Abstract

In this thesis, we study whether the geographic proximity between institutional investors and firms affects the corporate governance characteristics of firms. Using indices that capture both a firm’s external and internal governance quality as well as five individual governance mechanisms, we show that – compared to nonlocal institutional investors – the presence of local investors weakens a firm’s internal governance but improves its external governance. The findings of this study offer important insights pertaining to the debate how investor proximity affects corporate governance quality. Specifically, they provide supporting evidence for the substitution theory that argues that internal and external governance are interchangeable – in this case with close-by investors making up for poorer internal governance. Finally, we investigate firms’ preference for corporate governance mechanisms based on both their ex-ante firm characteristics and the presence of local investors. Our results suggest that smaller, less liquid firms have weaker boards and fewer antitakeover provisions if they are located in close proximity to their largest institutional investors.