Have Institutional Investors Really Played A Role In Governance?

The principal-agent problem brought by the separation of ownership and operation of modern companies has been troubling the theoretic and practical fields. Also, the successive exposure of worldwide corporation scandals has further exposed the flaw of the system of corporate governance. In such circumstances, the traditional internal corporate governance can’t play its role well enough, so is there a new governance mechanism which can effectively alleviate the principal-agent problem? Since the late 1980s, institutional investors’shareholder activism began to rise in Western countries. Then institutional investors are playing a more and more important role in the capital market, they can use voting、 shareholder proposal、private consultations、the joint action of other institutions or the other ways, to participate in the company management and to have a certain impact on the corporate governance. Some studies have found that institutions’ governance has replaced the takeover market to be one of the important external governance mechanisms. Based on the study of Li and Wang (2007)、Liu and Wu (2011)、Hartzell and Starks (2003) and Chung and Zhang (2011), this paper presents that whether institutional investors in our country play a role in governance、reduce the agency cost and enhance the corporate value, in the context of increasingly expanding of the scale and improving of the shareholding ratios of China’s institutional investors?The efficiency of corporate governance reflects in many aspects, among them, whether the internal governance mechanism is perfect or not is a direct prospective. Therefore, this paper uses the core of the internal governance mechanism — management governance and board governance as a proxy variable to measure the corporate governance. We choose executive compensation variable to measure management governance, boards’ leadership structure variable to measure board governance, with the asset turnover ratio to measure the agency cost, return on total assets ROA、earnings per share EPS and Tobin’s Q to measure corporate value, the entry point of the institutional investors shares, and the research samples of 2007-2013 A-share listed companies, to examine the effect of institutional shareholders on governance of listed companies. On this basis, we also explore further whether the agency cost has been reduced and whether the corporate value has been improved.This paper found that:(1) institutional investors can significantly influence the level of executive compensation, there is a significant positive correlation between the proportion of institutional ownership and executive compensation (2) institutional investors can significantly improve board’s leadership structure, the higher the proportion of institutional ownership is, the less likely the chairman and general manager being one person (3) institutional investors can significantly reduce the agency cost, the higher the proportion of institutional ownership is, the lower the agency cost will be (4) institutional investors can significantly improve the corporate value, that is, the higher the proportion of institutional ownership is, the higher the corporate value will be. In short, the study found that institutional investors can improve the two internal governance mechanism—management governance and board governance, enhance the level of corporate governance, reduce the agency cost and improve corporate value eventually. Currently, institutions’ governance has replaced the takeover market to be an important external governance mechanism, so this study not only enriches the theory of corporate governance, but also provides new empirical evidence to support the demonstration of whether the institutional investors have played a role in governance or not.