The Effect of Institutional Ownership on Board and Audit Committee Composition

Abstract

We investigate the relationship between institutional shareholdings and the firm's corporate governance by looking at changes in the composition of the board of directors and audit committee while institutional ownership increases over time. Our comparison of 74 firms showing increased institutional ownership with a matched control group of 62 firms finds that increased institutional ownership is positively associated with a higher proportion of outsiders on the board and with audit committee and board members who are less entrenched. These factors are widely regarded as signs of a strengthened system of corporate governance and control, underscoring the important role that institutional ownership may play in the firm's corporate governance structure.

The impact of board composition and family ownership on audit committee formation: Evidence from Hong Kong

“…The higher the owner-manager's ownership stake in the firm means the lesser the divergence of interests, therefore, the less likely monitoring needs to occur (Menon & Williams, 1994). Thus, the agency theory predicts the establishment of ACs as a means of attenuating agency costs through its monitoring role (Feldmann & Schwarzkopf, 2003;Menon & Williams, 1994). It follows that the degree of conflict between owner-managers and outside investors increases as owner-managers' ownership of the firm decreases.…”

“…Outside investors may perceive that the owner-manager behaves to maximize firm value when the owner-manager's holding is large (Abbott, Parker, & Peters, 2004;Fan & Wong, 2002). In this case, convergenceof-interest between the owner-manager and outside investors occurs (Feldmann & Schwarzkopf, 2003). The higher the owner-manager's ownership stake in the firm means the lesser the divergence of interests, therefore, the less likely monitoring needs to occur (Menon & Williams, 1994).…”

Ownership structure and debt structure as determinants of discretionary accruals: An empirical study of Pakistan

“…Johnson and Greening (1999) and Mahoney and Roberts (2007) stated that institutional investors reflect the finance held by non-individual investors like banks, insurance companies, pension funds, private investment organizations and any other party that keep and invest funds for the benefits of their customers. Lskavyan and Spatareanu (2011) and Feldmann and Schwarzkopf (2003) expounded that institutional shareholders play a very significant role in structuring the firm's corporate governance. Dechow et al (2012) and Chung, Firth, and Kim (2005) investigated that institutional investors have more courage and are able to play an active role in monitoring and disciplining managerial activities and also improve information asymmetry in the capital market.…”

The economic determinants of compensation committee quality

“…Klein (2002) finds that audit committee independence is positively associated with board size and board independence, and negatively associated with growth opportunities, the incidence of losses, the presence of block shareholders on audit committees, and firm size. Feldmann and Schwarzkopf (2003) find that audit committee independence increases as institutional holdings increase for firms with institutional ownership of less than 15%. Piot (2004) finds that audit committee independence is negatively related to inside ownership, the quality of financial reporting and is positively related to leverage.…”