Sustainable Returns: The Effect of Regional Industrial Development Policy on Institutional Investors’ Behavior in China

Abstract

Abstract:Within the market economy system controlled by the Chinese government, this study mainly explores whether government policies can sufficiently guide the investment decisions of professional investors. Thus, we examine whether professional investment institutions can support the government's policy for long-term investment to produce sustainable returns and create value for both the country and investment institutions. To perform this test, we use the annual data from firms held by institutional investors and listed in China A-shares to run a panel regression model. We then explore the following three issues: first, we examined whether firm-level characteristics or regional industrial development policy affect the investment behavior of the institutional investors. Second, we investigated whether four types of institutions have different favorite economic regions in China under the regional industrial development policy. Third, we analyzed which type of institutional investor supports the regional industrial development policy. The above four types of institutions are: independent, grey, domestic, and qualified foreign institutions. Empirical results show that both firm-level characteristics and regional industrial development policy can affect the investment behavior of the institutional owners. Of all the firm-level characteristics selected by institutions in China, return on equity (ROE) is the condition most commonly selected for all types of institutions, whereas the dividend yield (DY) is considered only by qualified foreign institutional investors (QFIIs). Notably, both independent and domestic institutions have the same firm selection criteria. As for the institutions' favorite industries for investment, only grey institutions prefer the power industry and QFIIs prefer manufacturing industry. In addition, all four types of institutional investors have different industrial favorites in the four economic regions in China under the regional industrial development policy. For example, independent institutions prefer the information industry and grey institutions appear to be interested in every industry. Moreover, domestic institutions prefer the manufacturing and information industries, whereas QFIIs prefer the manufacturing industry. Regarding the regional participation of institutions, both domestic institutions and QFIIs seem to focus on every region. Moreover, independent institutions focus on the eastern and western regions, whereas grey institutions only focus on the western region. Finally, domestic institutions received the greatest level of support, followed by grey and independent institutions, whereas the QFIIs receive the least support. Put simply, domestic institutions are deeply engaged in industrial development all over China, whereas QFIIs are only slightly engaged in this development.

Institutional Investors and Corporate Performance: Insights from China

“…Continuing our previous research [10,11], this study further explores the role of institutional investors on stock market stability and corporate governance. Most emerging stock markets often have high price volatility because of various uncertainties, such as unexpected market crashes caused by political or financial crises.…”

“…In Tables 4 and 5, models (4)(5)(6) show that the coefficients of LEV are significantly negative in pre-crisis. Conversely, the results of models (10)(11)(12) show that the coefficients of LEV are positive and significant in post-crisis. These results confirm that financial leverage can increase returns and can also increase investment losses.…”

“…During the crisis, models (7)(8)(9) show that Indep_IO is negatively and significantly correlated with the stock return volatility variables, which indicates that a higher proportion of shares held by independent institutional investment contribute to a lower risk for the corresponding company's stock returns, which is consistent with our expectation. Finally, the post-crisis period models (10)(11)(12) show that the coefficients of Indep_IO and Domes_IO are negative and significant. This negative relationship suggests that the stock prices of firms held by Indep_IO and Domes_IO are less risky.…”

“…Therefore, in order to test the relationship between institutional ownership and firm-level stock return volatility, idiosyncratic risks, and corporate governance, this study applies three regression models to the panel estimation, proposed by Lin et al [10] and Lu [11], which are…”

“…Institutional investors in China can be classified as domestic institutional investors and QFIIs based on geographic sources. According to previous research, domestic institutional investors in China are mainly composed of mutual funds belonging to independent institutions [10,27]. Domestic institutional investors are more familiar with the local market economy environment and have the advantage of information asymmetry.…”