We identify a sample of firms with directors employed by institutional investors and directly examine the effect of institutional monitoring. Both cross-sectional evidence and difference-in-differences tests show that institutional monitoring has a rather weak effect on corporate governance and informational efficiency. Surprisingly, the effect of institutional monitoring on firm performance is generally negative, particularly on stock performance. We further show that the negative effect on firm performance is mainly driven by firms adding institutional directors to their board. We rule out a number of potential explanations of our findings, such as changes of board structure, changes of payout policies, and conflict of interest among institutional shareholders.
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