Relations Investment Research

The history of the global capital market has shown that the institutionalization of equity ownership is among the most important developments since the 1970s,and institutional investors are playing an increasingly important role in the corporate governance in some western countries such as UK and USA. In academic research of corporate governance the role of institutional investors become one of significant subjects, and Lashbrook(1995)claimed that corporate governance is not the problem of trade and economics, but that of whether institutional investors is active or not.A kind of active participation of institutional investors in corporate governance with a long-term stakes in the corporation is called relational investing in western economic literature, which is one type of shareholder activism and regarded to be the most desirable mechanism or model for institutions to engage in corporate governance. In this paper I make comparatively systematic analysis of it, and suggest that it is more like a model of governance which is associated institutional investors' non-controlling ownership which lies somewhere between diffuse ownership and highly concentrated ownership.This model is a product of rising ownership stakes in corporations, and also responsive to some external constrains and internal ones of institutional investors in making investmentRelational investing is institutional investors-based model of corporate governance, which means both corporate governance and investment, and is the combination of active participation of corporate governance and long-term investments. As a mechanism of corporate governance, relational investing can constitute a substitute to such external mechanisms as takeovers to resolve the principal-agent problem by reducing the external distorted discipline, and can also be supplementary to such internal mechanisms as board of directors by increasing internal discipline as a long-term investors, thus reducing the agency costs. As an investment strategy relational investing is employed by institutional investors to manage and control investment risk which is associated with relative concentration of investment and market liquidity risks.In the market-based model, the agency problem is the conflict of interests between managers and shareholders, which is resolved mainly by external mechanisms, but in the bank-based model the problems are the expropriation of small shareholders by controlling shareholders or by both management and controlling shareholders in collusion. However in institutional-investor-based model, small shareholders are less likely to be expropriated due to institutional investors' monitoring, and the conflict of interests between institutional investors and small shareholder or managers may not so severe as those in other twoInstitutional investor can use one or more external or internal mechanisms at the same time to influence management, so relational investing may be more effective to reduce agency cost. Relational investing also has advantages over takeover mechanism in the flexibility of informal negotiation or formal initiation of proposals, and continuity of monitoring through implicit contract, which is in sharp contrast tofierce and costly contest for control by way of takeovers aiming to remove management.Relational investors pursue the goal of value maximization of both long-term investment and corporations, to some extent return to "classic ownership" , and shareholders resume the control of ownership.This paper makes a comparatively systematic analysis of relational investing, and is organized as follows: Background of this study is summarized in the first chapter. Prior research on corporate governance and relational investing is introduced in the second chapter. In the third chapter 1, I examine the heterogeneity of institutional investors, history of shareholder activism, and the origin and connotation of relational investing; In the fourth chapter, I analyze the theoretical basis of relational investing from diverse angels of both corporate governance and investment theories, and introduce a model in detail. In chapter 5, I discuss and analyze the supplementary and substituting relations of relational investing with external and internal mechanisms. In chapter 6, I analyze the strategic concerns, approaches and means of relational investing. In chapter 7,I make a cost-benefit analysis of relational investing, and point out the potential disadvantages. Then I discuss the possibility of relational investing in China and suggest some measures should be taken to facilitate the development of relational investment.