The Role Of Institutional Investors:Collusion,Supervision Or Onlooker?

Existing research divides the roles of institutional investors in the governance of listed companies into supervision,onlookers,and collusion.Although the shareholder composition of China’s listed companies is becoming more and more diversified,the ownership structure is still relatively concentrated,which also leads to the tendency of controlling shareholder to hollow out the company by means of related transactions and undermine the interests of non-controlling shareholders.As non-controlling shareholder,institutional investors are generally believed to have more time and energy to supervise the behavior of controlling shareholder,use their professional advantages to effectively alleviate the agency problem by playing a supervisory role,and become a force to supervise and balance controlling shareholder.However,from the large and abnormal fluctuations in the stock price of the investment group buying after the investigation of Hengshuai Co.,Ltd.,to the malicious reduction and arbitrage of the concept of hydrogen energy by Shaanxi International Investment Co.,Ltd.in cooperation with Meijin Energy,it is not uncommon for institutional investors and controlling shareholder to conspire to infringe upon the interests of small and medium shareholders.So what role do institutional investors play when controlling shareholder hollow out listed companies?This article will focus on the institutional investor shareholders of Concentrating Technology and reveal the role they play in the hollowing out of controlling shareholder.Focused Photonics has experienced a"U"-shaped change in the shareholding ratio of institutional investors,and the analysis of events before and after the inflection point can more clearly reflect the behavior path of institutional investors.This article adopts the single case study method,and selects Focused Photonics(Hangzhou)Co.,Ltd.(hereinafter referred to as "Focused Photonics")as the case study object.Focused Photonics is a company listed on the Growth Enterprise Market in 2011.At the end of 2021,the China Securities Regulatory Commission issued a warning letter on its illegal related party transactions.The company’s net profit in the 2022 annual report also turned from profit to loss for the first time.Such a company with controlling shareholder hollowing out and poor performance has obtained a high proportion of shares from institutional investors,and its stock price is also at a high level.This abnormal phenomenon is worth thinking about.This article takes the institutional investors of Focused Photonics as the case study object,combining Li Zhengguang’s(2014)research on short-term institutional investors’ governance motivations and weak effects,and Guo Xiaodong’s(2019)research on institutional investors’ groups paying more attention to short-term interests and tending to Research that exploits R&D spending for hype.Explore the role of institutional investors in the hollowing out behavior of Focused Photonics’s controlling shareholder from the aspects of system level,corporate fundamentals,institutional investor types,institutional investor motivations,institutional investor behavior,and listed companies’ responses to institutional investor behavior.Through research,this paper finds that institutional investors have not played the role of effective supervisors during Focused Photonics’s large shareholder hollowing out.In the face of the hollowing out of controlling shareholder’ illegal related transactions,institutional investors have neither "voted with their hands" actively nor did they "vote with their feet" to withdraw investment,instead they took a bystander attitude.The main motivations that make institutional investors fail to play an effective supervisory role include:First,the study found that the institutional investors of Focused Photonics are mainly short-term investors.Due to their short investment period,it is more difficult to pass active investment that requires long-term results.Second,although the total shareholding ratio of institutional investor shareholders of Focused Photonics is relatively high,the number of shareholding institutions is large,and the shareholding ratio of a single institution is relatively low."Free riding"behavior is widespread,and institutional investors are unwilling to pay more attention to active participation in governance.Third,the poor internal governance environment requires institutional investors to pay higher supervision costs,which hinders institutional investors from playing an active role in governance.Fourth,the behavior of the controlling shareholder’s equity pledge and the demand to reduce the shareholding make it easier for institutional investors to exert pressure on them through "exit threats",forcing the controlling shareholder to cooperate with institutional investors in short-term profit-seeking behavior.This paper also finds that institutional investors may adopt various ways to put pressure on the controlling shareholder,including:first,asking questions about certain types of business development and sending requirements during research activities.Reduce the frequency of research to convey the "warning" to the company.Second,force listed companies to replace executives by grouping together to "vote with their feet".This article focuses on the phenomenon of listed companies hollowed out by institutional investors with a high proportion of controlling shareholder,analyzes their roles,excavates their behavioral motivations,and clarifies the path of their influence,in order to effectively propose ways to help institutional investors better exert effective supervision and give relevant policy recommendations.Suggestions are as follows:1.Regulatory authorities:The securities trading regulation represented by the new regulations on shareholding reduction in 2017 has indeed played a role in curbing the abnormal systemic fluctuations in the stock market,but it has also had a negative impact on the policy goal of cultivating institutional investors to participate in the governance of listed companies.Securities regulators should consider the balance of different policy objectives.If they can consider the characteristics of institutional investors,such as starting from the holding period of investment,loose the trading regulations for long-term institutional investors,and implement precise constraints,then it will be better to fulfill the goal of maintaining market order and advancing institutional investor governance at the same time.2.Institutional investors:Institutional investors can seek joint participation in governance and unite with others to overcome the equity disadvantage compared to controlling shareholder and reduce their own governance costs in order to play a positive role in governance.3.Ordinary investors should fully understand the fundamentals of the invested company when investing,comprehensively consider the industry,technological advantages,R&D level and future development potential of the listed company,and make a decision on the investment value of the selected company through rational judgment.The types of institutional investors should be considered,and companies with a relatively high shareholding ratio of institutional investors should not be blindly followed,because short-term institutional investors are likely to fail their due role in supervising controlling shareholder for short-term arbitrage.