Academic journal article Management International Review

The Effects of Institutional Ownership on Corporate Governance and Performance: An Empirical Assessment in Hong Kong

Academic journal article Management International Review

The Effects of Institutional Ownership on Corporate Governance and Performance: An Empirical Assessment in Hong Kong

Article excerpt

Abstract

* Using 433 publicly listed companies in Hong Kong, this study analyses how the institutional ownership of firms affects their corporate governance and performance. Our results indicate that institutional ownership exerts a direct and significant influence on corporate governance in such areas as board composition, CEO duality, leadership diversity, and ownership concentration.

Key Results

* The results indicate that institutional ownership exerts a direct and significant influence on corporate governance in such areas as board composition, CEO duality, leadership diversity, and ownership concentration.

* The results also show that institutional ownership has only an indirect effect on firm performance, such as corporate profitability.

Introduction

Research has documented that changes in corporate ownership can trigger changes in corporate governance structure (Davis/Thompson 1994, Li 1994) and in firm behavior and performance (Dalton/Daily/Ellstrand/Johnson 1998). Some studies have suggested that increasing institutional ownership has an effect on corporate governance and corporate performance (Baysinger/Hoskisson 1990, Stewart 1993). However, despite these studies, some of the effects of institutional ownership on corporate governance and performance remain unclear. On the one hand there are some discrepancies in the empirical findings, and on the other hand few empirical studies have been conducted in an Eastern business context, although many Western institutional investors hold shares in East Asian firms. Therefore, the question remains as to whether East Asian business contexts influence the relations between institutional ownership, corporate governance, and corporate performance, and many authors have called for more empirical studies with non-U.S. data on these relations (Barkema/Gomez-Mejia 1998, Barkema/Geroski/Schwalbach 1997). Research has also shown that some dimensions of the business context, such as the legal environment and industry regulations, may influence corporate governance and corporate performance (Luoma/Goodstein 1999). Therefore, it would be of interest to test these relations in an East Asian Chinese business context, which differs in many dimensions from that of the West. This paper reports the testing of the aforementioned relations. Based on a brief review of the relevant literature, we first propose hypotheses, and then present our research method and findings. The paper concludes with a discussion of the implications of the findings.

Literature and Hypotheses

Many authors have discussed or tested the effects of institutional ownership on corporate governance and performance. Empirical evidence on these effects, however, has been mixed. For example, as Mallette and Fowler (1992) pointed out, some studies have shown that institutional investors may try to force firms to reduce R&D spending to stabilize or increase short-term profitability (Graves 1988, Hill/Snell 1988, Hoskisson/Hitt 1988, Baysinger/Hoskisson 1990). Other studies, however, have suggested that institutional ownership has a positive relationship with the R&D spending of firms, which may actually affect short-term profits (Hill/Hansen 1991, Baysinger/Kosnik/Turk 1991). In spite of these discrepancies, there have been some relatively consistent findings and observations from past research, which are given in the following.

First, institutional ownership may influence board composition (Whidbee 1997). Research has suggested that the larger the degree of institutional ownership, the stronger the social pressure to have a board that is more representative of the external constituencies of the firm (Kesner 1988), and the larger the proportion of outside directors on a board (Whidbee 1997).

Hypothesis 1. There is a positive relationship between institutional ownership and the proportion of outside directors.

In addition, as their ownership in public firms increases, institutional investors may clip the power of CEOs and prevent CEO duality, which is when the board chairperson is simultaneously the CEO of the firm (Finkelstein/D'Aveni 1994, Stewart 1993, Fromson 1990). …

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