Is institutional investor a supervisor or cooperator?

Abstract

PurposeThe purpose of this paper is to discuss whether top management will assume their liabilities especially when financial restatement occurs, and,based on the “effective supervision theory” and “strategic cooperation theory,” to examine whether an institutional investor is a supervisor or a cooperator considering the management turnover caused by financial restatement in the companies.Design/methodology/approachUsing a sample of the A-share-listed companies from year 2010 to year 2014 and dividing financial restatement into fraudulent financial restatement and other financial restatement, the authors examine the relationship between financial restatement and abnormal management turnover, which usually is related to the management integrity or capacity. By using group test methods, the authors test the influence of the institutional investors’ shareholding on the relation between financial restatements and management turnover.FindingsThis paper finds that financial restatement can result in abnormal management turnover, especially the fraudulent financial restatement. The institutional investors usually are supervisors but when the shareholding of institutional investor is too high and the management turnover results from fraudulent financial restatement, the institutional investors may become cooperators with management in the companies. Besides, the institutional investors play the supervisory function more significantly in non-state-owned enterprises.Originality/valueThis paper expands literature of the institutional investors in the corporate governance area and provides a basis for future research in the area of the institutional investors’ governance effect. It divides financial restatements into fraudulent financial restatement and other financial restatement and examines the relationship between financial restatement and abnormal management turnover so as to provide evidence about whether the management will assume their responsibilities when there is financial restatement in the company. It also tests whether the institutional investors will play supervisor’s or cooperator’s function in state-owned and non-state-owned enterprises.