Study On The Supervisory Role Of Institutional Investors On Companies’ Internal Controller And Economic Consequences

Since controlling shareholders’ equity is highly centralized and stock rights aresplit, corporate governance of Chinese listed companies are faced with serious insidercontrolling problems. It is not only the product of development of securities markets butalso the inevitable choice of development of institutional investors themselves to acertain stage that institutional investors involve in corporate governance toalleviate(mitigate) internal control issues. This dissertation researches the role ofinstitutional investors in corporate governance under the environment of "emerging andtransition" Chinese capital markets and the policy context of super-normally developinginstitutional investors in China.Based on the existing literatures and the development status of China’s institutionalinvestors, this dissertation analyzes the inevitability and necessity of institutionalinvestors taking parting in corporate governance, and the macro factors and microfactors affecting the active institutional shareholders. Then, starting from the two mains,the relationships between active institutional shareholders and the two types of insidercontrolling behaviors are theoretically analyzed at first, the one is the managercontrolling behavior, and the other is block shareholder controlling behavior. Hereafter,it does empirical tests that whether institutional investors impact on executivecompensation including pay-performance sensitivity and excessive consumption in job,and whether they monitoring and prevent the tunneling behavior of controllingshareholders in related party transactions. On this basis, economic consequences ofinstitutional investors impacting on the insiders’ controlling behaviors are discussed,which are corporate performance and value. Finally, considering Chinese existingsystem and state-owned enterprise reform processes, influences of corporate ownershipand split-share reform on institutional investors involving in corporate governance arefurther researched.Considering the four characteristics of institutional investors, includinginstitutional ownership concentration, the independence and the investment horizon ofthe institutional investors, and institutional ownership stability, this dissertation analyzesdeeply the different role of institutional investors in corporate governance between largeand small investors, long-term and short-term investors, stable and unstable investors,and dependent and independent investors. Overall, the empirical results indicate, with the addition of the institutional ownership, long-term, independent, stable holding andlarge institutional investors play a more active monitoring role than do other types ofinstitutions. They have stronger incentives and better capabilities to monitor insidercontrolling issues in China listed companies governance, and to overcome free riderproblem of individual investors in monitoring.Based on theoretical analysis, the empirical findings show as follows:1) When a company is mainly controlled by managers, the purpose of corporategovernance is to mitigate the conflicts of interest between shareholders and managers.Salary manipulation is the primary means to get private benefits for managers. Althoughevidence suggests that institutional investors play a role in monitoring management, notall institutions are equally willing or able to serve this function. The dissertationexamines the effects of institutional monitoring on executive compensation. The resultsindicate that independent institutional investor ownership is more positively associatedwith pay-performance sensitivity of managerial compensation than non-independentone. And independent institutional investors can reduce private benefits of managers,but there is no evidence that non-independent institutional investors can do. Partialreasons for non-independent institutional investors are that they would keep thepotential business relations with the corporations or be limited by governmentintervention. Meanwhile, this dissertation also investigates how the investment horizonof a firm’s institutional shareholders impacts the executive compensation. Long-terminvestors have more incentives and time to monitor their portfolio firms’ executivecompensation because they can get benefits from monitoring with lower cost. Theresults show there is no evidence of long-term investors enhancing managers’pay-performance sensitivity, but long-term investor ownership is negatively related tomanagerial private benefits. The findings imply that, for long-term investors,monitoring is possible, but they do not prefer the use of incentives to encouragemanagers to act in accordance with the interests of shareholders, and they mainly takethe direct monitoring such as filing shareholder proposals to facilitate managers’ actionin favor of companies. These findings are in line with standard agency theorysuggesting that institutional monitoring induced by long-term-investment horizonssubstitutes for managerial incentives. In contrary, short-term institutional investorscreate implicit incentives for CEOs to over-allocate effort toward improving currentearnings at the expense of creating long-term value, which is they increase managers’ pay-performance sensitivity in short-term but do not monitor the private benefits ofmanagers.2) When a company is controlled mainly by block shareholders, the conflicts ofinterest between the large and small shareholders is become the core issue in corporategovernance, and the controlling shareholder can expropriate wealth from minorityshareholders in many ways, but the main and direct means is tunneling in related-partytransactions. The dissertation testes the associations between institutional ownership andthe expropriation of minority shareholders by large holders in connected transactions.The results imply institutional investors within top ten shareholders can effectively limitthe tunneling behavior of large shareholders, to reduce the expropriation of minorityshareholders in related-party transactions. Meanwhile, the results show independent andlong-term institutional investor ownership are significantly negatively related to theexpropriation of minority shareholders, but other types of institutional investors showno monitoring effect. These findings suggest that independent and long-terminstitutional investors have advantages in monitoring firms’ tunneling of controllingshareholders.3) The monitoring effects of institutional investors involving in corporategovernance are reflected finally by firm performance and market value. So, theassociations between corporate firm performance and the level and stability ofinstitutional ownership within a simultaneous equation model are investigated.Considering the heterogeneity of institutional investors, this dissertation discusses theseassociations from four features of institutional investors, and those are institutionalownership concentration, the independence and the investment horizon of theinstitutional investors, and institutional ownership stability. Several results are obtainedfrom empirical tests. First, we find that there is a positive relationship between totalinstitutional ownership and firm performance. Second, we show that only concentratedholdings by long-term and independent institutions are positively associated with firmperformance. Further, the volatility of long-term institutions holdings is negative to firmperformance. That is, the more institutional ownership stability the better firmperformance is. However, concentrated holdings by short-term and non-independentinstitutions are not positive significantly to firm performance. These results indicate thatlarge investors, independent, long-term and stable institutions play a better role inmonitoring than other styles of institutions.4) Due to “the dominance of state-owned shares” and “dual ownership structure” is the special ownership structure of Chinese listed companies, monitoring effects ofinstitutional investors may be affected by corporate ownership. Based on Chinesespecial ownership structure, the impact of different listed companies’ ownership on therelationship between different institutional holdings and firm performance isinvestigated. The results show that state-owned property right of listed companieshinder the institutional investors from participating in corporate governance, and has anegative impact on institutional investors improving firm performance. Additionally,compared to the non-independent institutional investors, this negative effect is moresignificant on independent institutional investors. Moreover, this negative impact is notdiminished in Split-Share Structure Reform period.