Evidence on the Governance Role and Investment Strategy Performance of Boutique Institutional Investors

Abstract

I identify an unexplored type of institutional investor (equity boutiques) that are characterized by their relatively small size but highly concentrated investment strategy. This concentrated strategy suggests that boutiques have the incentive to monitor management, but their limited assets under management cast doubt on whether they will be influential. In the context of discretionary investment decisions, I find evidence that boutiques oversee management by curbing myopia. Even though boutiques are small, they still appear to be influencial. Empirical evidence suggests that this influence comes, in part, from their expertise, which is heeded by other institutional investors. I also examine whether boutique investors earn abnormal returns on their investments and provide insights into the potential sources of those returns. More specifically, consistent with the notion that boutiques have expertise and an information advantage, I find that boutiques earn abnormal returns and that these returns are earned in part by exploiting information incremental to publicly available information.