Institutional Investors In China Research Articles

Corporate ESG Performance and Shareholding Preference of Institutional Investors

With the widespread recognition of ESG investment concept, institutional investors in China's securities market are paying more and more attention to ESG performance of enterprises. However, different types of institutional investors pay different attention to ESG performance, and their shareholding preferences may be different. This paper takes A-share listed companies from 2018 to 2021 as samples to conduct an empirical study. The results show that: on the whole, institutional investors have an obvious ESG preference in China's A-share market, and corporate ESG performance is significantly positively correlated with institutional shareholding ratio. The research on different types of institutional investors shows that independent institutional investors have more obvious ESG preference for shareholding compared with non-independent institutional investors.

Institutional Investors in China: Problems and Prospects

Institutional investors play a crucial role in promoting good corporate governance and the efficient allocation of capital. As such, regulators have urged institutional investors to act as responsible stewards by actively engaging with their investee corporations in order to deliver long-term value to their ultimate beneficiaries and to promote the long-term success of corporations. While there is significant literature on US and UK institutional investors, far less has been written about institutional investors in China.
 This paper corrects this deficiency by exploring the critical question of whether, and if so, why, institutional investors in listed corporations in China are generally passive. I distinguish three categories of corporations—state-owned enterprises (SOEs), private-owned enterprises (POEs), and strategic investor enterprises. And I distinguish two main types of investors—state-backed institutional investors (SII) and privately-backed institutional investors (PII).
 I make three key arguments. First, in SOEs where the state is the controlling shareholder, minority SIIs and minority PIIs are generally passive. This is because minority SIIs are subject to regulatory requirements, face inadequate incentives, and encounter conflicts of interest. As for minority PIIs, they may be subject to influence or pressure from the state, may face state retaliation for their activism, and may rely on an investor protection agency. Second, in a POE where a private investor is in the majority, while some minority SIIs that are set up to advance the state’s interest are activist in nature, others are passive. Furthermore, most of the domestic minority PIIs are not active. As for the large foreign minority PIIs, there is inconclusive evidence that they improve monitoring and firm performance. Finally, in a strategic investor enterprise where there are majority strategic PIIs, they may face obstacles when pursuing an activist approach. This is because the management of the company may be controlled or influenced by the state, and minority investors can rely on an investor protection agency to challenge or constrain the actions of the majority strategic PII.
 To conclude, it suggests three principal mechanisms to increase engagement by minority SIIs, minority PIIs, and the majority strategic PII. The first is to reduce the influence of the state in SOEs. The second is to increase the incentives for the professional managers of passive minority SIIs to engage. Finally, the conflicts of interest surrounding the investor protection agency should be addressed.

Does increasing the QFII quota promote Chinese institutional investors to drive ESG?

ABSTRACT This paper assesses whether qualified foreign institutional investors (QFIIs) and domestic institutional investors in China drive the environmental, social, and governance (ESG) performance of firms. We first show that QFII ownership is positively associated with future ESG performance but that domestic institutional ownership is not. We then examine the effect of the increase in QFII investment funds on the decision of domestic institutional investors to drive ESG. We find that with the increase in QFII investment funds, domestic institutional investors start to promote firms to improve future ESG performance, especially domestic institutional investors who have held shares of one same firm as QFIIs at the same time. In particular, funds and security funds are affected by QFIIs, and the effect of institutional ownership is stronger in the ESG categories of corporate governance, workforce diversity and product quality. Overall, our results suggest that QFIIs motivate Chinese institutional investors to drive ESG.

Cultural distance, foreign ownership, and corporate innovation in China

ABSTRACT This study examines the impact of heterogeneous foreign institutional investors on innovation in Chinese listed firms from 2009 to 2020. Empirical results indicate that foreign institutional investors from regions with high cultural distance are associated with a significant increase in corporate innovation of Chinese firms. Moreover, the results remain robust to alternative cultural distance measures and methods that address endogeneity. This research provides novel evidence regarding the role of foreign institutional investors in China.

On the Gaming Behavior of Institutional Investors’ Participation in Corporate Governance

<p>Following the very rapid development of the real manufacturing economy in China, institutional investors in China have been <span style="font-family: 'Times New Roman';">expand</span>ing rapidly, which is of positive significance for standardizing the financial market and promoting the reform of the market economy and the development of the manufacturing economy. At present, pension funds as well as mutual funds in China take the lead, and investors from various institutions are directing the domestic securities market to implement the institutionalized physical reform of the investment body. However, much of the current equity of enterprises in China, especially most private enterprises, is <span style="font-family: 'Times New Roman';">held by</span> controlling shareholders, with less equity held collectively by these institutional investors. Moreover, with the imperfection of our domestic capital management market, institutional investors tend to be <span style="font-family: 'Times New Roman';">even </span>less motivated as well as less concerned about participating in corporate governance. How to promote the governance effectiveness of institutional investors has been the focus of experts and scholars in the development process of enterprises. Therefore, focusing on the gaming perspective, this paper analyzes in depth the factors that affect the governance behavior of institutional investors, and puts forward relevant suggestions based on the above issues, aiming to give full play to the effectiveness of governance of each institutional investor in enterprises.</p>

Institutional Investors in China: Corporate Governance and Policy Channeling in the Market Within the State

The extraordinary rise of China’s economy has made understanding Chinese corporate governance an issue of global importance. A rich literature has developed analyzing the Chinese Communist Party’s (CCP) role as China’s largest controlling shareholder and the impact that this has on Chinese corporate governance. However, the CCP’s role as the architect—and direct and indirect controller—of institutional investors in China has been largely overlooked in the legal literature. This Article aims to take the first step in filling this gap in the literature by drawing on Chinese sources and fresh hand-collected empirical, interview, and case study evidence to analyze the meteoric rise of institutional investors in China. It provides a taxonomy of institutional investors in China and reveals how the market for institutional investors has grown and has become increasingly “atomized” as different types of institutional investors have proliferated. The Article reveals how the CCP has actively and gradually promoted the growth of domestic institutional investors, in terms of types and size, through the relaxation of policies and law reforms to improve corporate governance and stabilize the stock market, while limiting the influence of foreign institutional investors. It further analyzes all the Activist Campaigns undertaken by institutional investors in China and maps the network of government bodies, regulations, and tactics that the CCP has developed to directly and indirectly control State-Owned Institutional Investors (SOIIs) and Private-Owned Institutional Investors (POIIs) for the purpose of policy channeling. This Article concludes by taking a step back and briefly considering what this examination of institutional investors tells us about China’s unique form of capitalism and system of corporate governance. It suggests that the rise of institutional investors in China has been strategically developed in a way to reinforce the CCP’s ultimate control over the financial system. However, contrary to what some conceptions of “state capitalism” may suggest, the CCP does not micro-manage institutional investors on a day-to-day basis. Rather, institutional investors normally function according to free-market forces and increasingly perform an important corporate governance role—with the CCP using its policy channeling in a targeted way to stabilize the market in times of crisis, execute important legal and market reforms, and to maintain calm in society during critical political events: what this Article termed as the “market within the state” for institutional investors in China.

Investor Activity in Chinese Financial Institutions: A Precursor to Economic Sustainability

One requirement for sustainable economic development is established, trusted, and utilized financial institutions to facilitate investment. The rapid development of financial markets in China, combined with the recency and magnitude of middle-class wealth, has resulted in a rapidly changing investment landscape, as well as changes in people’s investing activities. The extent to which economic growth is sustainable will depend, at least in part, on how financial institutions are perceived, as well as the extent to which they are utilized. The objective of this study was to examine the investment behaviors of individual investors as a way to ascertain the perceived level of trust and stability in the relatively recently developed financial institutions. The influence of market information acquisition on asset allocation and value investment in China was analyzed. This study used secondary data from a China securities corporation from previous research. The analyses utilized the general decision-making style test to assess respondents’ decision-making models and quantitative research methodology culminating in the use of correlation analysis. The results indicated that the acquisition of market information had a positive correlation with the number of assets and investment portfolios. Practical implications and suggestions for future research are provided. The results may be of interest to individual and institutional investors in China, as well as those with an interest in current trends in market information acquisition, asset allocation, and value investment in China.

The way back home: Trading behaviours of foreign institutional investors in China amid the COVID-19 pandemic

By using foreign institutional investors' daily trading data on 958 firms in China and COVID-19 infection data of six countries, this paper aims to investigate how the pandemic has influenced foreign institutional investors' trading behaviours during the first half year of 2020. In addition to domestic returns and foreign returns, ‘pull factors’ of COVID-19 pandemic in host country and ‘push factors’ of COVID-19 pandemic in home country were used to explain net foreign inflows. We find that ‘push factors’ of COVID-19 in home country are dominant in explaining the reduction of net foreign inflows in five out of 11 sectors, and ‘pull factors’ of domestic returns are dominant in explaining net foreign inflows in most sectors. The price impact of net foreign flows differs across sectors as well. A strong negative correlation between net foreign outflows and same-day return could be identified in the Financials sector. On the flip side, positive correlation between net foreign inflows and same-day return could be identified in seven other sectors. Finally, a pattern of flight-to-liquidity was discovered, as foreign institutional investors strategically sell illiquid stocks to conserve liquidity when market uncertainty is heightened.

The governance role of institutional investors in management compensation: evidence from China

AbstractThis study examines whether and how institutional investors play a corporate governance role in executive pay in China. Based on a sample of Chinese listed firms from 2005 to 2015, we find that higher institutional investor ownership is negatively related to excessive management compensation; this indicates that institutional investors play a governance role in listed firms’ decisions on management payment. Institutional investors are more likely to have an influence on executive compensation through their representatives on the corporate board or by conducting site visits, especially when their ownership is high. They will also react, as in the US, by ‘voting with their feet’; that is, holding fewer shares than they would otherwise, if firms pay excessive executive compensation, especially when their ownership is low. Cross‐sectional analyses show that the negative impact of institutional ownership on excess management compensation is more evident when firms are not owned by the government, monitored by fewer analysts, and located in regions of China with weak legal investor protection. Our results indicate that institutional investors in China can play an important governance role, especially for firms with characteristics such as location and analyst coverage, for which outside monitoring mechanisms will be in high demand.

Are Non‐controlling Foreign Institutional Investors a Friend or Foe to Equity Liquidity? Evidence from China*

AbstractChina has opened its stock market to internationally renowned institutional investors but restricts their ownership. We examine whether foreign institutional investors in China, as liquidity providers with superior information, reduce information asymmetry and improve stock liquidity. Using a panel dataset of 18 173 firm–year observations from 2006 to 2015, we find that non‐controlling foreign institutional investors in China enhance liquidity. This association is more pronounced for firms with poor internal corporate governance and in underdeveloped institutional environments. Additional analysis shows our results are unlikely to be driven by reverse causality or omitted variables.

Institutional Investors in China: Corporate Governance and Policy Channeling in the Market Within the State

The extraordinary rise of China’s economy has made understanding Chinese corporate governance an issue of global importance. A rich literature has developed analyzing the Chinese Communist Party’s (CCP’s) role as China’s largest controlling shareholder and the impact that this has on Chinese corporate governance. However, the CCP’s role as the architect – and direct and indirect controller – of institutional investors in China has been largely overlooked in the comparative corporate law literature. This Article aims to take the first step in filling this gap in the literature by drawing on Chinese sources and fresh hand-collected empirical, interview, and case study evidence to analyze the meteoric rise of institutional investors in China. It provides a taxonomy of institutional investors in China and reveals how as the market for institutional investors has grown it has become increasingly “atomized” as different types of institutional investors have proliferated. The Article reveals how the CCP has actively and gradually promoted the growth of domestic institutional investors, in terms of types and size, through relaxation of policies and law reforms to improve corporate governance and stabilize the stock market, while limiting the influence of foreign institutional investors. It further analyzes all the Activist Campaigns undertaken by institutional investors in China and maps the network of government bodies, regulations, and tactics that the CCP has developed to directly and indirectly control State-Owned Institutional Investors (SOIIs) and Private-Owned Institutional Investors (POIIs) for the purpose of policy channeling. This Article concludes by taking a step back and briefly considering what this examination of institutional investors tells us about China’s unique form of capitalism and system of corporate governance. It suggests that the rise of institutional investors in China has been strategically developed in a way to reinforce the CCP’s ultimate control over the financial system. However, contrary to what some conceptions of “state capitalism” may suggest, the CCP does not micro-manage institutional investors on a day-to-day basis. Rather, institutional investors normally function according to free-market forces and increasingly perform an important corporate governance role – with the CCP using its policy channeling in a targeted way to stabilize the market in times of crisis, execute important legal and market reforms, and to maintain calm in society during critical political events: what this Article coin’s the “market within the state” for institutional investors in China.

The Impact of Institutional Investor Attention on Enterprise Performance: Empirical Test Based on Chain Multiple Mediating Effect Model

In recent years, the number and types of institutional investors in China have achieved rapid development, and gradually become an important part of China's capital market. Institutional investors pay more attention to the long-term performance of enterprises in order to maintain their long-term and stable return on investment. This paper uses the investor relationship data of the "interactive easy" platform of Shenzhen Stock Exchange and the data of listed companies of Shenzhen Stock Exchange from 2014 to 2019 to construct the index of institutional investor attention, and empirically examines the influence mechanism of institutional investor attention on enterprise performance. Furthermore, a chain-type multiple intermediary effect model is constructed to investigate investor attention affecting enterprise performance. The results show that institutional investor attention can significantly improve enterprise performance. The attention of institutional investors can reduce the quality of economic development by increasing the innovation investment of enterprises and strengthening the incentive intensity of executive compensation, as well as the chain-type intermediary channel of “Executive Compensation Incentive Increase → Enterprise innovation investment increase”, the independent intermediary effect of executive compensation incentive is the most prominent. Furthermore, the results show that institutional investor attention promotes the performance of non-state-owned enterprises and state-owned enterprises. However, the state-owned enterprises can only improve their performance through the compensation incentive independent intermediary channels.

News release and the role of different types of investors

We examine how investors react to positive and negative news in the Chinese stock market. We show that positive news is followed by a reversal in stock price, while negative news reports are accompanied by a drift. Using a unique account-level dataset, we find that institutional investors' attention bias contributes to the market's absorption process for different types of news, which is different from the conclusion that the phenomenon is driven by retail investors in the U.S. market. We explain the differences between the two markets as the short-sale constraints induce the attention bias of institutional investors in China. Individual investors are not able to correctly judge the content of news reports, and act as a liquidity provider. We highlight the market regulation plays an important role in the process of investors analyzing information.

Did Institutional Investors’ Behavior Affect U.S.-China Equity Market Sentiment? Evidence from the U.S.-China Trade Turbulence

In the current situation of U.S.-China trade turbulence, this study focuses on quarterly panel data from May 2016 to September 2019 in order to verify the effectiveness of feedback trading strategy and smart money theory in stabilizing U.S.-China securities markets and to understand the role of institutional investors’ behavior, to come up with suggestions for improving and perfecting the market mechanism in stabilizing the U.S.-China securities markets. In this study, we adopt the generalized method of moments (GMM) to perform dynamic panel data analysis and discuss the changes in professional institutional investors’ behavior and equity market sentiment in the U.S. and China during the trade turbulence, and then analyze whether that behavior will suppress local stock market sentiment. Through empirical research, we found that institutional investors on both sides of the trade turbulence have a different impact on the stability of the local securities market. The behavior of institutional investors in the United States has played a role in stabilizing equity market sentiment in accordance with feedback trading strategy and smart money theory. However, the behavior of institutional investors in China is the opposite.

Does CSR reporting matter to foreign institutional investors in China?

This study empirically examines how the mandatory reporting of corporate social responsibility (CSR) affects the investment behavior of foreign institutional investors as measured by Qualified Foreign Institutional Investors (QFIIs) in China. Our analysis uses difference-in-differences (DiD) design by exploring the enactment of China’s 2008 CSR mandatory disclosure requirement. The results show that firms with mandatory CSR reporting undergo an increase in their QFII ownership percentage. Local institutional investors’ ownership and investment weight relative to the market portfolio also increased following the mandate for firms to provide CSR reporting. We find some evidence that QFIIs from common-law countries may invest more in firms with CSR reporting when compared with QFIIs’ full portfolio and QFIIs from code-law countries. Overall, our study provides practical guidance on the impact of nonfinancial information, indicating that CSR reporting can help firms in China to improve their information environment and attract international and local institutional shareholders.

The investment behavior of Qualified Foreign Institutional Investors in China

Using data from Chinese listed firms, this paper examines the investment behavior of Qualified Foreign Institutional Investors (QFIIs). QFIIs have a preference for large well-known firms with some element of state ownership, lower liability levels and greater turnover capacity. Furthermore, the presence of QFIIs in Chinese firms is associated with better levels of corporate operating performance. We show that this positive relationship is more pronounced, the greater the international investors level of commitment, in terms of investment size and horizon. Our results highlight the heterogeneity of foreign institutional investors and support the view that foreign institutional investors in emerging markets provide an important source of managerial oversight. Our results are particularly noteworthy given all QFIIs in China represent small overall holdings, with shareholdings below blockholder thresholds.

Shareholder voting in China: The role of large shareholders and institutional investors

AbstractManuscript TypeEmpiricalResearch Question/IssueShareholders of nearly every company are given the right to vote, yet relatively little is known about the determinants of their voting behavior. Unique data in China render the votes of large shareholders observable, providing a rare opportunity to study the determinants of shareholder voting.Research Findings/InsightsWe find that (a) large shareholders are significantly less likely to vote against reform proposals than small shareholders and (b) institutional investors—especially mutual funds (the largest institutional investors in China)—are significantly less likely to vote against proposals than individual investors.Theoretical/Academic ImplicationsWe provide strong evidence for insider intervention in the voting process. Our study also adds to the understanding of voting behavior of large shareholders and institutional investors along with their governance roles in countries with weak legal protection for investors.Practitioner/Policy ImplicationsTo improve the governance role of shareholder voting in countries with weak investor protection, it is necessary to strengthen the level of disclosure and supervision of shareholder voting decisions.

The mechanisms of institutional activism: qualified foreign institutional investors in China

Key points: - This article examines the mechanisms available to institutional investors in China, especially Qualified Foreign Institutional Investors (QFIIs), that may allow them to engage in activism in publicly traded corporations. - The presumption behind China’s QFIIs policy is that foreign institutional investors will engage in activism and improve the corporate governance of Chinese listed companies. - The article explores the mechanisms available to QFIIs and identifies the extent to which they have the capacity or potential capacity to engage in shareholder activism. - The article concludes that QFIIs could potentially form shareholder consortia. However, based on Shapley-Shubik and Banzhaf-Coleman indices which measure QFIIs’ voting power, it further concludes that QFIIs do not have the capacity or even the potential capacity to form shareholder consortia with sufficient weight to engage in activism.

Private Information, Investor Sentiment, and IPO Pricing: Which Institutional Investors Are Better Informed?

ABSTRACT We provide new empirical evidence that certain institutional investors have private information that they use to profit from initial public offerings (IPOs). In this study, we analyze the bidding information related to five types of institutional investors in China’s ChiNext market to examine the impact of private information and investor sentiment on first-day IPO returns. The results show that private information and institutional investor sentiment are positively correlated with initial returns. The analysis of the different institutional sectors shows that some securities companies may profit from IPOs by using private information. It was also found that qualified foreign institutional investors (QFII) may be at an informational disadvantage on the Chinese stock market.

The Investment Behavior of Qualified Foreign Institutional Investors in China

Using data from Chinese listed firms, this paper examines the investment behavior of Qualified Foreign Institutional Investors (QFIIs). QFIIs have a preference for large well known firms with some element of state ownership, lower liability levels and greater turnover capacity. Furthermore, the presence of QFIIs in Chinese firms is associated with better levels of corporate operating performance. We show that this positive relationship is more pronounced, the deeper the international investors commitment, in terms of investment size and horizon. Our results highlight the heterogeneity of foreign institutional investors and provide evidence to support the view that foreign institutional investors in emerging markets provide an important source of managerial oversight. Our results are particularly noteworthy given all QFII’s in China represent small investors, with shareholdings below blockholder thresholds.