The Impact Of Institutional Investors On Corporate Performance

As one of the refinancing methods in China’s equity capital market, the issue fraction and the number of participating companies of private placements are far more than that of right issues and convertible bonds issues. According to CSMAR database, there are 576 companies conducting private placements in 2015, which have financed 831.816 billion yuan. However, there are only 5 companies conducting right issues and 14 companies issuing convertible bonds in 2015, which have separately financed 157.62 and 227.94 billion yuan. Private placements have been increasingly popular, and more and more institutional investors have participated in it, especially funds and security companies. According to CSMAR database, private placements are for institutional investors accounting for 59.4 percent, of which funds for 50.5 percent and security companies for 25.1 percent from 2010 to 2015. Besides, the proportion of institutional investors who participate in private placements is also large, on average accounting for 47.8 percent of the issue fraction, of which funds for 34.4 percent and security companies for 6.9 percent.When the company raises a lot of money through secondary equity offerings, because of the agency problem, if the management fails to carry out a reasonable allocation of resources, there is greater probability of free cash flow problem, which may result in underperformance. The participation of institutional investors in the private placements improves the corporate ownership structure, so whether the institutional investors can be effective monitors in order to alleviate the free cash flow problem? If the monitoring role of institutional investors is sure, in the short-term, whether the information of issuing to institutional investors will be a positive signal in the capital market? In the long run, whether these institutional investors could play a strong monitoring role, and thus improve the operating performance?Regarding these issues, there are two main viewpoints from foreign scholars. Wruck(1989) has put forward the monitoring hypothesis to support the institutional investors’ monitoring role for the corporate governance, and he thinks that the participation of institutional investors has a positive short-term market reaction and improves long-term performance. While the managerial entrenchment hypothesis mentioned by Barclay et al. (2007) and the shareholder negativism hypothesis mentioned by Bhide (1993), both support that institutional investors do not have sufficient motivation and ability to supervise and have little impact on improving corporate performance, or even impose a negative impact. Chinese scholars begin to study the private placements relatively late, the literature on the performance of private placements mainly focused on whether announcement effect is positive or negative,without analyzing from the angle of institutional investors. However, this has basis of theory and empirical research in the foreign literature. In addition, as to the explanation of post-issue performance, Wang and Zhang(2006) propose ownership structure is perhaps one factor, but they do not conduct relevant empirical research. This paper makes up for gaps in research in this area and draws the conclusion that compared to monitoring hypothesis, managerial entrenchment hypothesis and shareholder negativism hypothesis can better explain the performance of issuing companies. This paper can not only afford references for the companies to make the right refinancing decisions and choose the suitable purchasers, but also can provide more extensive empirical evidence about the institutional investors’ role in corporate governance.This paper has selected sample data from Shanghai and Shenzhen A-shares market between 2010 and 2015, and has an in-depth empirical analysis on the impact of institutional investors for the performance of listed companies which participate in private placements. The sample data in this field is up to year 2011, but this paper studies the new periods and has sufficient samples. This paper has an empirical research on short-term market performance based on 495 samples from 2010 to 2015 and long-term operating performance based on 144 samples from 2010 to 2012. In the short-term market performance research, this paper has studied two issues:Firstly, what is the impact of private placements on the short-term announcement effect? Secondly, will issuing to institutional investors be positive information on the capital market? As to the long-term operating performance, this paper also has studied on two issues:Firstly, how about the corporate long-term operating performance after the private placements? Secondly, what is the impact on operating performance of the participation of institutional investors?In the study of short-term market performance, firstly, this paper has calculated the cumulated abnormal return as with the previous literature. This paper has selected market model to estimate the expected return, in order to ensure the objective analysis, this paper has selected two market indexes to calculate abnormal return. This paper chooses the announcement day as event day, and analyzes the average abnormal return and average cumulated abnormal return with the event window of [-20,+20] as well as the estimated window of [-240,-40]. Secondly, this paper analyzes the impact of the participation of institutional investor on corporate short-term market performance in the multiple regression models, and chooses the most significant CAR with the window of [-5,+10]. As to the explanatory variables, this paper involves three dummy variables which are institutional investors’participation, the funds’participation and the security companies’participation, and also involves the allocation rate of institutional investors, aiming at quantifying the participation of the institutional investors. However, the study in this field is rare.In the study of long-term operating performance, firstly, this paper chooses the method come up by Barber and Lyon (1996) to calculate the abnormal performance, which is the measurement of long-term operating performance. In this paper, return on assets and cash-flow return on assets are selected to calculate abnormal performance. Secondly, this paper involves three dummy variables which are institutional investors’participation, the funds’participation and the security companies’participation, in order to analyze institutional investors’ participation and how its impact on the long-term operating performance will be.The main conclusions about short-term performance are as follows:Firstly, abnormal return fluctuates before the announcement during the event window of [-20,+20], which means information may be leaked in advance. Secondly, abnormal return is not significant at the announcement day, but the cumulated abnormal return is significantly below 0 near the announcement day. Thirdly, the participation of institutional investors has a significant negative impact on short- term performance, and the more the proportion of institutional investors who participate in private placement, the more negative impact on short-term announcement effects. Lastly, whatever the participation of funds or security companies, they both have a negative impact on the cumulated abnormal return. This result cannot support monitoring hypothesis and also casts doubt on the viewpoint that most funds are active investors.The main conclusions about long-term performance are as follows:Firstly, at the private placement year, first year and second year, profitability of company conducting private placement is significantly lower than that of matched company, and the profitability gradually decreases. The participation of institutional investors does not have a significant impact on the profitability. Secondly, both for the total sample and sub-samples, compared with the matched company, the company who conducts private placement has lower cash flow generating ability, and the free cash flow experiences a downward trend, which reflects the serious free cash flow problem. The participation of institutional investors has a negative impact on cash flow generating ability, while in a separate research on funds and security companies, the impact is not significant.The main contributions of this paper are as follows:Firstly, in terms of the research objects, there is few literature about the short-term private placement announcement effects and long-term performance from the angle of institutional investors. Therefore, this paper has studied this issue based on this view, according to the reference of monitoring hypothesis come up by Wruck (1989) and the managerial entrenchment hypothesis come up by Barclay et al. (2007).This paper has studied the impact of institutional investors on the corporate performance. Furthermore, because of the private placements samples are composed mainly with funds and security companies, following the classification by Brickley et al. (1988),funds are usually active investors and security companies are usually passive investors. Therefore, this paper has conducted a research on the impact of different types of institutional investors on corporate performance, which enriches the existing literature in this field.Secondly, in terms of research methods, many scholars select financial indicators to measure the long-term performance, and then directly use multiple regression or factor analysis method to evaluate the performance, however, it can not rule out other factors on performance. This paper refines the drawbacks, following Barber and Lyon (1996), as well as using financial data to calculate the long-term abnormal operating performance. This accounting research method can help analyzing how the operating performance changes based on private placements.This paper also has two drawbacks as follows:Firstly, this paper has not considered the endogenous problem between the participation of institutional investors and long-term operating performance. Because of the difficulty of finding appropriate instrumental variables, this paper does not conduct further study on this issue.Secondly, this paper does not select the sample that only institutional investors participating in, and there are some inevitable impacts in the sample from large shareholders and other outside investors. The reason is that the number of only institutional investors participating in is too small, which means inability to conduct an effective multiple regression analysis, while the number of institutional investors participating in is up to 294, which accounts for 59 percent of the whole sample.