Delegated Monitoring, Institutional Ownership, and Corporate Misconduct Spillovers

Ugur Lel, Gerald S. Martin, and Zhongling Qin

Upon the revelation of corporate misconduct by firms in their portfolios, institutional investors experience a significant discount in the market value of their portfolios, excluding misconduct firms, creating a short-term spillover that averages $92.7 billion losses per year. We examine an expansive set of channels under which this spillover to non-target firms can occur, and find that it reflects the loss of the embedded value of monitoring by a common institutional owner, enforcement wave activity, and industry peer and business relationships. Institutional investors also experience significant abnormal outflow of funds in the year following the misconduct event.