Institutional Investor Ownership Research Articles

Do ESG ratings inhibit corporate leverage manipulation? The moderating effects of internal and external supervision

Purpose This paper aims to investigate the relationship between corporate environmental, social and governance (ESG) ratings and leverage manipulation and the moderating effects of internal and external supervision. Design/methodology/approach The authors draw on a sample of Chinese non-financial A-share-listed firms from 2013 to 2020 to explore the effect of ESG ratings on leverage manipulation. Robustness and endogeneity tests confirm the validity of the regression results. Findings ESG ratings inhibit leverage manipulation by improving social reputation, information transparency and financing constraints. This effect is weakened by internal supervision, captured by the ratio of institutional investor ownership, and strengthened by external supervision, captured by the level of marketization. The effect is stronger in non-state-owned firms and firms in non-polluting industries. The governance dimension of ESG exhibits the strongest effect, with comprehensive environmental governance ratings and social governance ratings also suppressing leverage manipulation. Practical implications Firms should strive to cultivate environmental awareness, fulfil their social responsibilities and enhance internal governance, which may help to strengthen the firm’s sustainability orientation, mitigate opportunistic behaviours and ultimately contribute to high-quality firm development. The top managers of firms should exercise self-restraint and take the initiative to reduce leverage manipulation by establishing an appropriate governance structure and sustainable business operation system that incorporate environmental and social governance in addition to general governance. Social implications Policymakers and regulators should formulate unified guidelines with comprehensive criteria to improve the scope and quality of ESG information disclosure and provide specific guidance on ESG practice for firms. Investors should incorporate ESG ratings into their investment decision framework to lower their portfolio risk. Originality/value This study contributes to the literature in four ways. Firstly, to the best of the authors’ knowledge, it is among the first to show that high ESG ratings may mitigate firms’ opportunistic behaviours. Secondly, it identifies the governance factor of leverage manipulation from the perspective of firms’ subjective sustainability orientation. Thirdly, it demonstrates that the relationship between ESG ratings and leverage manipulation varies with the level of internal and external supervision. Finally, it highlights the importance of governance in guaranteeing the other two dimensions’ roles by decomposing overall ESG.

Institutional Investors and ESG Preferences

ABSTRACTResearch Question/IssueWe examine the effect of multiple environmental, social, and governance (ESG) scores on institutional investor ownership of firms and investor portfolio weightings. We are also the first to analyze the three individual components of ESG rankings to estimate the relative preferences of institutional investors.Research Findings/InsightsUsing a unique panel dataset covering US companies and institutional investor portfolios over the 2010–2019 period, we find that while investors are driven to add high‐quality ESG companies to their portfolios, there is a negative relationship with ESG when it comes to taking large ownership stakes. Furthermore, ESG scores are negatively related to the portfolio weightings of institutional investors, which raises concerns of greenwashing. Our analysis of individual ESG scores points to significantly larger effects of G scores in terms of holdings, and G is the only score with no negative impact on portfolio weightings. Finally, in support of systematic stewardship theory, top institutional investors allocate higher proportions of their portfolios to firms with high‐ESG ratings. Our results are robust to the use of a difference‐in‐differences analysis addressing endogeneity concerns.Theoretical/Academic ImplicationsThe findings in this paper offer important policy implications for institutional investors, managers, and policymakers. Given the ongoing debate on ESG scores, this paper shows the importance of examining greenwashing for investors who have a concern regarding the extent to which the valuation of assets might be influenced by unsupported sustainability claims. In addition, our study adds to the debate regarding ESG investing and stewardship theory.

Punishment or deterrence? Environmental justice construction and corporate equity financing––Evidence from environmental courts

In this study, we explore the impact of the establishment of environmental courts, an environmental justice system, on the cost of equity capital. Based on a quasi-natural experiment of establishing environmental courts in China, we find that they have a deterrent effect and reduce the cost of equity capital for heavily polluting firms in localities. We also find that a low proportion of managerial ownership, a low level of analyst attention, and high environmental uncertainty induce this deterrent effect. Furthermore, mechanism tests indicate that environmental courts enhance corporate environmental engagement and corporate ESG ratings, increase long-term institutional investor ownership, and reduce urban environmental violations to achieve a deterrent effect. The findings are more pronounced for the trial court sample, firms in cities with lower public participation in environmental protection, and firms with lower environmental information transparency. We also suggest the impacts and underlying mechanisms of the environmental justice system on the equity capital market, which is conducive to long-term planning by firm managers.

R&D investments in emerging market firms: the role of institutional investors and board interlocks

Despite the increase in institutional investor shareholdings in emerging market firms, their impact on R&D investments has received scant attention in the literature. By integrating agency and resource dependence perspectives, we examine the role of different types of institutional investors and their interactions with board interlocks in shaping their preference for R&D investment in their portfolio firms. We test our hypotheses on a sample of 2,478 Indian firm‐year observations from 2005 to 2019, using various estimation techniques. Our results indicate that different categories of institutional investors have distinct preferences for R&D investment. Specifically, we find that ownership by both foreign institutional investors and mutual fund investors negatively impacts R&D investments in firms. While board interlocks positively moderate the impact of institutional investors such as banks and financial institutions and foreign institutional investors on R&D investments in firms, this moderation is negative in the case of mutual fund investors and R&D investments in firms. We contribute to the understanding of the determinants of R&D investments in emerging market firms, with a specific focus on institutional investor ownership and add to the nascent literature on the interaction between two forms of governance, i.e., ownership and board characteristics, in shaping this firm strategy.

Can corporate ESG performance improve audit efficiency?: Empirical evidence based on audit latency perspective.

Environmental, Social and Governance (ESG) is closely related to the "dual carbon" objective and the concept of sustainable development. The impact of ESG performance on audit efficiency, especially on audit delays, is still an issue to be studied in depth. Drawing on stakeholder theory, sustainable development theory, shared value concept and corporate social responsibility theory, this study adopts regression analysis and structural equation modeling (SEM) to investigate the impact of ESG on audit efficiency based on the data of A-share listed companies in the period of 2015-2022, with a focus on audit delay. The results of regression analysis show that ESG performance has a significant effect on reducing audit delay, and audit delay is reduced by 0.007 on average for each unit increase in ESG performance. In structural equation modeling, the effect of ESG performance on audit delay is more significant, with an estimated value of -0.555 and a standard error of 0.097. In addition, the study shows that the corporate ESG performance on audit efficiency has a positive impact is more pronounced among firms with stronger ESG practices, especially among non-state-owned firms with lower institutional investor ownership and firms audited by "Big Four" firms. These results not only demonstrate the importance of ESG performance in improving audit efficiency, but also provide important guidance for corporate management and policy making. This study enriches the existing literature on corporate ESG performance and audit efficiency and provides new perspectives and directions for future research.

Institutional investors ownership concentration and its effect on disclosure and transparency of United Nations sustainable development goals

Ownership concentration (OC) has garnered scholarly attention because it may affect firms' governance, transparency and disclosure of issues related to the sustainable development goals (SDGs). This paper thus investigated the effect of the OC of institutional investors on the disclosure and transparency of firms' SDGs practices. To do so, a balanced data panel is employed; the sample is composed of 353 European listed companies and 1412 observations for the period 2018–2021. The results obtained underline the significant effects that various categories of institutional investors have on the disclosure and transparency of companies' SDGs practices and endeavours. Specifically, there appears to be a positive relationship between financial institutions' OC and SDG disclosure and transparency, as well as a negative relationship between the OC of foreign institutional investors, governments, cross-holdings and pension funds and organizations' SDGs disclosure and transparency. This study contributes to the growing literature on SDGs and institutional investors. Regarding managerial implications, this research highlights the role of institutional investors when seeking to promote environmental, social and ethical practices. The need for norms and legislation to foster adherence to companies' disclosure practices concerning SDGs is also highlighted.

The rise of female board representation in China as a glocalization process (2010–2018)

Our examination of publicly listed firms in China (2010–2018) reveals that a firm promotes more women to its board when it faces either stronger global pressure, as measured by the ownership of global institutional investors, or stronger local pressure, as measured by the domestic industry average of female board representation. Local pressure has a stronger impact than global pressure, and the two substitute each other. More importantly, stronger global pressure is associated with the promotion of more returnee women but not of domestic women, while stronger local pressure is associated with the promotion of more domestic women but not of returnee women. The findings advance the literature by revealing that the adoption of female board representation in China is driven by the co-constitutive influences of “the global” and “the local”, and that different types of potential beneficiaries receive heterogeneous benefits in this glocalization process.

Institutional monitoring on corporate earnings: Evidence from U.S. Cross-listed Firms

Existing research on the effectiveness of institutional monitoring internationally highlights the advantage domestic investors hold due to their geographic proximity to the invested firms. We revisit the topic by examining a unique setting: the U.S. cross-listing market. U.S. institutions as foreign investors may benefit from their market proximity because cross-listed firms are traded in the United States and must adhere to U.S. regulations and listing requirements. Using earnings management as the proxy for monitoring effectiveness, we find that only the ownership of home institutional investors is negatively associated with earnings management, suggesting that the market proximity advantage enjoyed by U.S. institutions is not enough to overcome the disadvantage related to their geographic distance from the invested firms. This finding holds across alternative measures of earnings management and remains robust when addressing endogeneity concerns in the model specification. Thus, our results have important policy implications.

Institutional ownership, earnings management and earnings surprises: evidence from 39 years of U.S. data

PurposeAs the influence of institutional investors over managerial decision-making grows, so does the importance of understanding the effect of institutional investor ownership (IO) on firm outcomes. The authors take a comprehensive approach to studying the effect of IO on earnings management (EM).Design/methodology/approach The authors study the relation between IO and EM using a sample of 59,503 listed U.S. firm-year observations from 1981–2019. The authors proxy EM with earnings surprises and with accrual-based and real activity measures. The authors test for nonlinear relations and analyze changes resulting from the passage of the Sarbanes–Oxley Act.FindingsThe findings support a positive IO-EM relation overall, but show that the relation is dynamic and heavily context-dependent with evidence of nonlinearity. The authors also find evidence that IO positively affects accrual-based EM and real activities EM negatively.Originality/valueTo the authors’ knowledge, this is the first study of the IO-EM relation to consider evidence of nonlinearity in the U.S. context, measuring changes to the relation over time, and with the use of several measures of EM.

Company ESG performance and institutional investor ownership preferences

AbstractHeterogeneous institutional investors' shareholding preferences have been driven to change by the deepening of ESG investment philosophy. Therefore, we examine the impact of corporate ESG performance on institutional investors' shareholding preferences and its mechanism of action. We conduct mixed OLS and mediation effect tests using data on ESG responsibility scores and institutional investors' shareholding ratios of A‐share listed companies in China from 2010 to 2020 as samples. We find that corporate ESG performance can significantly and robustly increase institutional investors' shareholdings; the mediation effect analysis shows that overall corporate ESG performance contributes to increases in corporate book and market values, thus encouraging institutional investors to increase their shareholdings. The heterogeneity analysis shows that independent institutional investors attach more importance to corporate ESG responsibility performance, and long‐term institutional investors attach more importance to corporate environmental performance; moreover, institutional investors have more significant ESG shareholding preferences for Chinese SOEs. Our study can strengthen the encouragement of institutional investors to integrate ESG investment concepts from multiple perspectives, such as research and analysis, portfolio management, risk control, and due diligence management, to design and develop targeted ESG investment tools, give full play to the role of shareholders and guide the sound development of listed companies from the perspective of investment strategy objectives.

Implications of sustainability reporting and institutional investors’ ownership for external audit work: evidence from Saudi Arabia

Purpose This study aims to assess whether non-financial corporate social responsibility (CSR) information decreases audit risk and audit scope and enables speedier completion of audit reports. The study also investigates whether institutional investors’ ownership (IIO) has an influence on the association between CSR disclosures and audit report lag (ARL). Design/methodology/approach This study uses a sample of 154 Saudi firms over 2016–2021 (837 observations) and applies ordinary least square regression to examine the study hypotheses. Findings This study’s results show that ARL is significantly shorter for firms with higher CSR disclosures. Furthermore, the findings show that IIO has no significant impact on the association between CSR disclosures and ARL. Originality/value This study offers new insights into how auditors respond to CSR disclosures and whether institutional investor monitoring influences the audit process in an emerging economy.

Institutional investors and corporate environmental costs: The roles of investment horizon and investor origin

AbstractUsing an international data set that quantifies corporate environmental costs, we analyze the influence of institutional investor ownership, particularly investment horizon and investor origin, on the monetized environmental impact generated by their investee firms. Institutional investor ownership is negatively related to corporate environmental costs. This effect is driven by long‐term foreign institutional investors, especially investors from advanced economies. Corporate environmental costs are negatively correlated with firm valuation and positively correlated with the cost of equity. Since corporate environmental costs are not reflected in environmental, social and governance ratings, our results shed new light on the role of institutional investors in shaping corporate environmental impact.

Insider Sales and Corporate Bond Yield Spread: Evidence from China

ABSTRACT We study whether and how insider sales affect a firm’s bond yield spreads. By examining insider sales and corporate bond yield spreads from 2011 to 2022 in the Chinese market, we find robust evidence that insider sales have a significant and important impact on corporate bond yield spreads. A one-standard-deviation increase in insider sales resulted in an increase of 11.82 bps in corporate bond yield spread. Further analysis suggests that while both the information asymmetry channel and the tunneling channel exist, bond investors do not believe that excess return from insider sales would reduce fund occupancy and alleviate default risk. We also find that ownership structure matters for the impact of insider sales on corporate bond yield spreads, where insiders in firms with more concentrated ownership structures tend to tunnel or withhold private information, whereas a more balanced ownership has the opposite effect. There is also weak evidence that the impact of insider sales on corporate bond yield spreads is larger in private firms than in state-owned ones. In addition, institutional investor ownership weakens the role of insider sales in bond pricing and, in particular, weakens the response of bond investors to insider sales in private firms.

Stock liquidity and controlling shareholders' encroachment of private interests: Evidence from China

This paper investigated the effects of stock liquidity on controlling shareholders’ encroachment of private interests. It showed that stock liquidity positively affects controlling shareholders’ encroachment of private interests in China's listed companies. Further, institutional investor ownership and stock price crash risk have a mediating effect on stock liquidity toward controlling shareholders’ encroachment of private interests, respectively. This research strives to provide valuable insights for management to strengthen stock liquidity assessment and improve corporate governance.

Adverse Effects of Data Breach on Public Companies: A Study Based on Interpersonal Gossip Theory

ABSTRACT The ability to effectively curb the adverse effects of data breach has become an urgent issue for enterprises. Employing interpersonal gossip theory, this study argues that the mechanism relating to information transparency and control provided by companies helps mitigate the adverse effects of data breach on these companies. Using listed companies in China with data breach in 2011–2020 as the treatment group and firms without data breach as the control group. We test the two-period PSM-DID model and find that transparency and control can effectively suppress the adverse effects of data breach on companies’ stock price and revenue. Specifically, the mechanism test found that: transparency and control inhibit the adverse effects of data breach by reducing negative rhetoric. The heterogeneity test found that firms with low institutional investor ownership significantly reduce the adverse effects of data breach by using transparency and control, while the dampening effect only occurs in state-owned enterprises with a high level of transparency. This study contributes to understanding the importance of establishing data security systems in firms and provides insights into the governance of data breach in listed firms.

Ownership structure and firm sustainable investments: evidence from emerging markets

PurposeThe aim of this study is to examine the ownership impact on firm sustainable investments (FSIs). In particular, this research examines the link between institutional investor ownership (IIO), managerial ownership (MOWN) and FSIs in the tourism industry in Malaysia.Design/methodology/approachThis study uses a data set of 346 firm-year observations from 2008 to 2020 and applies feasible generalized least squares (FGLS) regression analysis. The study sample is based on tourism firms listed on Bursa Malaysia (the Malaysian Stock Exchange).FindingsThere is a significant positive association between IIO and FSIs. When IIO is classified into foreign (FIIO) and local (LIIO), this significant association is mainly driven by FIIO. In addition, there is a significant, positive association between managerial ownership (MOWN) and firm sustainable investments (FSIs). These findings imply that firm ownership has an influence on FSIs in the tourism industry.Originality/valueThis is the first attempt to consider IIO and MOWN simultaneously in a single model estimation. The findings contribute to emerging capital markets where the involvement of ownership concentration in the governance of publicly listed firms is a common practice.

Pengaruh Kepemilikan Investor Institusi Asing Terhadap Volatilitas Harga Saham di Indeks Kompas100

This journal investigates the effect of foreign institutional investor ownership on share price volatility with a sample of 207 companies between 2008 and 2021 that are included in the Kompas100 Index. The empirical results of this study indicate that foreign institutional investor ownership reduces share price volatility in Indonesia with control variables: market capitalization, turnover, leverage, and market to book. In addition, we also document the results of research that the greater the market capitalization of a company, the lower the volatility of its share price and foreign investors increase stock trading turnover in Indonesia because it attracts the attention of domestic investors, especially individual investors. Foreign institutional investors also prefer to invest in companies with a market to book rating that have a premium.

중국 기업의 ESG의 특징과 기업가치에 대한 영향

Purpose - Since the 2020s, the management philosophy of Chinese firms' ESG has been rapidly established under the leadership of the Chinese government. We empirically analyze the ESG characteristics and effects on corporate value of Chinese firms.
 Design/methodology/approach - Using OLS and random effect panel regression analysis, we identify ESG determinants. In analyzing the impact on corporate value, likewise a large number of literatures, we adopt a 2SLS methodology using instrumental variables in the reason of endogeneity between ESG and firm value. We analyze using the G2SLS methodology, which is improving the efficiency of the estimation coefficients along with 2SLS.
 Findings - We find that ESG ratings are high in state-owned and foreign capital invested companies, ESG ratings are low in companies with a high proportion of non-floating stocks which implies information asymmetry. However, there are no significance in the institutional investor's, the major 10 largest shareholders’ and manager’s ownership. Furthermore, we can support most of the hypotheses that ESG ratings will be high in companies with high management performance. ESG ratings are significantly higher in companies with high ROA, rich in cash asset, low debt ratio, and large size. we strongly support the hypothesis that the higher the ESG rating, the higher the firm value, and ESG has a moderating effect on state-owned companies, non-floating shares, the ownership of institutional investors, manager, and the 10 major shareholder. In particular, state-owned companies, the proportion of non-floating shares, and the ownership of the 10 major shareholders have a negative impact on firm value, however, ESG attenuates this negative effect.
 Research implications or Originality - This study looks forward to enhancing our understanding of ESG characteristics in East Asia.

Carbon policy risk and corporate capital structure decision

This study examines the relationship between carbon policy risk and corporate capital structure in China. Using a sample of A-share listed firms from 1997 to 2018, we find that carbon policy risk reduces firms' financial leverage. The result is robust to the introduction of difference-in-differences tests, instrumental variable regression, and a placebo test used to address endogeneity, as well as to other tests of alternative measures. This negative relationship is more pronounced for non-state-owned enterprises, firms with low institutional investor ownership, firms with poor corporate social responsibility performance, firms belonging to competitive or carbon-sensitive industries, and firms located in provincial cities. Financing constraints, bankruptcy risk, and government power are potential mechanisms underlying this observation. Our findings provide practical suggestions through which firms can address carbon policy risk and provide guidance to governments and regulators for the further implementation of environmental policies.

Managerial Myopia and Long-Term Investment: Evidence from China

A corporation’s ability to uphold valuable long-term investments is a critical component of the business’s sustainability. Combining the views of the upper echelons theory and agency theory, this study argues that myopic managerial behavior is detrimental to a firm’s long-term investment. We construct an indicator assessing managerial myopia based on the textual analysis approach. The moderating effect analysis suggested that the negative impact of managerial myopia on long-term investments is lessened with an increase in institutional investor ownership and analyst coverage. In addition, we found that managerial myopia negatively correlates with capital expenditures and R&D investments. Furthermore, the cross-sectional analysis suggested that the correlation between managerial myopia and long-term investment is stronger among firms with higher industry competition, poor performance levels, and in non-state-owned enterprises.