Heterogeneity of Institutional Investors and Investment Effects
- Empirical Evidence from Chinese Securities Market
Ying Jin1
1School
of Business, Jinling Institute of Technology, Nanjing
( jy@jit.edu.cn)
Abstract - With social security funds and securities
investment funds as research objects, this paper makes an
empirical study on cross-sectional data in the period
2008-2010 of listed companies of which the stocks are
heavily held by institutional investors. Using property rights
theory and agency theory, this paper verifies the following
hypothesis: securities investment funds and social security
funds face different political and social pressure, and have
different payment mechanisms for managers, thus the fund
owners may have conflict or convergence of interests with
companies’ administration, which may affect contrarily the
investment value of companies. This paper contributes by
demonstrating the influence on companies’ investment
effects of heterogeneity of Chinese institutional investors,
which provides new evidence for judging, in the era of
diversified institutional investors, the different roles of
different institutional investors in corporate governance and
performance, and offers supporting evidence for China to
formulate development strategy for institutional investors.
Keywords - Corporate Governance, Investment Value,
Securities Investment Fund, Social Security Fund
I.
INTRODUCTION
In mature capital markets, the supervision of
institutional investors tends to exert important influence
on the corporate governance, and it is a reliable
mechanism for addressing corporate governance issues.
As super-conventional development of Chinese
institutional investors leads to a diversified structure,
people are concerned whether it is possible to effectively
supervise the company's administration and alleviate the
problem of internal control to accrue the value of the
company, and whether different institutional investors
have different effects on corporate governance as well as
investment value. Diversified institutional investors mean
that except securities investment funds, institutional
investors have held a certain amount of stocks, and may
have significant impact on the capital market. This article
will study difference between securities investment funds
and social security funds in aspects such as the political
and social pressure they face and the incentives, and
make an empirical research on the different effects caused
when these two kinds of funds hold stocks
II. LITERATURE
REVIEW
____________________
Fund: This paper explains the preliminary results of the philosophy and
social science project (2010SJD630048) of Education Department of
Jiangsu Province.
Jiangsu, China
At present, a lot of domestic and foreign research
has been made on institutional investors’ participation in
corporate governance. On whether institutional investors
are involved in corporate governance, there are different
types of opinions among foreign scholars. Scholars who
believe in "shareholder activism" think that institutional
investors have favorable conditions for supervision, for
example, they are professional investors and hold a large
amount of stocks, and therefore they obtain information
superiority. In addition, heavily held stocks make them
susceptible to liquidity losses when they withdraw from
the market, and they have to bear a strict fiduciary
responsibility. This means investors can benefit from
supervision. The above factors indicate that "free rider"
problem can be avoided[1-3]. Scholars who believe in
"shareholder passivism" presume that because of reasons
like legal restrictions, difficulty of supervision, high cost
and liquidity, institutional investors are not proactively
involved in supervision of the companies; their stock
holding has no significant impact on the value of the
companies[4-6]. Those who hold the eclectic opinion
believe that due to different funding sources, amount of
shareholdings, and whether the institutional investors
have conflict of interest with the companies, investors’
roles in corporate governance differ[7] .
Previously, Chinese researchers think that due to
their own conditions and external environmental
constraints, institutional investors (mainly those of
securities investment funds) have very limited roles in
corporate governance. For instance, Huang Xingnian[8]
considered that Chinese institutional investors were
highly dependent on the government, and that the
government intervened in operations of institutional
investors with resource control or political control.
However, huge disparity existed between government
targets and business goals, therefore institutional
investors were not qualified to supervise the businesses.
Over time, a growing number of scholars believe that
Chinese institutional investors do resort their oversight
capacity to govern. For example, Wang Zongjun[9]
presumed that as transformation of our government’s
functions and reform of split share structure went on, the
government was being phased out as a manager and a
supervisor. Since the types of institutional investors
augmented and their share proportions increased, it was
possible for them to become qualified company oversight
bodies.
According to associated preliminary findings in
China, these studies mainly focused on securities
investment funds, or they regarded all institutional
investors as homogeneous funds. The findings simply
presumed that institutional shareholders had either no
significant impact or positive effect on firm value.
However, they ignored that differences between
institutional managers’ business objectives might affect
adversely the firm value.
III. RESEARCH
HYPOTHESES
Many foreign scholars believe that unlike banks and
insurance companies which have business ties with the
invested companies, public pension funds are relatively
independent institutional investors7 as well as long-term
funds, they are suitable to be the overseers of enterprises.
Woidtke[10] divided pension funds into two types: public
pension funds and private pension funds. By comparing
effects on industry’s adjustment Tobin's Q of companies
when these two types of funds hold stocks in companies,
Woidtke found that shareholdings of public pension funds
are negatively related with industry’s adjustment Tobin’s
Q, while the shareholdings of private pension funds are
positively related with industry’s adjustment Tobin's Q.
She suggested that the remarkable differences were
resulted from the fact that public pension funds faced
greater political pressure than private pension funds and
their incentives were decoupled from performance.
Domestic scholars, such as Zhang Wancheng[11], believed
that the social security funds had long-term goals, and
were suitable to be institutional investors who could
participate in corporate governance and stabilize market.
However, they ignored the inconsistency between
objectives of social security fund managers and those of
corporate. Wang Wenling12 proposed that one particular
problem of agency during management of public pension
reserve funds was the intervention of political factors in
the funds’ operations. Based on the above analysis, we
propose Hypothesis 1:
H1: The shareholding proportions of social security
funds are negatively correlated with investment value of
companies.
The minority shareholders have the rights to transfer
fund shares, which is the rights provided by the
redemption mechanism (for open-end funds), or the rights
of transfer in capital markets (for closed-end funds), and
can pose strong constraints on fund managers. In
addition, an essential part of incomes of the fund
companies is the management fees charged in accordance
with the size of the trust fund. The rights to transfer of
minority shareholders provide incentives for fund
managers to monitor management of the companies; this
can maximize the interests of minority shareholders, and
can also make the goals of the fund managers less
susceptible to administrative intervention. From the
perspective of incentives of the funds, at the beginning of
each year, fund managers and fund companies sign a
performance contract, in which both parties agree on
certain performance targets. The targets are usually about
how high the annual cumulative rate of return of the fund
administered by a fund manager must rank among the
same type of funds. The ranking is directly linked with
the performance bonus that fund manager can obtain.
This performance-sensitive payment system urges fund
managers to strive to safeguard the interests of minority
shareholders, and strengthen supervision as the
shareholdings of funds expand. Such supervision can ease
the company's problem of agency, reduce agency costs,
and increase the value of the companies as well as that of
the funds. Moreover, Chinese fund companies have strict
trust and agency relationship with minority shareholders.
This means fund managers are under dual supervision of
the trustees and the general assembly of fund holders, and
they are responsible, on behalf of the minority
shareholders, to oversee the companies and to protect and
increase the interests of minority shareholders. Therefore,
fund managers and the firms have the same goal:
maximization of investment value. Based on the above
analysis, we propose Hypothesis 2:
H2: The shareholding proportions of securities
investment funds are positively correlated with the
investment value.
Because securities investment funds account for a
majority of institutional investors, this paper proposes
Hypothesis 3:
H3: The shareholding proportions of institutional
investors as a whole (including securities investment
funds, social security funds and insurance companies) are
positively correlated with the investment value.
IV.
STUDY
DESIGN
A. Sample Source and Selection
We have chosen the period 2008-2010 as the sample
interval. Since value indicators lag by one year, we
verified how the shareholding proportions of securities
investment funds, social security funds and institutions as
a whole in the period 2008-2009 affected corporate
investment value of 2009 to 2010. We selected 817
samples of 2008, and 1178 samples of 2009. The data
used in this paper comes from the CSMAR database.
B. Variable Setting and Model Design
As for indicators of investment value, in addition to
earnings per share and net assets yield that represent
companies' accounting performance, Tobin’s Q used to
study relationship between corporate governance and the
value was also chosen. Tobin's Q, which is a market
indicator, equals to the ratio of the company's market
value to replacement value of the company’s assets, and
can reflect the company's future development potential.
What’s more, Tobin's Q can reflect not only the public
shareholder activism, but also the value effects of
nonpublic shareholder activism, for example private
negotiations[10][13] .
To fully reflect the investment effect, capital
expenditure, which is the company's most important
investment decision, was also considered. Many scholars
believe that capital expenditure is likely to become an
important tool for the controlling shareholders or
administrators of the company to secure personal interests
and damage the interests of minority shareholders14.
Under the institutional context in which companies are
controlled by the largest shareholders, investigating the
impact of active shareholder behavior of institutional
investors, which is an emerging governing mechanism, on
investor protection from the perspective of capital
expenditure will help understand the effect of the
supervision of the institutional investors, and provide
backing evidence for Chinese authorities’ vigorous
decisions on supporting institutional investors.
We selected capital expenditure as the proxy
indicator of investor protection, and used "cash for
building the fixed assets, intangible assets and other
long-term assets" on the cash flow statement as the proxy
variable of total capital expenditure[15]. Referring to the
article of Hua Guiru and Liu Zhiyuan[16], we used the
following variables as control variables. First, we used
GROW to represent the company's growth. Capital
expenditures differ as companies’ growth differs. More
developed companies have more potential investment
opportunities and thus will spend more capital. Operating
revenue growth rate is frequently used as indicators for
measuring growth. Second, we used CASH to represent
net cash flow generated from operations. The above
mentioned net cash flow is an important factor affecting
the company's capital expenditure level.
In terms of indicators for institutional shareholding
(INS), this paper used shareholding proportions of
securities investment funds, shareholding proportions of
the social security funds and those of institutional
investors as a whole. In terms of control variables, we
used the ownership structure variables to represent
internal mechanism of corporate governance[17]. We
selected the shareholding proportions of the largest
shareholders (TOP1) and those of the second to the tenth
largest shareholders (TOP2-10). TOP1 reflects corporate
holding structure with Chinese characteristics; TOP2-10
reflects the roles of the second to the tenth largest
shareholders in balancing internal control of the largest
shareholders. Company size and financial leverage
(asset-liability ratio) were used to represent the other
control variables that affect the corporate investment
value.
We took into consideration that institutional
investors might expand their shareholding proportions the
same time when investment value increased. That is to
say, institutional investors may invest in the company due
to recent growth in investment value, rather than
company stocks in order to improve companies’ increase
investment value. For example, institutional investors
supervise company’s administration after holding more
their shareholdings of the company after finding that
corporate performance is better. At this point, institutional
investors' ownership and investment value are also
positively correlated. Therefore, we measured indicator
variables of investment value in the following year, to
ensure investment improvement derived from the
influence of institutional investors’ shareholdings
increase on the company's administration decisions. Due
to the hysteretic nature of accounting statements, the
ownership structural variables, indicators of financial
leverage and firm size have also been brought forward a
year. The regression equation is as follows:
TBQ＝ α＋ β INS ＋∑βi Controli ＋ε
(1)
EPS= α＋ β INS ＋∑βi Controli ＋ε
(2)
ROE= α＋ β INS＋∑βi Controli ＋ε
(3)
CAP= α＋ β INS＋∑βi Controli ＋ε
(4)
The variables used in this paper are showed in Table I .
V.
EMPIRICAL RESULTS AND ANALYSIS
In this paper, we used cross-sectional data to make
least-square linear regression of the above variables, and
analyzed the impact of year by year change in the
macroeconomic environment on the institutional
investors’ shareholdings with annual dummy variable
YEAR ( for data of shareholdings in 2008, YEAR = 0; for
data of shareholdings in 2009, YEAR = 1).
From statistical characteristics of variables, we can
learn that in the period 2009-2010, average Tobin’ Q of
stocks heavily held by institutional investors is 2.84,
average earnings per share is 0.45, average return of net
assets is 12.04, average rate of capital expenditures is
6.24%. In the period 2008-2009, average shareholding
proportion of securities investment funds is 4.54%,
average shareholding proportion of social security funds
is 0.29% and that of institutional investors as a whole is
12.04%. In listed companies of which the stocks are
heavily held by institutional investors, the average
shareholding proportion of the largest shareholders is
38.55%, while that of the second to the tenth largest
shareholders is 19.69, the average asset-liability ratio is
49.7%.
According to the results of multiple linear
regressions(results table omitted), we can see that VIF
values of the regression equations are much less than 10,
indicating that the regression model is not affected by the
multicollinearity. The Durbin-Watson stat is also close to
2, which demonstrates that the auto-correlation between
the variables is low. The regression results show that the
negative correlation between shareholding proportions of
social security funds and TBQ, EPS, ROE, CAP is
significant, which validates H1. The remuneration of
managers in social security funds is not linked to
performance. Under political social pressure, social
security funds have different goals with the listed
companies, and they will exercise a negative impact on
the companies' investment value. The positive correlation
between shareholding proportions of securities
investment funds, shareholding proportions of
institutional investors as a whole and TBQ, EPS, ROE,
CAP is significant, which validates H2 and H3. With
Table I
DEFINITION OF VARIABLES
Classification of Variables
Dependent
Variables
Descriptions of Variables
Indicators of Market Value
TBQ
Tobin's Q of the Company
Indicators of Earning Capacity
EPS
ROE
Earnings per Share
Return on Net Assets
Capital Expenditure Rate= Cash Paid to build Fixed Assets,
Intangible Assets and Other Long-Term Assets/Total Assets
Shareholding Proportions of Securities Investment Funds
Shareholding Proportions of Social Security Funds
Shareholding Proportions of Institutional Investors as a whole
Shareholding Proportions of the Largest Shareholders
Shareholding Proportions of the Second to the Tenth Largest
Shareholders
Log of Total assets (Company Size)
Financial Leverage (Debt Ratio)
Net Cash Flow Generated from Operations/Total Assets
Operating Revenue Growth Rate
Protection Indicators
Minority Shareholders
Independent
Variables
Names of Variables
of
Interests
of
Institutional Ownership Variables (Of the
Top Ten Shareholders)
Characteristics of Ownership Structure
Control
Variables
Other Variables
CAP
INSSE
INSSO
INS
TOP1
TOP2-10
LOGSIZE
LEV
CASH
GROW
expanding of shareholding proportions of securities
investment funds, securities investment funds and
institutional investors as a whole can overcome "free
rider" problem of minority shareholders. They are
motivated and capable to oversee the company's
administration, and can play imperative roles in
promoting the company's investment value. In addition,
we can conclude the following from the empirical results:
(1) the ownership structural variables have no significant
impact on the investment value, indicating that the largest
shareholders used their advantages of control to violate
company assets and undermine the interests of outside
investors. Other large shareholders, because they have
different targets, do not manage to form effective balance
with the largest shareholders. This also demonstrates that
institutional investors as a whole can inhibit large
shareholders from infringing the interests of minority
shareholders, protect their interests, and mitigate the
problem of agency; (2) the negative correlation between
investment value of companies and company size as well
as asset-liability ratio is significant. The investment value
of companies is negatively correlated with company size;
this conforms to the fact that investment value of larger
companies is prone to be underestimated while the
investment value of smaller companies is prone to be
overestimated. High debt ratio will increase creditors’
constraints on the companies, and diminish the necessity
of oversight and institutional investors’ interest in
investment, thereby reducing investment value of
companies; (3) the positive correlation between the net
cash flow generated from operations and capital
expenditure rate is significant, indicating that investment
spending is influenced by the scale of internal financing.
However, the negative correlation between the company's
growth and capital expenditure level is insignificant and
does not pass statistical test. That is to say, companies'
investment spending decreases with the improvement of
investment opportunities, therefore reflecting a possible
shortage of investment in Chinese listed companies.
VI. CONCLUSIONS AND RECOMMENDATIONS
The results of empirical tests show that although the
social security funds are relatively long-term funds and
have conditions for supervising administration of listed
companies, they, under the political and social pressure,
have different operating objectives with listed companies
and will pose a negative impact on their market value.
The securities investment funds’ incentives are highly
related with performance, making them less vulnerable to
the political and social pressure. To increase in funds’
shareholdings will urge the funds to supervise more
closely listed companies, thereby accruing the investment
value. Moreover, it is verified that the overall
shareholdings of institutional investors have a positive
impact on the investment value of listed companies.
This paper demonstrates that heterogeneity exists in
institutional investors, due to differences between
incentives and conflicts of interests, different institutions
have different impacts on corporate governance and value
of listed companies, which provides new evidence for
judging roles of different institutions in corporate
governance in the era of diversified Chinese institutional
investors. Given the ineffective supervision of Board of
Directors and roles of institutional investors as a whole in
promoting the value of companies, supervision of
institutional investors has become a reliable mechanism
for overseeing listed companies. Chinese authorities
should continue to vigorously support institutional
investors. But given that social security funds have
negative influence on the investment value of listed
companies, Chinese government, when supporting
diversified institutional investors, should reduce the
political and social pressure on institutional investors and
set up payment systems that are closely linked to
performance, in order to enable the funds to be
independent market participants and create a harmonious
governance structure.
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