Delegated Blocks. Seminar

Department: Finance

Speaker: Amil Dasgupta (LSE)

Room: T117

Delegated Blocks

Amil Dasgupta Richmond D. Mathews

Date Written: May 17, 2023

Abstract

Will asset managers with large amounts of capital and high risk-bearing capacity hold large blocks and monitor aggressively? Both block size and monitoring intensity are governed by the contractual incentives of institutional investors, which themselves are endogenous. We show that when high risk-bearing capacity arises via optimal delegation, funds holds smaller blocks and monitor significantly less than proprietary investors with identical risk-bearing capacity. This is because the optimal contract enables the separation of risk sharing and monitoring incentives. Our findings rationalize characteristics of real world asset managers and imply that block sizes will be a poor predictor of monitoring intensity.

Keywords: corporate governance, blockholder monitoring, institutional investors, financial markets