Institutional investors, controlling shareholders and CEO pay‐performance relationship: evidence from China

Abstract

Using a large sample of China’s listed firms between 2005 and 2015, we find that domestic mutual funds have a positive effect on the CEO pay‐performance relationship, and this effect becomes stronger when their ownership is higher and closer to the controlling shareholder’s ownership. This effect is stronger in non‐state‐owned enterprises (non‐SOEs), firms facing weaker industry competition incentives, and firms located in more developed regions. However, Qualified Foreign Institutional Investors (QFIIs) do not have such an influence. Overall, our study contends that the effectiveness of institutional investors’ monitoring role is subject to their identity, controlling shareholders and institutional environments.

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

“…investment horizons, institutional investors in China are unlikely to be effective monitors of firms' decisions. However, other studies conclude that institutional investors in the country can exert a positive influence on firm performance and valuation (Yuan et al, 2008), corporate strategies, such as dividend policies (Firth et al, 2016), corporate fraud (Aggarwal et al, 2014;Wu et al, 2016) and corporate governance (Yao and Liu, 2009;Huang and Zhu, 2015;Zhang et al, 2019). Jiang and Kim (2015) also contend that the findings of the positive influence of institutional investors in these studies have a reverse causality bias and do not specify any channels through which institutional investors influence firms.…”

“…Following Zhang et al . (2019), we utilise the industry median level of institutional ownership ( MeanInsthold ) as the fourth instrument for institutional ownership. The institutional holdings for a specific firm are related to the industry average, while industry‐average institutional holdings are not related to the management payment for a specific firm.…”

“…First, following Firth et al (2016) and Zhang et al (2019), we use the index inclusion of a firm as the first instrument for institutional ownership. A dummy variable (INDEX) is defined to take the value of 1 if a firm is included in either the Shanghai 180 index or Shenzhen Component index in a year and 0 otherwise.…”

“…First, we empirically identify the governance role of institutional shareholders and provide three specific channels of the governance role: (i) representatives on the board of directors, (ii) conducting site visits and (iii) ‘voting with their feet’. While previous studies that focus on the governance role of institutional investors in China either argue the lack of significant influence or find positive influences, these studies do not specify the governance channels through which institutional investors play their governance roles (e.g., Firth et al ., 2016; Zhang et al ., 2019). Thus, we contribute to this discussion by providing direct evidence on whether and how institutional investors suppress excessive management compensation.…”

Financial slack, institutional shareholding and enterprise innovation investment: evidence from China

“…The number of institutional investors in China is ever‐growing, and they have become essential participants in the country’s capital market (Zhang et al ., 2019). As an external corporate governance mechanism, institutions participate in corporate governance activities and affect companies’ decision‐making, thereby contributing to alleviating the internal principal‐agent problem (Hartzell and Starks, 2003).…”