Corporate Governance Effects Of Institutional Investors

The issuance of Kaitai Fund and Kaiyuan Fund signified institutional investors formally stepped on the stage of in capital market of China in 1998. With the development of capital market, the classification, amount and scale of China institutional investor have gained great achievement. Owing to the increasing proportion of stock held by institutional investors, they have replaced retail investors and become the primary participants of Chinese A-stock market. The original intention for the establishment of Chinese capital market was designed to serve for solving the problems and reform of the stated owned enterprises, which result in impressed feature of transitional economy for Chinese capital. Although Chinese capital market has went further during short 20 years, there are blemish which need purify compared with western well-developed capital market.Based on the background, what role China institutional investors will play in corporate governance, what the impact of the enterprises is and whether they may improve corporate governance level and promote corporate performance sequentially is questions that remain to answer.There are many kinds of institutional investors in China, including securities investment fund, securities companies, insurance companies, banks, QFII, social security fund, enterprise annuities, investment trust, finance companies et al. Because they differ a lot in source of capital, management mode and risk preference, there are significant differences in ability and motive of corporate governance. However, the present research, especially domestic research used to taking all institutional investors as a whole and neglecting the great discrepancy of institutional investors, as would be likely to make the conclusions bias and produce less reliability.Because of comparatively stronger position of China government in political and economic field, most listed companies was state owned enterprises before reform, and government is the powerful shareholders relative to others, even the absolute sharehold-controller, government has motivation to achieve its target into enterprises controlled. Thus, how will state-own affect corporate governance effect of institutional investors? How will the level of government affect corporate governance effects of institutional investors in state owned companies?Being a institutional investors in corporate governance depends on favorable macroscopical governance environment. There are remarkable differences in the process of market, the degree of government intervention and the implement of law in various districts, how will macroscopical governance environment affect participation of corporate governance of institutional investors?In order to solve problems above, this paper in the first place reviews property theory, principal-agent theory, stakeholder theory and cost and income theory to provide a theoretical basis for institutional investors participation in corporate governance, in the second place, our paper analyses the inner and external mechanism of institutional investors participation in corporate governance and reveals the potential influences of it, further more, this paper reviews the situation of China's institutional investors and introduce the practice of institutional investors'participation in corporate governance through three cases of Tiange Science and technology reorganization et al., at last, this paper selects 933 listed companies from 2004 to 2008 as our sample, analyses corporate governance effects of China's institutional investors and make conclusion below:1. The whole institutional investors in corporate governance is effective. Institutional ownership positively affects not only the level of corporate governance and corporate performance, but also one-lag the level of corporate governance and corporate performance; institutional investor can improve corporate governance structure and enhance the level of corporate governance; institutional investors do not participate production decision-making, they make corporate performance better through improving the level of corporate governance, further more, the level of corporate governance is mediate variable among institutional investors.2. There are prominent differences between corporate governance effects of various institutional investors. Based on the current papers, this paper classifies institutional investors into pressure-insensitive and pressure-sensitive institutional investors through examine whether there are potential profits between institutional investors and target companies and whether they may resist pressures coming from target companies or not. The empirical analysis also finds that corporate governance effects of pressure-insensitive institutional investors are better than pressure-sensitive one because they can improve the level of corporate governance and corporate performance more effectively.3. The type of controlling shareholders has remarkable influence on corporate governance effects of institutional investors. According to the type of controlling shareholders, this paper classifies samples into state-controlled and non-stated-controlled. The empirical analysis shows that the former limits corporate governance effects of institutional investors while the latter does much better. In order to analyze the level of government impact for controlled companies on corporate governance effects of institutional investors, we further classify state-owned companies into central-government-controlled and local-government-controlled. The result shows that central government pays more attention to keep its status and intervenes in enterprises less relative to local government, the corporate governance effects of institutional investors in central government controlled are better.4. Macroscopical governance environment can impact corporate governance effects of institutional investors remarkably. Using the data from market index of China, this paper analyzes the influences of macroscopical governance environment on the effects of institutional investors taking part in corporate governance. The conclusion is that the more developed the market, the better corporate governance effects of institutional investors are. Participation in corporate governance of institutional investors can acquire more favorable institutional safeguard with lower cost. The market has remarkably positive influence on corporate governance effects of institutional investors.In order to optimize governance structure of China's listed companies and develop capital market in a healthy and orderly way, it's necessary to take effective measures to pace up the development of institutional investors. What's more, we should create more favorable external environment for participation in corporate governance of institutional investors through breaking the drawback of the limits of institutional investors development, building up good mechanism of motivation and restraint, strengthening the supervision for institutional investors, clearing the relation between government and enterprise, reducing the intervention in factories from local government, removing the adverse effect of state owned enterprise, speeding up the development of all nations especially the western region, making more laws, enhancing the judicial level, shifting government role and raising the market level.