The Empirical Study About Spatial Distance And Institutional Investors’Corporate Governance Effect

A major feature of modern corporate governance structure is the separation between ownership and management. This kind of separation between ownership and management improves the professional level of the company’s business, while improving the efficiency of the corporate governance, but the agency problem will follow either. Benefit game between owners and operators of the company intensified with the complicated company management, and this benefit game makes managers may choose to sacrifice the company’s long-term development in the formulation of corporate strategy, which will have negatively impact on corporate governance and performance. China is currently still in the the primary stage of the socialist market economy, and the corporate governance problems of listed companies are still very serious, internal and external governance mechanisms cannot play its due role in supervising. Institutional investors as the third force between the controlling shareholder and individual shareholders of listed companies, have the advantages of capital, information and the mode of operation relative to individual investors. They can ease the "free-rider" problem of the individual investors in corporate governance, thereby enhancing the efficiency of corporate governance and corporate performance.The effect of corporate governance of institutional investors is an important area of modern corporate governance theory and empirical research concern. In corporate governance there are two opposing views for the role of institutional investors in the literature. One is effective supervision hypothesis, which means that institutional investors oversee the company management positively through "vote by hand" method; another is negative supervision hypothesis, which means that institutional investors participate in governance activities passively by "vote by foot" method. Institutional investors will be measured between the benefits and costs when to participate in corporate governance. If monitoring costs are more, institutional investors will only choose passive participation in corporate governance.Foreign scholars have found that geographic advantages will bring economic benefits by studying. Institutional investors that are closer to companies can effectively reduce their supervision and control of operating costs and the cost of collective decision-making during their participation in the corporate governance, making monitoring revenue exceed the cost of supervision. So, for China’s listed companies, is spatial distance between institutional investors and companies able to affect the company’s performance? How is the effect of the governance of institutional investors that are closer to companies? This paper attempts to answer these questions through theoretical and empirical analysis.The article is divided into four parts, as follows:The first chapter is the introduction, mainly explains the research background and research significance, and finishing the research thought and writing frame.The second chapter is the literature review. Four aspects of domestic and foreign research results have been reviewed in this part:the motivation and barrier for institutional investors to response to the governance activities, corporate governance and geographic advantage, the role played by institutional investors when they participate in governance activities, and described research significance on the basis of this review.The third chapter is the related concepts and basic theories. First, this chapter has a brief description of related concepts of institutional investors and institutional investors’ development process in China. Second, this chapter presents the theoretical basis of this article:agency theory, corporate governance theory, and cost-benefit theory. Using the theory, I propose the research hypotheses: spatial distance between institutional investors and companies are negatively related to corporate performance measured by Tobin Q, EPS, and FCFF. Institutional investors in China are now mostly located in the four first-tier cities of Beijing, Shanghai, Guangzhou, Shenzhen. I analyze the different situation between the first-tier cities and non-first-tier cities as the main object of this study is the spatial distance.The fourth chapter is study design. According to the research hypotheses, I establish a regression model, interpret each variable, give reasons for variable selection, and sample selection criteria and data sources. In order to verify the effect of distance of institutional investors on corporate performance, this paper use China’s A-share listed companies in2011as samples, and use Tobin Q, EPS, FCFF as the indicators to measure performance of listed companies. Then I use company financial leverage ratio at the end of the period, the total assets, earnings and operating margin to weigh the capital structure, size, market expectations and profitability of a company, and use them as control variables in the pattern.The fifth chapter is the empirical results and analysis. This chapter focuses on descriptive statistics of variables, multiple regression analysis, correlation analysis, and robustness test of the effect of distance of institutional investors on corporate performance. The empirical results shows that distance between institutional investors and companies is negatively related to corporate performance significantly measured by Tobin Q, EPS, and FCFF. Meanwhile, the spatial distance of institutional investors in non-first-tier cities has higher negative impact of the corporate market performance than the first-tier cities.The sixth part draws relevant research conclusions and implications. The conclusions of this study are:1. The spatial distance between institutional investors and companies will affect the cost of governance of institutional investors. Institutional investors will measure between benefits and costs before they participate in corporate governance. If treatment costs exceed governance benefits, institutional investors will choose "vote by foot", and passively response to the governance activities. Institutional investors that are closer to companies can effectively reduce their supervision and control of operating costs and the cost of collective decision-making during their participation in the corporate governance, making monitoring revenue exceed the cost of supervision. In this case, they will choose to "vote by hand", and actively involved in corporate governance, improve supervision efficiency, so as to improve the performance of the company.2. Spatial distance between institutional investors and companies will affect the effect of corporate governance, so as to improve corporate governance and corporate performance. The empirical study results show that, despite facing the pressure from customers’short-term high rate of return request and firm’s quarterly assessment on investment return, institutional investors which are closer to companies prefer to actively participate in corporate governance, and have better corporate governance effect to improve the company’s performance and value.3. The spatial distance of institutional investors in non-first-tier cities has higher negative impact of the corporate governance effect than the first-tier cities as institutional investors in China are now mostly located in the four first-tier cities of Beijing, Shanghai, Guangzhou, Shenzhen.The contribution of this article is mainly reflected in:this is the first empirical research to examine the relationship between spatial distance and institutional investors’ corporate governance effect based on the Chinese market. Institutional investors’ connection with corporate governance has been a focus objects in the research areas of modern corporate governance, but fewer scholars make a concrete analysis from the perspective of spatial distance.But still, drawbacks beyond control exist to be eliminated with future research going further. First, there are many factors to impact the corporate governance effect, so it is possible to omit control variables for this paper. Second, when comes to the method of measuring spatial distance between institutional investors and companies, though I reference to the previous scholars’research to find the most suitable measurement method for listed companies in China, the results are still not accurate enough. Third, the current research just proves a correlation between the spatial distance of institutional investors and corporate performance; it has not proved a direct causal relationship between the two. Irrational structure of institutional investors in China is very serious, and could lead to biased conclusions of this article. Therefore, whether to regard the conclusions of this study as a theoretical basis for the policy makers remains to be further validation.