Institutional Investors,Corporate Governance And Stock Price Stability

Foreign mature capital market development experience shows that large share of individual investors lead to blindly trend trading easily, purchasing price rising stock selling pirce tumbling stock, at last increasing the disorder of market fluctuations. On the contrary, institutional investors can reduce market noise and stabilize it by reversing the irrational trading behavior of the individual investors. In addition, with the rise of shareholder activism, institutional investors as big shareholders of tradable shares often choose to take the initiative to participate in corporate governance in order to standardize the organization structure and management behavior, then help to alleviate the agency conflicts, reduce agency cost, improve corporate governance efficiency and reduce the information asymmetry of market. Therefore, in the past ten years, China’s regulators have issued more than 50 important guidance documents, such as laws, regulations or industry guidelines to regulate and promote the development of institutional investors in China. And hope that China’s institutional investors can play a positive role.In the past ten years, the type and scale of institutional investors in China have achieved leapfrog development. The economic consequences of developing institutional investors have become a hot topic both within the management area and academic research gradually. Researches about the impact of institutional investors on the capital market mainly in two aspects. The first is the company level, which discusses the influence of institutional investors in corporate governance mainly. The second is the market level, which studies the effect of institutional investors on the stock price mainly. In fact, this two levels have strong and complex relations in nature. On the one hand, the governance effect of institutional investors can affect the company value through the company’s performance, at the same time, the trading behavior of institutional investors can also affect the company value through the stock price. On the other hand, the interaction relationship between company performance and stock price can also give a combined effect on the institutional investors holding decision and governance behavior reversely. Due to the different aspects of market system and institutional investors’ development, the institutional investors governance behavior and trading behavior in western markets is not exactly the same as in China. So many theories and evidences developed from foreign market studies may not be fully applicable in China’s market. Based on Chinese reality of market environment, this paper tries to reveal the path of the institutional investors participating in corporate governance in our country, find all the economic consequences of institutional investors governance behavior and trading behavior, and make people be more clear with the function of China’s institutional investors in promoting corporate governance efficiency or market stability, by using theoretical analysis and empirical research methods. Finally, the findings of this paper will enrich and perfect the theory system of corporate finance, investor behavior and financial market, and provide a valuable reference for future study of other scholars.The paper is organized as follows:Chapter 1, Introduction. Introduces the research contents, research framework, research methods and results, etc., and briefly introduces the general situation of the development of China’s institutional investors.Chapter 2, Literature review at home and abroad. Research results at home and abroad were reviewed and discussed respectively on institutional investors, corporate governance, stock market and some other related fields.Chapter 3, Investigates the influence of institutional investors on corporate value from the perspective of agency costs, and examines the choice behavior of institutional investors in participating corporate governance. The value of the company is directly related to agency cost. In theory, when efficiency of the corporate governance elaborate extremely, agency cost will be completely eliminated, and the value of the company will be at the optimal level. But in reality, the agency conflict are inevitable, which makes the real value of the company unilateral deviate from its optimal level, and the deviation "gap" can be regarded as the agency cost. Based on this understanding, this chapter uses the stochastic frontier model, by stripping out the agency cost from the company forefront value, to re-examines the hot argument of "Can institutional investors improve corporate value?" from another angle. Further more, this part uses panel threshold model (Hansen,1999), to test and calculate the "threshold" effect of institutional investors in participating corporate governance.Chapter 4, Carries on empirical analysis on the subject of whether institutional investors could reduce the information asymmetry or financing constraint faced by the company. The information asymmetry between the investors and companies leads to high cost of external financing, and makes the company face with financing constraints. In order to lower the cost of financing to meet the demand of investment, companies will tend to improve the level of internal cash holdings. But excessive reliance on internal financing will reduce the efficiency of the use of funds, therefore it will not be conducive to maximize shareholder value. Based on the cash value model, this chapter examines the impact of institutional investors on reducing the information asymmetry (corporate financing constraints) systematically by introducing institutional investors variables.Chapter 5, Examines the influence of institutional investors on the top management turnover, and analyses the impact of institutional investors trading behavior on the company’s stock price from the perspective of top management turnover. The classical financial theory thinks that self-interest behavior of executives is the source of high agency cost, and the institutional investors can alleviate the agency conflicts and reduce the agency cost by intervening the authorities like board of directors to standardize the management structure and behavior, at last promote the company value. So, from a direct perspective of executive changes, this chapter reveals the specific path in which institutional investors participating in corporate governance. At the same time, this chapter also tries to clear executives change events’influence on the company’s stock price, and focuses on analyzing how this influence rely on the trading behavior of institutional investors.Chapter 6, Inspects the stock selection preference of institutional investors, and studies whether institutional investors can stabilize the stock price from micro perspective. The level of the stock volatility is the outcome of combination of various factors. However, factors which can affect the stock volatility, such as the company’s financial factors and corporate governance factors, can also affect the institutional investors stock selection decision in most cases. For this reason, the selected and unselected stocks show entirely different characteristics in many aspects. In order to analyze whether institutional investors have a positive effect on reducing price volatility, we must construct a reasonable evaluation criteria avoiding the endogeneity problem caused by sample selection bias or confounding bias. Thus, this chapter uses the propensity score matching method (PSM), picking out stocks "similar" to the institutional holdings, to overcome the endogeneity between institutional ownership and stock volatility in the maximum extent, and finally get the "net" effect of institutional investors on stock volatility.Chapter 7, Summarizes the conclusions and main points of view in this paper. Based on that, puts forward some constructive policy suggestions. Finally it briefly elaborated the research direction in the future.The main conclusions of this paper is as follows:By studying the influence of institutional investors on the agency costs and company value, found that:(1) With the increase of institutional investors holdings, the company value increased significantly, but it also shows an inverse-L-shaped relationship between the two. (2) Use the panel threshold model proposed by Hansen(1999) to calculating the threshold level when the impact of institutional investors on the company has been changed significant from structure. The results find that when the proportion of institutional ownership exceeds about 12%, the impact of institutional investors on company value will be greatly diminished. (3) This paper provides the evidence supporting the point of statement that open-end funds have more positive and significant influence on company value than closed-end funds.By studying the impact of institutional investors on asymmetric information and financing constraints, found that:(1) With the increase of institutional investors holdings, the company’s cash value decreased significantly. This indicates that institutional investors improved the efficiency of market information and the company’s external financial environment, and also reduced company’s dependence on the internal cash holdings. (2) The results show that, companies with greater financial constraints tend to maintain a higher level of cash holdings and lower level of leverage. The marginal value of cash declines with larger cash holdings and higher leverage. (3) In the end, this paper provides the evidence supporting the point of statement that institutional investors have more influence on companies which facing greater financial constraints or higher information asymmetry.By studying the influence of institutional investors on the top management turnover, found that:(1) For those company which can not get their achievement, institutional investors evacuation can form a strong external pressure, forcing executives to change. But for those companies which still remain profitable, institutional investors pressure effect is not obvious. Overall, the business performance has always been the main reason for top management turnover, and institutional investors in China has always played their part by "voting with their feet". (2) Executive compulsory alteration will be a negative signal to institutional investors, the new executive will not restore the institutional investors’ confidence in the stock holding. (3) The noise traders (small individual investors) tend to interpret executives changing events in loss companies as a good news, whose actively buying behavior directly improves the fluctuation of the stock volatility after the changing events.By studying the influence of institutional investors on the stock volatility, found that: (1) institutional investors prefer investing companies with good financial conditions and effective corporate governance, and such company stocks tend to exhibit lower volatility. (2) During the rising phase of the market, institutional investors increased the volatility of the stock. While during the decline stage, institutional investors reduced stock volatility, but failed to stop the stocks price going downward. (3) Furthermore, there is a strong positive relationship between institutional investors’buying behavior and stock gains in the corresponding period. But stocks with higher institutional ownership showed no higher rate of return in the lag period, which seems to imply that the individual investors who want to follow the institutions’trading may have missed the best buying time.Main characteristics and innovation of this paper can be summarized as follows:(1) Perspective innovation-1. By the first time, institutional investors variable were introduced into the research field of top management change problem, and from the perspective of top management change, this paper explores institutional investors’ governance mechanism and the influence on corporate value. This study not only enriches research achievements of the related fields from the empirical level, but also provides concrete, visualized research path and evidence for other scholars in researching of "institutional investors governance effect" subject.(2) Perspective innovation-2. By the first time, from the perspective of "cash value" to study whether institutional investors can help reduce the information asymmetry between investors and listed companies, also reduce the degree of dependence on internal cash holdings, and reduce the company’s financing constraints. This perspective is closer to the nature of corporate financing behavior, which can reflects the inner mechanism of institutional investors affecting corporate governance and its role of value creation.(3) Perspective innovation-3. By the first time studies the influence of top management turnover events on the shareholder wealth (stock returns and volatility) from the perspective of investor behavior. Because the movement of stock price is the outcome of all kinds of trading behavior, the impact of top management turnover events on the stock price is the impact on investors’ trading behavior in essence. Previous studies of this problem, mostly stays on the level of "phenomenon capturing", few studies explored the fundamental reason. This paper will be based on the difference of various types of investors’ scale and behavior, not only find the appearance of "what it is" but also answer the question of "why it is".(4) Method innovation-1. In order to test the influence of institutional investors on the stock price volatility, this paper uses PSM model, starting from the objective fact, basing on the counterfactual analysis framework, and taking full consideration of institutional investors stock holding preference, exploring the "independent" impact of institutional investors trading behavior on the stock volatility, yields and turnover rate. PSM model effectively overcomes the endogeneity problem caused by sample selection bias and confounding bias, which can hardly be avoided in OLS model, and finally gets a more objective, solid and convincing empirical conclusion.(5)Method innovation-2. In order to explore the path of institutional investors affect the company value, this paper uses stochastic frontier technology (SFA), to "strip out" the agency cost from the company forefront value, and inspect the economic consequences of institutional investors governance behavior from the perspective of agency costs. Compared with the previous method that directly discuss the relationship between institutional investors and company value, this paper re-examines this problem from the perspective of agency costs based on the unique advantages of SFA model. This practice do not only accords with the theory of logic, but also gets more abundant empirical results.(6) Method innovation-3. In order to inspect the institutional investors "free-rider" phenomenon, this paper uses Panel Threshold Model (PTM) to study the "Threshold effect" of institutional investors governance behavior. This paper selects institutional investors variables as the "threshold" variables, and inspects the nonlinear relationship between institutional investors and the company value, finally finds out the threshold point where institutional investors influence exhibits a significant structural change. The findings not only just give the empirical evidence but also provide micro basis for policy making on institutional investors development of China.