Coordinator or colluder: Institutional investor network and excess goodwill

• Institutional investor network centrality is positively associated with excess goodwill recognition. • The effect is more pronounced in non-SOE firms and in vertical and mixed M&A transactions. This relationship remains robust after controlling for common ownership. • Managerial myopia may weak this effect, whereas managerial overconfidence tends to intensify it. • The positive association is stronger when the number of heavy-holding institutional investors exceeds the industry average. However, frequent site visits by institutional investors can partially mitigate excess goodwill recognition. Institutional investors are often regarded as external monitors that strengthen governance by counterbalancing controlling shareholders and managers. However, evidence from China’s common ownership networks shows that they may tolerate practices harmful to long-term development, particularly goodwill premiums. Using data on Chinese A-share firms from 2008 to 2022, we find that companies with centrally positioned institutional investors report higher excess goodwill. The effect is stronger in non-state-owned enterprises, vertical and mixed mergers and acquisitions, firms with overconfident executives, and firms with institutional investor concentration exceeding the industry average. More frequent site visits by institutional investors reduce excess goodwill, but they do not eliminate it. These findings remain robust across multiple sensitivity checks and endogeneity tests.