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

Abstract

This 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.

The power of crowds: can minority shareholder activism promote management earnings forecast accuracy

“…Prior research demonstrates that shareholder activism can directly affect corporate disclosures by exerting pressure through demanding information (Bourveau and Schoenfeld, 2017;Baloria et al, 2019;Michelon et al, 2020;Flammer et al, 2021). However, current research mainly focuses on the role of institutional investors by submitting shareholder proposals in the US setting (Bourveau and Schoenfeld, 2017;Baloria et al, 2019;Michelon et al, 2020;Flammer et al, 2021) or regarding the ownership percentage of institutional investors as governing efforts in the Chinese setting Zhu et al, 2021). However, activism plays a limited role in protecting the whole group of minority shareholders in emerging markets, such as China, because they cannot act on behalf of all minority shareholders who are extremely vulnerable to managers' opportunistic information disclosures.…”

Exploring the role of institutional investors in voting, monitoring and dialogue engagement in mitigating agency conflict in Malaysia’s public listed companies

“…They are seen to be in a unique position to influence the firms in which they invest. According to Li, Zhang, Zhao, & Zhu (2022) and Zhu, Huang, & Bradford (2022), institutional investors have greater clout when it comes to persuading listed businesses to modify their corporate governance practises. Businesses that are contacted by institutional investors are more likely to reveal more information than those that are not solicited (Lin, Song, & Tan, 2017).…”

Institutional ownership and board governance. A structured literature review on the heterogeneous monitoring role of institutional investors

“…According to Borochin and Yang (2017), transient, focused and short-term IO leads to increased executive compensation in the USA, whereas active IO lowers the amount (Almazan et al , 2005, USA). Moreover, funds, insurances and qualified foreign IO decrease excessive compensation in Chinese setting (Zhu et al , 2021). This link was moderated by nonstate ownership, fewer analysts, firm location in regions with weak legal investor protection, institutional representatives on the board and the frequency of site visits of IO in a year.…”