Institutional Blockholders Research Articles

Multiple Large Shareholders and Financial Reporting Quality: Evidence from China

In this paper, we examine the effect of multiple large shareholders (MLS) on financial reporting quality. Using a sample of Chinese listed firms over the period 2007–2018, we find that firms with MLS tend to have lower financial reporting quality. Our findings are robust to an array of robustness tests, including controlling for possible omitted variables, a Heckman two‐step sample selection model, and a difference‐in‐differences analysis based on a propensity score matched sample. We further show that the effect of MLS on financial reporting quality is attenuated for firms followed by more analysts, cross‐listed on the Hong Kong Stock Exchange, and held by institutional blockholders. Finally, we find that agency problems appear to be the possible underlying mechanisms through which MLS lower financial reporting quality.

Common institutional blockholders and tail risk

We find that the tail risk of a firm's stock returns is positively affected by the tail risk of other firms held by the same common institutional blockholder (CIB). The CIB peer effect on tail risk increases (decreases) after exogenous initiations (terminations) of peer connections via CIB ownership, consistent with a causal interpretation. Our findings support the disclosure herding hypothesis, which predicts that firms release bad news after other firms’ bad news announcements. In addition, commonality in the real investment decisions of a firm and its CIB peers, along with the common trading pressure of these firms, contribute to the positive relationship between firms’ tail risk, highlighting the multifaceted roles of institutional investors in the contagion of firms’ tail risk. Finally, the CIB peer effect on tail risk is stronger when the CEO is more risk averse, CIBs hold more shares, or CIBs are pressure-sensitive (i.e., banks and insurance companies).

Geographic Concentration of Institutional Blockholders and Workplace Safety Violations

Geographic Concentration of Institutional Blockholders and Workplace Safety Violations

Effects of 10-K readability on institutional blockholder monitoring of risk management

ABSTRACT Using the Plain Writing Act (PWA) of October 2010 as a source of exogenous variation in 10-K readability, we examine whether improvements in 10-K reports enhance institutional investors’ monitoring of firm risk management. The results indicate that the negative association between monitoring institutional ownership and systematic risk is stronger when firms provide more readable 10-K reports. The impact of readability improvement on the relation between institutional monitoring and risk is more pronounced after the PWA. This finding confirms our hypothesis that improved readability provides institutional investors with more complete firm information with which to conduct their monitoring efforts, thus inducing more effective risk management.

Common institutional ownership and corporate misconduct

This paper explores the relationship between common institutional ownership and corporate misconduct. Empirical evidence indicates that common institutional blockholders (institutional blockholders with multiple blockholdings), with advantages in information, experience and resources, can effectively inhibit corporate misconduct. Furthermore, the inhibitory effect is stronger in firms prone to commit misconduct. Empirical results also support the role of state blockholders with multiple blockholdings and common institutional blockholders with high ownership proportions in restraining corporate misconduct. This paper contributes to the heated debate on the economic implications of common ownership and provides additional evidence for the role of common blockholders in Chinese capital markets.

The Wall Street stampede: Exit as governance with interacting blockholders

The growth of the asset management industry has made it commonplace for firms to have multiple institutional blockholders. In such firms, the strength of governance via exit depends on how blockholders react to each other’s exit. We present a model to show that open-ended institutional investors such as mutual funds react strongly to an informed blockholder’s exit, leading to correlated exits that enhance corporate governance. Our analysis points to a new role for mutual funds in corporate governance. We examine the trades of mutual funds around exits by activist hedge funds to present empirical evidence consistent with our model.

Does corporate social responsibility affect the institutional ownership of firms in the hospitality and tourism industry?

As hospitality and tourism (H&T) businesses mature, they often seek institutional equity financing to support their growth. Capital intensive H&T firms, such as cruise operators, casinos and large restaurant and hotel chains, continuously rely on institutional capital to fund their operations. This study examines which corporate social responsibility dimensions affect H&T firms’ ability to attract institutional equity capital providers. We document that firms with better social and governance performance have higher institutional ownership, particularly by investors focused on long-term growth and value creation, such as dedicated institutional investors, domestic investors and blockholders. Community and environmental performance do not increase institutional holdings.

Do domestic or foreign institutional investors matter? The case of firm information asymmetry in Korea

We examine the impact of institutional investors on the effectiveness of firms' governance in Korea, as evidenced by information asymmetry. We find that lagged institutional blockholdings are negatively related to future information asymmetry measures, primarily through long-term, domestic institutions. We attribute this finding to domestic institutions' proximity advantages in local markets. Our findings imply that policy initiatives aiming to resolve firm-level agency issues in emerging markets may maximize their effectiveness by promoting the active participation of domestic institutions.

Keeping up with the Joneses: Corporate Dividends and Common Institutional Blockholders

Keeping up with the Joneses: Corporate Dividends and Common Institutional Blockholders

Frenemies: Corporate Advertising Under Common Ownership

In this paper, we investigate the impact of ownership structure on corporate advertising expenditures. Using mutual fund mergers as an exogenous shock to ownership structure, we find that competing firms owned by the same institutional blockholders experience a significant reduction in advertising expenditure. The reduction in advertising expenditure is more likely to occur in the presence of higher coordination benefits or lower coordination costs. Specifically, this effect is more pronounced for firms in more competitive industries, in higher advertising-intensity industries, with greater common ownership, with more concentrated institutional ownership, and with headquarters located in the same state. Overall, our empirical evidence indicates that ownership by common institutional investors significantly affects corporate advertising strategy. This paper was accepted by Matthew Shum, marketing.

Institutional Blockholders and Voluntary Disclosure

We study how institutional blockholdings affect firm voluntary disclosure. We document that concentrated institutional ownership reduces firms’ voluntary disclosure measured by the propensity to issue management forecasts, comprehensiveness of guidance, propensity to engage in conference calls, and the number of 8-K filings. We identify two channels through which institutional blockholders affect firms’ voluntary disclosure. First, blockholders have easier access to managers and substitute private for public information acquisition. Second, a higher proportion of non-monitoring blockholders with low demand for voluntary disclosure, such as passive blockholders, reduces the firm’s incentive to provide voluntary disclosure. The results are robust to endogeneity and reverse causality concerns. Our study identifies an important effect that concentrated ownership has on firm corporate disclosure.

이사회 성별 다양성과 기관투자자가 기업 가치에 미치는 영향

The amended Act on Financial Investment Services and Capital Markets Act stipulates that listed firms with assets of 2 trillion won or more should have at least one woman on their boards. This study aims to explore the impact of board gender diversity on firm value and the role of institutional blockholders on the relationship. The results are as follows. First, the board gender diversity is positively related to firm value regardless of markets, firm size, industry. Second, foreign blockholders reinforce the positive relationship between board gender diversity and firm value, while domestic blockholders mitigate the relationship. Third, board gender diversity and firm value has an inverted U shape relationship. Firm value increases with the proportion of female directors to a certain level, after which it decreases. The optimal board structure was reached when the ratio of female directors was between 18 and 44 percent, up to conditions. This finding provides an insightful grounds on the effectiveness of the revised Act, regarding appointment of female directors and gives a guideline for policy makers by suggesting optimal level of board gender structure.

Institutional investors and bank governance: An international analysis of bank earnings management

Despite the growing importance of institutional investors in global capital markets and the link between bank earnings management and financial crash risk, little is known about the role of institutional investors in mitigating bank earnings management. We conduct the first international analysis of this issue using a broad sample of banks and institutional investors. We find a negative relation between institutional ownership and bank earnings management, after controlling for the stringency of a country's bank regulations and other relevant bank and country characteristics. Additionally, institutional ownership is more negatively related to earnings management in countries with more-stringent bank disclosure requirements or when ownership is held by domestic rather than foreign institutional investors. Institutional ownership is also more negatively related to earnings management in countries in which insiders extract more private benefits or when ownership is held by institutional blockholders. Our findings have important policy implications regarding institutional investors' engagement with banks.

Informational Advantage of Institutional Blockholders

This study investigates whether institutional investors with large ownership (institutional blockholders) have informational advantages over other investors. The sample of this study is constructed from institutional investors’ mandatory filings on block shareholding of greater than 5% of a firm’s shares. Institutional blockholders are classified into active institutions if they express an intention to engage in a firm’s management as their purpose of investment and into passive institutions otherwise. To verify the information content of block ownership, this study investigates the short- and long-term market reaction to announcements of institutional investors’ block ownership. Main findings are summarized as follows. First, significant cumulative abnormal returns (CARs) are observed around the announcements. The CARs are much higher for active institutions than passive institutions. Second, the stocks owned by passive asset management companies significantly outperform both the market and the benchmark portfolio in the long-term. In contrast, the stocks owned by active private investment companies significantly underperform the benchmark portfolio. Overall, the results of this study suggest that passive asset management companies have superior skills in selecting undervalued stocks and they use long-lived information when they make large investment. In contrast, the inconsistent results on short- and long-term performance of stocks owned by active private investment companies imply that private investment companies’ activism are not effective enough to meet the initial expectations of the market.

The Influence of Domestic and Foreign Institutional Blockholders on Chinese Firms’ Innovation Performance

혁신은 특히 신흥국가 시장에 속한 기업들에게 도전적인 일이다. 5% 이상 지분을 소유한 소위 블록 기관투자자는 기업 혁신에 있어 중요한 역할을 맡고 있다. 본 연구는 중국 증시에 상장된 기업들을 표본으로 블록 기관투자자들이 기업혁신의 성과에 미치는 영향을 분석하였다. 주요 연구자료로서 기업이 허가받은 발명 특허의 건수를 사용하여 기업혁신의 성과를 측정하였다. 2007년부터 2016년까지 1,126개 중국 기업의 패널 데이터를 사용하여 분석한 결과, 블록 기관투자자는 기업 경영에 대해 적극적인 모니터링을 수행하며, 경영진의 커리어 우려를 해소시킴으로써 기업의 혁신 성과에 긍정적인 영향을 미치고 있음을 발견하였다. 어떤 유형의 블록 기관투자자가 보다 유의한 영향을 미치는지를 분석하기 위하여 기관투자자의 국적과 투자기간에 따라 블록 기관투자자를 국내 블록 기관투자자와 해외 블록 기관투자자, 그리고 장기적 블록 기관투자자와 단기적 블록 기관투자자로 구분하였다. 실증분석 결과, 국내 및 해외의 블록 기관투자자는 모두 중국기업의 혁신 성과에 유의하게 긍정적인 영향을 미치고 있었다. 특히 해외의 장기적인 블록 기관투자자의 긍정적인 영향이 가장 크게 나타났다. 반면에 단기적인 블록 기관투자자가 혁신 성과에 미치는 영향은 통계적으로 유의하지 않았다. 이런 분석 결과들은 강건성 테스트에서도 일치하게 나타났다.

Institutional blockholders and the variability of firm performance

PurposeWe examine the effect of institutional blockholders on the variability of firm performance.Design/methodology/approachWe use OLS regression models to estimate the effect of institutional blockholders on within-firm, over-time variability of firm performance.FindingsWe find that firms with more institutional blockholders experience less variable firm performance. In particular, more institutional blockholders are associated with less variability of annual stock returns, ROA and the market-to-book ratio. We further explore several underlying mechanisms through with institutional blockholders reduce firm performance variability. We find that more institutional blockholders are associated with less variable capital expenditures and R&D investments, and less frequent acquisition activities.Research limitations/implicationsA limitation of this paper is that our sample period only covers 1996–2006. Future studies can extend our research to a more recent period (e.g. 2009–2019) to test whether our findings remain valid in other periods.Practical implicationsWe document a significant relation between institutional blockholders and firm performance variability in this paper. However, we do not make any judgment as to whether firms should increase their institutional blockholders as it is unclear whether the caused reduction in risk-taking is socially efficient. We argue that the value implication of institutional blockholders depends on the existing blockholder structure and the different levels of risk appetite between the CEO and shareholders. Thus, the decision on the increase or decrease of institutional blockholders should be carefully made based on a firm’s specific characteristics.Originality/valueThis paper is a first study which examines the impact of the presence of institutional blockholders on the variability of firm performance, while most prior studies focus on the stock ownership of institutional blockholders and examine its impact on the level of firm performance.

Governance disclosure quality and market valuation of firms in UK and Germany

AbstractThis study develops a “comply or explain” index which captures compliance and quality of explanations given for non‐compliance with the corporate governance codes in UK and Germany. In particular, we explain, how compliance and quality of explanations provided in non‐compliance disclosures, and various other internal corporate governance mechanisms, affect the market valuation of firms in the two countries. A dynamic generalised method of moments (GMM) estimator is employed as the research technique for our analysis, which enabled us to control for the potential effects of endogeneity in our models. The findings of our content analysis suggest that firms exhibit significant differences in compliance, board independence and ownership structure in both countries. The “comply or explain” index is positively associated with the market valuation of UK firms suggesting that compliance and quality governance disclosure are value relevant in the UK. Institutional blockholders' ownership is, however, negatively associated with the market value of firms, which raises questions about the monitoring role of institutional shareholders in both countries. We argue that both compliance and explanations given for non‐compliance are equally important, as long as valid reasons and justifications for non‐compliance are provided by the reporting companies. These findings thus imply that the “comply or explain” principle is working well and that UK and German companies could benefit from the flexibility offered by this principle. With respect to the role of board size, board independence, ownership structure, and institutional ownership of firms, this study offers policy implications.

Hedge Fund Redemption Restrictions and Stock Price Fragility

This paper explores the idea that the increasing concentration of institutional ownership in equity markets makes stock prices more fragile, i.e., more exposed to liquidity shocks to institutional investors. I argue that institutional stockholders with stricter redemption policies, who are less likely to experience redemption-generated liquidity shocks, should expose stocks to lower levels of price fragility. An analysis of hedge fund characteristics confirms that hedge funds with strict redemption policies exhibit less portfolio turnover, and stocks held by high-restriction funds are less exposed to flow-induced liquidity trading. A hand-collected dataset of institutional block acquisitions reveals comparatively higher cumulative abnormal returns following block acquisitions by hedge funds with tighter redemption restrictions, confirming that the market places a value on strict redemption policies. Finally, a difference-in-differences regression reveals that stocks purchased by institutional blockholders with stricter redemption policies experience a significant decrease in volatility.

Do Institutional Investors Improve Corporate Governance Quality? Evidence From the Blockholdings of the Korean National Pension Service

ABSTRACT Institutional investors dissatisfied with weak firm governance can directly or indirectly intervene in management to maximise profits. However, no study has investigated the effects of such interventions on corporate governance. This study therefore examines the effect of Korean National Pension Service blockholdings on firms’ corporate governance quality in the Korean market. This setting is interesting because the market is dominated by chaebols, which have ineffective internal governance mechanisms. We find that blockholdings reduce corporate governance quality under various endogeneity checks and empirical models; this finding in an emerging market implies that regulatory authorities should support institutional blockholders’ active market participation.

OWNERSHIP, COMPENSATION AND BOARD DIVERSITY AS INNOVATION DRIVERS: A COMPARISON OF U.S. AND CANADIAN FIRMS

Using a large sample of North American firms, from 1999 to 2016, we investigate the effect of corporate governance structures, specifically ownership, board characteristics, and executive compensation contracts on innovation intensity and output. We consider both R[Formula: see text]D expenditures and patents as innovation proxies and evaluate consequences of the economic downturns of 2000 and 2008. We find that R[Formula: see text]D investment increases with ownership by institutional blockholders and with the number of institutional owners, confirming the key role institutions play in innovation activities of firms. We observe higher R[Formula: see text]D levels for firms with more independent boards, more females board members and more outside directorships held by directors. We report that firms with CEO/chair of the board duality have lower R[Formula: see text]D intensity, as do firms with higher ownership by directors and with a higher mean board age. Innovation is negatively related to CEO salary levels, but positively related to the ratio of incentives to total compensation, confirming that incentives contribute to aligning shareholders and management interests, which leads to better long-term decisions. However, those incentives reduce the number of patents. We do not find any systematic changes in R[Formula: see text]D for the 2000 recession, however there is an increase for the 2008 financial crisis.