Do UK institutional shareholders monitor their investee firms?

As institutional investors are the largest shareholders in most listed UK firms, one expects them to monitor the firms they invest in. However, there is mount ing empirical evidence which suggests that they do not perform any monitoring. This paper provides a new test on whether UK institutional investors engage in monitoring. The test consists of an event study on directors’ trades. If institutional shareholders act as monitors, their monitoring activities convey new information about a firm’s future value to other outside shareholders and reduce the infor mational asymmetry between the managers and the market. As a result, direc tors’ trades convey less information to the market, and the stock price reaction is weaker. However, our results show that institutional shareholders do not have any significant impact on the stock price reaction which stands in marked contrast with the impact that families, individuals and other firms have on stock prices.