and control naturally characterizes the modern corporation – reigned supreme. Shareholder passivity was seen as an inevitable result of the scale of modern industrial enterprise and of the collective action problems that face shareholders, each of whom owns only a small fraction of a large firm's shares. A paradigm shift may be in the making, however. Rival hypotheses have recently been offered to explain shareholder passivity. According to a new "political" theory of corporate governance, financial institutions in the United States are not naturally apathetic but rather have been regulated into submission by legal rules that – sometimes intentionally, sometimes inadvertently – hobble American institutions and raise the costs of participation in corporate governance.