Abstract
This study uses the annual data of Chinese A-share listed companies held by institutional investors during the period of 2005–2016 for empirical analysis. First, this study uses the panel regression model to explore the relationship between institutional ownership and stock return volatility. Then, the CAPM one-factor model and the Fama–French three-factor model are used to analyze the relationship between institutional ownership and idiosyncratic risks. Finally, we estimate the relationship between institutional ownership and corporate governance. Furthermore, we compare the empirical results before, during, and after the crisis. This study uses the Hausman test and the endogenous test to validate the results. The empirical results show that the management behavior of independent institutional investors is more obvious post-crisis. However, gray institutional investors have no impact on idiosyncratic risks. In the regression of the CAPM one-factor model, domestic institutional investors have effectively reduced the idiosyncratic risks before the financial crisis. Foreign institutions’ monitoring performance before, during, and after the crisis is not obvious. All institutional ownership has a significant positive impact on the top 10 shareholders, but independent and domestic institutional ownership has a significant negative impact on senior shareholders. Institutional ownership has little impact on the movement of the first shareholder and CEO.
Highlights
The role of institutional investors in corporate governance is becoming increasingly important
The second group of Pearson’s correlation coefficient (PCC) tests is the relation between the stock return volatility variables and firm-level control variables. In this group of tests, this study found that PCC values between the SIZE and stock return volatility variables were almost significantly negative
The fourth group of PCC tests is the relation between the corporate governance variables and firm-level control variables. In this group of tests, we found that the top 10 shareholders vs. senior shareholders have a different relationship with SIZE and TURN, but both have the same relationship with LEV, where the PCC values were significantly negative
Summary
The role of institutional investors in corporate governance is becoming increasingly important. Many economists believe that the 2007–2008 global financial crisis was the worst financial crisis since the Great Depression of the 1930s. This crisis raised awareness of the importance of corporate governance. Mcnulty and Nordberg [3] argue that institutional investors play an important role as stewards in corporate governance. Since China joined the World Trade Organization (WTO) in 2001, the total investment quota of qualified foreign institutional investors (QFII) from June 2003 to September 2010 has increased from US $425 million to US $19 billion [4]. Liu [6] believes that China will speed up its approval of joint ventures for security companies and fund companies, in which foreign investors have a majority stake, which is a sign that policymakers are pushing for the opening of the national financial system
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