Board financial expertise and foreign institutional investment: the moderating role of ownership concentration

Abstract

Purpose The purpose of this paper is to empirically investigate the impact of board financial expertise on the shareholding of foreign institutional investors in an emerging equity market of China and to explore whether ownership concentration moderates the relationship between board financial expertise and foreign institutional investment. Design/methodology/approach To test the hypothesized relationships, this study uses panel data regression models, i.e. static (fixed effect and random effect) and dynamic (two-step generalized methods of moments) models. Further, to control the possible endogeniety issue, this study uses two instrumental variables, namely, board size and industry average financial expertise of board to proxy board financial expertise. This study covers a period from 2006 to 2015 for 169 listed Chinese firms. Findings The results revealed that foreign institutional investors positively perceived board financial expertise and holds more shareholdings with the increasing level of financial experts at boards of directors. Moreover, ownership concentration positively moderated this relationship. It means that in highly concentrated firms, the board financial expertise conveys a stronger signal to foreign institutional investors that firms can manage financial resources rationally by controlling negative effects of ownership concentration. Further, the robustness model also confirmed the relationship between board financial expertise and foreign institutional shareholdings. Originality/value To the best of authors’ knowledge, this is the first study to investigate board-level financial expertise as a determinant of foreign institutional ownership. Further, no previous study has used ownership concentration as a contextual variable on the relationship between board financial expertise and foreign institutional investment.

Economic Crisis and Corporate Governance: How Can Board Independence and Expertise Maximize the Firm Value?

“…And third, we propose a theoretical framework that sheds a new light on the absence of consensus in the literature on the independence-performance relationship (Bhagat & Black, 1999;Wintoki et al, 2012). Our model and empirical evidence suggest that expertise should be taken into account (Ali et al, 2022;Gilani et al, 2021) as it may affect the trade-off between monitoring and advisory functions, supporting the recent results of Wang et al (2015), Dass et al (2014) and Faleye et al (2013). Moreover, our model also documents a non linear relationship between expertise, independence and firm performance confirming the need identified in previous literature (Crifo et al, 2018) to train inside directors to improve corporate performance.…”

“…On the other hand, expertise is an alternative proxy to measure boards' ability to provide their services (Cunningham, 2008;Wagner, 2011). Expertise is inherently multi-dimensional and ranges from knowledge of the industry (Dass et al, 2014) to firm specific information and other director-craft competences such as political connections, financial literacy or sustainable development goals (Ali et al, 2022;Ammari, 2022;Gilani et al, 2021;Naheed et al, 2021;Crifo et al, 2018;Sekarlangit & Wardhani, 2021;Burak Guner et al, 2008;Mire, 2016). Directors develop their expertise through their education, their professional experience and their business activity with the firm (Anderson et al, 2011;Reeb & Zhao, 2013).…”

Does board diversity reduce the probability of financial distress? Evidence from Chinese firms

“…Financial distress F.D. Score Altman Z_Score calculated as Z-Score = 6.56*X 1 + 3.26*X 2 + 6.72*X 3 + 1.05*X 4 Where, X 1 = Sales/Total Assets, X 2 = Retained Earnings/Total Assets, X 3 = EBIT/Total Assets, X 4 = Book Value of Equity/Total Assets (Altman et al, 2007;Zhang et al, 2010;Ali et al, 2021a).…”

“…Education diversity Education_D Index of education variety uses five categories: Technical secondary school and lower, Associate degree, Bachelor, Master, and Ph.D. indicated by 1,2,3,4,5, respectively (Ararat et al, 2015;Ali et al, 2021a).…”

Towards better informed foreign institutional investment

“…Given this void, Ali et al (2021) examine data from 169 Chinese non-financial listed companies over a ten-year period ending 2016. China has grown to become the world’s second largest economy, making it important to ascertain the type of firms foreign institutional investors are likely to be interested in.…”