Institutional Shareholders Research Articles

Board Attributes and Firm Performance of Non-Financial Listed Firms in Pakistan: Role of Ownership Structure

Purpose: This research intends to explore the impact of board attributes on the performance of non-financial listed firms in Pakistan and how ownership structure plays a moderating role in shaping this link. This research posits that institutional shareholders possess motivations to enhance board governance due to their advanced financial knowledge and managerial expertise.
 Methodology: Four attributes of the board (board size, women on board, board independence, and board busyness) were studied to see the impact. The firm performance was measured using Tobin Q. The present study employs 80 non-financial listed firms in its sample, and the multiple regression approach was used to inspect a 12-year panel dataset.
 Findings: The results discovered that board size has a positive and significant influence on the performance of companies. However, board independence and women on board have a significant negative effect on firm performance. Moreover, the outcomes of this study indicate that the ownership structure acts as a moderator, influencing the correlation between board attributes (board size and board busyness) with non-financial listed firms’ performance in Pakistan.
 Implications: The current study provides useful insight into this relationship to the policymakers, government, researchers, and other stakeholders. Therefore, based on this study's findings, non-financial firms listed in Pakistan should consider adopting institutional shareholding as a strategy to strengthen their capacity to secure long-term financing to support their growth initiatives.

The Moderating Effect of Institutional Shareholders on the Relationship between Board Attributes and Auditor Selection among Listed Financial Service Firms in Nigeria

The study examines the moderating effect of institutional ownership on the relationship between board attributes and auditor selection among listed financial service firms in Nigeria. It investigated whether institutional shareholding moderate the relationship between board size, board independence, board gender diversity, board meeting attendance and auditor selection among listed financial firms in Nigeria. The study used secondary data extracted from the published financial statements of the sampled firms for the period 2007 to 2020. The population of the study consists of 53 listed financial service firms in Nigeria. The study adopts correlational research design using logistic regression as a tool of analysis. This study presents evidence that higher levels of institutional ownership strengthen the effect of board attributes (gender diversity and board meeting attendance) on auditor selection. Hence, the result implies that managers may face stringent monitoring when institutional investors, board gender diversity and board meeting attendance interacts. Such superior monitoring may compel managers to consider hiring an industry specialist auditor to audit the firm which leads to boosting the firm’ value. The finding of this investigation has an important policy implication on enhancing sound corporate governance practices, particularly for firms operating in developing countries where the market for corporate control is ineffective.

Investor attention and stock price efficiency: Evidence from quasi‐natural experiments in China

AbstractWe examine whether increasing investor attention affects stock price efficiency. To identify the causal effect, we employ daily repeated quasi‐natural experiments in China where investor attention difference is purely driven by price rounding effect without information regarding stock fundamentals. Stocks tend to draw significant more attention and show higher price efficiency after being exposed to the Winner List. We also find supporting evidence for two nonexclusive channels through which investor attention enhance stock price efficiency: increasing stock liquidity and stronger net inflows from large orders. The positive relationship between investor attention and price efficiency is more pronounced among stocks with lower institutional shareholdings, stocks without overseas or Big Four audit firms, and stocks without B‐ or H‐shares. Our findings further shed light on the significant impact of saliency on the capital market.

Institutional investors’ horizons and bank transparency

AbstractWe examine the relation between institutional investors’ horizons and bank transparency. The novelty of this research is to consider three important aspects of transparency: disclosure quality, private information gathering and auditor fees. We find strong evidence indicating that banks dominated by long‐term (short‐term [ST]) institutional shareholders exhibit higher (lower) levels of disclosure quality. However, there is no evidence that investor horizon has a differential effect on private information gathering and audit pricing. The study employs alternative proxies and estimations such as two‐stage least squares and propensity score matching to address endogeneity. We also document that banks with higher ST institutional shareholding are associated with lower crash risk. These findings are particularly significant because poor bank transparency has been identified as a contributing factor to the 2007–2009 financial crisis.

Agency problems and corporate social responsibility: Evidence from shareholder-creditor mergers

We show that the presence of dual holders following the mergers between institutional shareholders and creditors of industry firms leads to a decrease in the firms' excessive corporate social responsibility (CSR) activities. The negative effect of dual holders on CSR activities is stronger for firms with more severe conflict of interest between shareholders and creditors or managerial agency problems. Further analysis indicates that decreased CSR activities are associated with greater firm value. Our findings provide evidence that dual holders mitigate agency-motivated CSR activities.

The Controversy over Proxy Voting: The Role of Fund Managers and Proxy Advisors

In this statement, we assess the role and power of proxy advisors and asset managers in corporate governance in a market that is characterized by a limited number of voting advisory firms (Institutional Shareholder Services and Glass Lewis) and a growing dominance of index investing concentrated in a few large asset managers, such as BlackRock, Vanguard, and State Street. We discuss the business model of proxy advisory firms and contrast its objectives with those of asset managers in the context of the informational screening/filtering role and voting analysis and conclude with a set of policy recommendations addressing transparency and regulatory oversight.

The audit committee and dividend policy: an empirical study of the post-SOX era

PurposePost-Sarbanes Oxley Act (SOX), the audit committee has been empowered greatly to play a central role in the corporate governance of firms. Embedded in agency theory, this study aims to examine the effect of the audit committee on the likelihood by firms to pay dividends.Design/methodology/approachThe study population is US firms in the Institutional Shareholder Services (ISS) database from 2007 to 2018. The authors apply the multivariate logit fixed-effect regression for the analyses after conducting the appropriate statistical tests.FindingsFrom the results of the research model, the authors find that there is a positive relationship between the size and gender diversity of the audit committee and the propensity to pay dividends suggesting that a larger audit committee with substantial women representation improve the information environment in firms leading to higher dividend distribution. The extent of busyness of the audit committee impacts negatively on the propensity to pay dividends. The results are driven by high-performing firms and not driven by specific levels of firm size.Research limitations/implicationsThe findings of the study give impetus to the audit committee as an important component of the corporate governance mechanism that advances the interest of stakeholders. Thus, efforts that seeks to promote the audit committee’s resourcefulness must be embraced by all stakeholders.Originality/valueTo the best of the authors’ knowledge, this study is the first to focus on audit committee and dividend payout policy of US firms post-SOX. The study demonstrates how the audit committee characteristics including its size, gender diversity and busyness affect dividend policy by mitigating information asymmetry problems.

Does corporate social responsibility mediate the relationship between corporate governance and firm performance? Empirical evidence from BRICS countries

AbstractThis study analyzes how corporate governance affects financial performance and explores the role of corporate social responsibility as a mediator for 495 firms located in emerging economies in BRICS countries, including Brazil, Russia, India, China, and South Africa from 2011 to 2021. This study evaluates the impact of various board characteristics such as board size, board independence, and gender diversity, as well as ownership structure elements such as family, foreign, and institutional shareholding, on firm performance in BRICS countries. This study uses a generalized method of moments (GMM) methodology to examine the relationship between corporate governance, corporate social responsibility (CSR), and firm performance. The results reveal that board attributes including size, independence, and gender diversity positively influence firm performance. All three components of ownership structure, family, foreign, and institutional shareholdings, positively affect firm performance. CSR partially mediates the positive relationship between corporate governance and firm performance. This study contributes to the literature by adding CSR as a mediating variable in the relationship between corporate governance and firm performance in BRICS countries. These findings suggest that managers must understand that effective corporate governance mechanisms are essential for better performance and should align their interests with firms' objectives. The mediation effect of CSR implies that policymakers should consider CSR as an additive tool to enhance firm performance rather than as an additional expenditure.

Does the S&P index effect differ between large and small company stocks?

PurposeThe purpose of this study is to compare market reactions to the change in the demand by index funds between large and small company stocks by examining the transition of the S&P 500, S&P 400 MidCap and S&P 600 SmallCap indexes from market capitalization to free-float weighting. This unique information-free event allows not only avoiding confounding information signaling and investor awareness effects but also comparing the effect of the decrease in demand on stocks of different sizes.Design/methodology/approachThis study uses the event study methodology to calculate abnormal returns and trading volume around the full-float adjustment day. It also tests for significant changes in institutional ownership and liquidity. Multivariate regressions are used to examine the relation of liquidity changes and price elasticity of demand to the cumulative abnormal returns around the full-float adjustment day.FindingsThis study finds significant decreases in stock price accompanied with significant increases in trading volume on the full-float adjustment day, and significant gains in quasi-indexer institutional ownership and liquidity. The main finding is that cumulative abnormal returns around the event period are related to changes in the number of quasi-indexer and transient institutional shareholders, not to changes in liquidity or price elasticity of demand.Originality/valueThis study provides the first comprehensive comparison analysis of stock market reactions to the decline in demand between large and small company stocks. As an important implication for future studies of the index effect, changes in institutional ownership should be considered in the analysis.

Impact of institutional ownership on environmental disclosure in Indonesian companies

PurposeThis study aims to investigate the effect of the classification of origin country of institutional shareholder (domestic, developed and developing country) and its status on stock exchange (listed and unlisted) on environmental disclosure level in Indonesian companies.Design/methodology/approachThe data set comprises 474 non-financial firms listed in Indonesian Stock Exchange (IDX) for the period of 2017 to 2019. The study uses an environmental disclosure checklist to measure the extent of environmental disclosure in companies’ reports. Panel regression analysis technique is adopted to investigate the association between total percentage of shares held by institutional shareholders based on the classification of origin country and the status in stock exchange, and the extent of environmental disclosure.FindingsThe study reveals that the extent of environmental disclosure is positively and significantly associated with institutional investors from domestic, developed countries, listed and unlisted institutional investors. Further analysis shows interesting results that institutions from developing countries have a negative and significant relationship with environmental disclosure in non-sensitive industries.Research limitations/implicationsThe authors recognize the issue of authors’ subjectivity in the measurement process of environmental disclosure. The sample for this study encompasses Indonesian listed firms. Thus, the results may not be generalized to Indonesian unlisted firms and other countries or regions.Practical implicationsThis study suggests managers to engage more with institutional shareholders because they have greater concern for environmental disclosure practices. The current study also suggests managers to make strong environmental policies as they are important to ensure that institutional shareholders’ investments are safe.Social implicationsGiven the positive impact institutional shareholders have on the level of environmental disclosure, it indirectly indicates that institutional shareholders have a strong motivation to make the world a better place.Originality/valueThis study offers in-depth insights into the effect of institutional ownership on environmental disclosure based on the classification of origin country and listing status of institutional investors.

The Impact of Institutional Investors' Shareholding on The Efficiency of Corporate Investment

This study investigates the impact of institutional shareholding on corporate investment efficiency and identifies the role played by information asymmetry as well as agency costs. The results show that (1) institutional shareholding promotes corporate investment efficiency, with state-owned institutions playing a more pronounced role. (2) Institutional investors' shareholding is negatively related to information asymmetry. (3) Institutional investors' shareholding is negatively related to agency costs. (4) Institutional investors' shareholding can improve corporate investment efficiency by reducing corporate information asymmetry and agency costs, which are reflected in reducing corporate information opacity and analysts' forecast divergence.

Are ESG performance-based incentives a panacea or a smokescreen for excess compensation?

PurposeThis paper aims to examine how the use of environmental, social and governance (ESG) incentives intersects with top management power and various corporate governance mechanisms to affect excess annual cash bonus compensation.Design/methodology/approachThe authors use a novel artificial intelligence (AI) technique to obtain data about ESG incentives use by firms in the S&P 500. The authors test the hypotheses with an endogenous treatment-regression and a contrast test.FindingsWhen the top management team has power and uses ESG incentives, there is a 32% reduction in excess annual cash bonuses implying ESG incentives are an effective corporate governance tool. However, nuanced analyses reveal that when powerful management teams with ESG incentives are from environmentally sensitive industries, have a corporate social responsibility (CSR) committee or have long-term view institutional shareholders, they derive excess bonuses.Practical implicationsStakeholders will better understand management’s motivations for the inclusion of ESG incentives in executive compensation contracts and be able to identify situations which require closer scrutiny.Social implicationsGiven the increased popularity of ESG incentives, society, regulators, boards of directors and management teams will be interested in better understanding when these incentives might be effective and when they might be abused.Originality/valueTo the best of the authors’ knowledge, this study is the first to examine the use of ESG incentives in relation to excess pay. The authors contribute to both the CSR and executive compensation literatures. The work also uses a new methodological technique using AI to gather difficult-to-obtain data, opening new avenues for research.

Institutional shareholders, proxy advisor recommendation, and vote outcomes in shareholder meetings

Our investigations into the shareholder meetings of UK indexed companies indicate that vote outcomes become more sensitive to proxy advisor recommendations as ownership by well-diversified foreign institutions increases. Vote sensitivity is associated especially with ownership by well-diversified institutional investors that speak a different language. The results support the recent regulatory focus on proxy advisory firms and on how institutional investors manage their fiduciary duties. The findings are supported by firm*agenda fixed-effects models, matching analyses of director election, alternative definitions of portfolio diversification, and examination of specific countries’ institutions that reduce endogeneity biases. French and Japanese data also show qualitatively the same result.

The spillover effects of financial misconduct on director‐interlocked firms: Evidence from auditor scrutiny

AbstractThis paper examines the impact of firm financial misconduct on its director‐interlocked firms from the perspective of auditors. We argue that when a firm engages in financial misconduct, auditors tend to perceive its director‐interlocked firms as having higher audit risks. This is because accounting policies, procedures and corporate governance can propagate via common directors. Using a sample of listed US firms from 1999 to 2018, we find that auditors charge higher fees for firms whose director‐interlocked firms engage in financial misconduct. Further analyses show that this spillover effect is stronger when focal firms are riskier (when they are financially distressed or have worse earnings quality) or they have weaker alternative monitoring mechanisms (as evidenced by lower institutional shareholding). The effect is also more prominent when the tainted directors hold important positions or the financial misconduct is more severe. We also find that the higher auditor fees arise from not only risk premium but also greater audit effort. Our results are still valid after conducting a series of robustness tests.

Female directorship and ethical corporate governance disclosure practices in highly patriarchal contexts

We examine whether and to what extent female directors impact on ethical CG disclosure practices in a highly patriarchal sub-Saharan African country—Nigeria. Using hand-collected data for 108 listed firms from 2011 to 2017 (756 firm-year observations) and employing a system GMM model to control for endogeneity, we show that female directorship is positively and significantly associated with ethical CG disclosures. Our evidence suggests that, even within patriarchal societies where women face negative preconceptions and stereotypes about their leadership capabilities, firms with female directors disclose higher ethical CG practices than firms without such representation. Furthermore, the effectiveness of female directors in influencing ethical CG practices is positively enhanced by foreign directors and institutional shareholders but weakened in larger boardrooms. We also evidence that in firm-level configuration of CG bundle, female directorship is a substitute mechanism for leadership duality, larger boards, non-executive and foreign directorship.

How Does a Regulatory Minority Shareholder Influence the ESG Performance? A Quasi-Natural Experiment

Based on China’s newly established Securities Investor Services Center (CSISC), a minority shareholder protection mechanism, we investigated how the CSISC shareholder influences the ESG performance of listed companies. Using a difference-in-differences analysis for a sample of Chinese listed companies during 2013–2017, we found that the pilot reform of CSISC shareholding has a positive influence on the ESG performance of listed companies. We also found that this effect exists in large companies and in companies in non-high-polluting industries. Besides, analysts’ attention, external auditing quality, institutional shareholding, and highly-developed market intermediary and legal systems can strengthen the effect of CSISC shareholding on corporate ESG performance. Our findings inspire regulators in emerging markets to establish suitable mechanisms to protect minority shareholder rights in the long run.

The dark side of digital finance: evidence from environmental information disclosure of Chinese listed companies

PurposeThis study aims to explore the relationship between corporate environmental information disclosure and digital finance.Design/methodology/approachThe authors used Chinese listed enterprises as the sample. Data on digital finance are from the China Digital Inclusive Finance Index published by the Institute of Digital Finance of Peking University, and corporate environmental information disclosure is collected from the China Securities Market and Accounting Research database. Multivariate regression and Stata software were used for data analysis.FindingsThe findings suggest that digital finance significantly inhibits firms’ environmental information disclosure. Digital finance increases firms’ motivation to meet low-income customers’ demands, which is achieved at the expense of environmental performance, leading to deteriorated environmental information disclosure. Furthermore, this inhibitory effect is exacerbated by managerial power but mitigated by institutional shareholdings and political connections.Practical implicationsThe findings have important implications for policymakers and managers when formulating relevant policies regarding the co-development of digital finance and corporate environmental information disclosure.Social implicationsEnvironmental information disclosure is a crucial element in CSR disclosure quality.Originality/valueThis study enriches the literature on the environmental influences of digital finance by examining the relationship between digital finance and corporate environmental information disclosure, a crucial way through which external stakeholders obtain information about corporate environmental behaviours.

Institutional shareholder services' proxy voting guidelines and ROE management

AbstractWe examine the impact of the Institutional Shareholder Services (ISS) proxy voting guidelines on managers' opportunistic reporting behaviours. In February 2015, the ISS introduced a new advisory policy based on firms' return on equity (ROE) and started to issue negative recommendations for top executive election in firms whose past average and most recent ROE are lower than 5%. We find that managers are more likely to achieve the 5% ROE after implementing the policy, and they do so by discretionary activities. Our findings imply that accounting‐based guidelines issued by a proxy voting advisor can generate managers' incentives for opportunistic reporting.

Analyst Coverage and Corporate Environmental Policies

Abstract Exploiting two quasi-natural experiments, we find that firms increase emissions of toxic pollution following decreases in analyst coverage. The effects are stronger for firms with low initial analyst coverage, poor corporate governance, and firms subject to less stringent monitoring by environmental regulators. Decreases in environmental-related questions raised in conference calls, an increased cost of monitoring to institutional shareholders, reductions in pollution abatement investment, and the weakening of internal governance related to environmental performance are channels through which reduced analyst coverage contributes to increases in firm pollution. Our study highlights the monitoring role analysts play in shaping corporate environmental policies.

Does internal whistleblowing build more socially responsible firms？

We examine the impact of internal whistleblowing on firms' CSR performance. We find that establishing internal whistleblowing poses a significantly positive impact on firms' CSR performance. To alleviate endogenous problems, we implement the instrumental variable regression and propensity score matching methods.Furthermore, we find that the effect of internal whistleblowing on firms' CSR performance is more pronounced in firms with fewer financial constraints or own higher profitability, firms with less institutional shareholding and less analyst following, and firms located in provinces with a greater cultural atmosphere of egalitarianism and humanism. Finally, we further provide evidence that a positive effect of internal whistleblowing on firms' profit and market value is stronger among the more socially responsible firms. Our paper is the first to explore the link between the monitoring role of employees and firms' CSR, contributing to the growing literature on whether and how employees impact a firm's CSR performance.