Institutional ownership of bank shares

U.S. bank regulations weaken the incentives for market-based monitoring of bank CEOs, and bank assets are difficult for outside investors to value. Th erefore, we analyzed factors that might influence institutional holdings of bank shares. Our primary expectation was that alignment of the economic in terests of bank CEOs with those of bank shareholders would be particularly important in determining which banks attract institutional investment funds . Our results suggest that the sensitivity of a bank CEO's compensation to shareholder wealth does have a positive influence on the proportion of a ba nk's shares held by institutional investors. Additional evidence suggests t hat bank size is positively related to institutional ownership whereas capi tal adequacy and stock variance are negatively related to institutional own ership. In general, the evidence implies that when a company's quality is d ifficult for outside investors to determine, portfolio managers consider th e economic incentives of company managers.