Does "communication" Rather Than "intervention" Have Governance Effects

In 2010,thanks to the launch of Share Price Index Futures by China Financial Futures Exchange and securities margin trading by Shanghai Stock Exchange,China's private securities investment funds were formally born(Chen et al.,2014).After the abnormal fluctuation of the stock market in 2015,private securities investment funds ushered in a period of vigorous development because of their excellent risk management ability.As of 2019,private securities investment funds were comparable to mutual funds in terms of asset management capabilities and average daily trading volume.More importantly,nearly 40% of the top ten shareholders of listed companies in China have private securities investment funds,which have become an important source of external shareholders of listed companies,and have begun to influence the actual operation of target companies by submitting shareholder bills,publicly criticizing and competing for corporate control rights.Zhao et al.(2018)found that China's private securities investment funds have grown into hedge funds in the overseas sense.In overseas financial markets,hedge funds participate in corporate management by exercising shareholder activism,rather than “voting with their feet” when they encounter problems.This stems from the hedge fund as a new force in corporate governance has its inherent advantages of governance: First,the legal supervision is weak;Second,the problem of internal agency is relatively small;Thirdly,the locking clause stipulated by law makes it hold for a long time and has a long-term governance goal(Boyson et al.,2010).Therefore,hedge funds belong to “active management”,while mutual funds and pension funds belong to “passive management”,and overseas academic research has studied them separately from other institutional investors(Brav et al.,2008;Brav et al.,2015b).Shareholder activism by hedge funds falls into the following five categories: active intervention to help managers increase shareholder value,recapitalization of the target company,adjustment of business strategy,attempted sale or acquisition of the target company,direct impact on corporate governance,with the first and fifth categories predominating.That is to say,hedge funds often affect corporate governance to achieve the goal of enhancing corporate value.Most of the above actions of hedge funds require formal corporate governance procedures,that is,“intervention” rather than“communication” to the target company;“Communication” refers to informal behavior that does not require corporate governance procedures(Brav et al.,2008).From a practical point of view,the hedge fund “intervention” is no longer all,more and more hedge funds through the “communication” affect corporate governance(Brav et al.,2008).This phenomenon has received theoretical attention,Levit(2019,2020).A theoretical model is set up to show that “communication” and “intervention” are not complementary but substitute for each other,that is,“intervention” sometimes damages“communication”;When the principal's “intervention” threat is greater or the agent's agency cost is higher,we should choose “communication” rather than “intervention”.However,the above theoretical expectations have not yet been supported by empirical evidence.Further,whether hedge-fund shareholder activism is actually creating value,whether through “communication” or “intervention”,is debatable.Some scholars believe that hedge funds enhance the level of operation,financial management and governance structure by improving the principal-agent problem,and then improve the stock market pricing efficiency of the target company.However,some scholars believe that hedge funds are not only useless to the shareholder value of the target company,but also will not have a substantial impact on the actual business behavior of the target company(Brav et al.,2015a;Cheng et al.,2015;Boyson and Pichler,2019).To sum up,it is not clear whether hedge funds can really exercise shareholder activism through “communication” or “intervention” in overseas academic research,especially through which channels hedge funds can produce governance effects.The key to the limitation of overseas research is that hedge funds disclose less information,and it is difficult for scholars to find direct evidence of “communication” or“intervention” between hedge funds and management as shareholders,while China's financial market provides such a research opportunity.In China's financial market,there is an important investment behavior of private equity funds-field research of listed companies.Especially after the listed companies held by private equity investment funds,the most concerned issues in field research have changed from industry competition and business model to corporate governance,at this time,there is a face-to-face “communication” between the managers of private equity investment funds and the management of listed companies.Private equity fund managers often have good professional quality and keen market sense,and will fully communicate with management on corporate governance issues,perhaps both sides can get valuable information from “communication”(Trouche et al.,2014;Carlson,2019;Chen et al.,2020).Therefore,this paper studies the governance effect of“communication” rather than “intervention” of private equity investment funds by investigating listed companies after the positions of private equity investment funds in China from 2013 to 2018,and combining with the exogenous events of the regulatory reform(the threat of “intervention” is reduced)of the private equity investment fund industry in 2016.The results show that when the Chinese private securities investment funds investigate the listed companies after holding positions,they can improve the stock market valuation and financial performance of the target companies by“communicating” corporate governance issues with the management.When the threat of “intervention” by private equity investment funds in listed companies decreases after the regulatory reform in 2016,the effect of “communication” is greatly reduced,especially in companies with low equity concentration or serious agency problems.At the same time,the “communication” effect between private equity investment funds and management is limited to the level of affecting corporate governance and then improving corporate financial performance,and cannot affect more companies' actual investment and financing business behavior.Overall,the results of this study on the one hand verify the Levit(2019,2020).The theoretical expectation is that the “communication” between principal and agent is valuable,and the relationship between “communication” and “intervention” is substitution rather than supplement;When the client's “intervention” threat is greater and the agent's agency cost is higher,the client should choose “communication” rather than “intervention”,which is more in line with the interests of the client;On the other hand,it helps to understand the impact of China's private securities investment funds on corporate governance and the governance role they play in the financial market.It provides theoretical support and empirical basis for financial regulators to formulate policies.