The role of the audit committee and institutional investors in constraining earnings management : evidence from Chinese firms listed in Hong Kong

Using data from 2004 to 2008, we find that an audit committee is an important monitoring mechanism as audit committee independence, expertise and size are associated with reduced levels of abnormal accruals, our measure of earnings management. This study also attempts to discern when the monitoring role of the audit committee is more salient for the firm. We find that ownership concentration and the presence of government officials on the audit committee are important determinants of the negative association between audit committee characteristics and earnings management. In contrast, we find no significant associations between the audit committee and abnormal accruals for Chinese firms listed only on the Chinese domestic Stock Exchanges. The paper contributes to the corporate governance literature in a transitional economy. Identifying the role of audit committees of firms listed on markets other than the domicile market demonstrates the importance of considering the institutional setting in governance research.

The impact of the Malaysian code on corporate governance: compliance, institutional investors and stock performance

In 2001, the Malaysian Code on Corporate Governance (MCCG) became an integral part of the Bursa Malaysia Listing Rules, which requires all listed firms to disclose the extent of compliance with the MCCG. Our panel analysis of 440 firms from 1999 to 2002 finds that corporate governance reform in Malaysia has been successful, with a significant improvement in governance practices. The relationship between ownership by the Employees Provident Fund (EPF) and corporate governance has strengthened during the period subsequent to the reform, in line with the lead role taken by the EPF in establishing the Minority Shareholders Watchdog Group. The implementation of MCCG has had a substantial effect on shareholders' wealth, increasing stock prices by an average of about 4.8%. Although there is no evidence that politically connected firms perform better, political connections do have a significantly negative effect on corporate governance, which is mitigated by institutional ownership.

Institutional investors, political connections and analyst following in Malaysia

We examine the association between institutional ownership, political connections, and analyst following in Malaysia from 1999 to 2009. Based on 940 firm-year observations, we document a positive relation between institutional ownership, particularly by Employees Provident Fund (EPF), and analyst following, thus supporting the governance role that institutional investors play in promoting corporate transparency. However, there is no evidence that political connections matter to analyst following. The monitoring role of institutional investors, including EPF, does not appear to be any different between politically connected and non-connected firms.

Institutional investors, risk/return and corporate governance : practical lessons from the Global Financial Crisis

The global grown in institutional investors means that firms can no longer ignore their influence in capital markets. However, not all institutional investors have the same motives to influence the firms they invest in. Institution investors' ability to influence management depends on the size of their investment and whether they have any business relations with the firm. Using a sample of Australian firms from 2006 to 2008, our empirical results show that the proportion of a company's shares held by institutional investors is positively associated with firm governance ratings, risk and profitability. This study shows that a positive association between risk and return is associated with large active institutional ownership, which we interpret as shareholders with sufficient power to pressure management to increase short-term profits.

Institutional investors, risk/performance and corporate governance

Modern portfolio theory suggests that investors minimize risk for a given level of expected return by carefully choosing the proportions of various assets. This study sets out to determine the role of the institutional investor in monitoring risk and firm performance. Using a sample of Australian firms from 2006 to 2008, our empirical study shows a positive association between firm-specific risk, risk-management policy, and performance for firms with increasing institutional shareholdings. The study also finds that the significance of this association depends on the institutional investor's ability to influence management, which in turn depends on the size of ownership and whether the investee firm does not have potential business dealings with the investor. We also find that when firms are financially distressed, institutional investors engage in promoting short-term performance or exit rather than support long-term value creation. The results are robust while controlling the potential for endogeneity and using sensitivity tests to control for variants of performance and risk. These findings add to the growing body of literature examining institutional ownership and the importance of understanding the role of risk-management in the risk and return relation.

The ebbing hegemon? An evolutionary perspective on the emergence of holistic governance and the efficient role of Institutional Investors in Environmental, Social and Governance issues (ESG)

This paper seeks to chronicle the roots of corporate governance form its narrow shareholder perspective to the current bourgeoning stakeholder approach while giving cognizance to institutional investors and their effective role in ESG in light of the King Report III of South Africa. It is aimed at a critical review of the extant literature from the shareholder Cadbury epoch to the present day King Report novelty. We aim to: (i) offer an analytical state of corporate governance in the Anglo-Saxon world, Middle East and North Africa (MENA), Far East Asia and Africa; and (ii) illuminate the lead role the king Report of South Africa is playing as the bellwether of the stakeholder approach to corporate governance as well as guiding the role of institutional investors in ESG.

Investigation of institutional investors’ responsible investment practices in UK

The focus of Corporate Governance is shifting from the role of directors to active ownership. Based on their fiduciary duty to other shareholders, it is believed that institutional investors have an important role to play in this regard. However, the Pension Funds and the Sovereign Wealth Organisations are not driven by the same set of objectives. In addition, Environmental Social and Governance (ESG) issues in investment decision-making are now becoming more important and they are capable of becoming the mainstream in the future. However, there are widespread variations in perception of fiduciary responsibilities, ESG issues appraisal, as well as the strategies adopted by institutional investors on shareholder engagement as responsible investors. Responsible Investment market is largely driven by institutional investors and they are expected to continue to lead the way. This research work investigates the role of the main asset owners and their advisors in responsible investment practices in the UK. It adopts a qualitative approach using semi-structured interviews, questionnaire and meetings observations. Gathered data is analysed using grounded theory and the findings highlight the perception of the various investor groups to corporate governance. The research work contributes to the body of knowledge by assessing the corporate governance perspectives of the various classes of institutional investors which may have practical implications for other countries.

Can institutional investors bias real estate portfolio appraisals? Evidence from the market downturn

This paper investigates the extent to which institutional investors may have influenced independent real estate appraisals during the financial crisis. A conceptual model of the determinants of client influence on real estate appraisals is proposed. It is suggested that the extent of clients’ ability and willingness to bias appraisal outputs is contingent upon market and regulatory environments (ethical norms and legal and institutional frameworks), the salience of the appraisal(s) to the client, financial incentives for the appraiser to respond to client pressure, organisational culture, the level of moral reasoning of both individual clients and appraisers, client knowledge and the degree of appraisal uncertainty. The potential of client influence to bias ostensibly independent real estate appraisals is examined using the opportunity afforded by the market downturn commencing in 2007 in the UK. During the market turbulence at the end of 2007, the motivations of different types of owners to bias appraisals diverged clearly and temporarily provided a unique opportunity to assess potential appraisal bias. We use appraisal-based performance data for individual real estate assets to test whether there were significant ownership effects on performance during this period. The results support the hypothesis that real estate appraisals in this period reflected the differing needs of clients.

Institutional investors: arbitrageurs or rational trend chasers?

This paper studies the relationship between institutional investor holdings and stock misvaluation in the U.S. between 1980 and 2010. I find that institutional investors overweigh overvalued and underweigh undervalued stocks in their portfolio, taking the market portfolio as a benchmark. Cross-sectionally, institutional investors hold more overvalued stocks than undervalued stocks. The time-series studies also show that institutional ownership of overvalued portfolios increases as the portfolios' degree of overvaluation. As an investment strategy, institutional investors' ride of stock misvaluation is neither driven by the fund flows from individual investors into institutions, nor industry-specific. Consistent with the agency problem explanation, investment companies and independent investment advisors have a higher tendency to ride stock misvaluation than other institutions. There is weak evidence that institutional investors make positive profit by riding stock misvaluation. My findings challenge the models that view individual investors as noise traders and disregard the role of institutional investors in stock market misvaluation.

Mitigating high ‘equity capital’ risk exposure to ‘small cap’ sector in India: analysing ‘key factors of success’ for ‘Institutional Investors’ whilst Investing in small cap sector in India

This paper deals with the subject of mitigating high ‘Equity Capital’ Risk Exposure to ‘Small Cap’ Sector in India. Institutional investors in India are prone to be risk averse when it comes to investing in the small cap sector in India as they find the companies risky and volatile. This paper will help analyse ‘Key Factors of success’ for ‘Institutional Investors’ whilst investing in Small Cap sector in India as some of these Indian small cap stocks offer handsome returns despite economic downturn. This paper has been harnessed carefully under the influence of expert investors, which includes Benjamin Graham (Security Analysis); Warren Buffet; Philip Fisher (Common Stocks and Uncommon Profits); and Aswath Damodaran.

Climate change, Hans Jonas and indirect investors

This article considers how corporate behaviour in relation to climate change might be reconfigured and the role that indirect investors might play in this reconfiguring. The article suggests that the consequences of climate change are serious enough that indirect investors might be prevailed upon, using a model of behaviour suggested by the work of Hans Jonas, to pressure institutional investors into demanding changes in corporate policy towards climate change. Jonas' work represents a plea for the recognition and acceptance of responsibility in the face of nature's vulnerability and humanity's power over technology. The article suggests that this ethic can be operationalised in relation to corporate governance by building on the changes in the pattern of investment holdings that have taken place in large public companies in the preceding two decades or so. The idea is to appeal to individuals who may perceive themselves as currently being outsiders – or at least only distant stakeholders in relation to the corporation – to realise the responsibility vested in them as beneficiaries through their interest in pension funds, life assurance policies, annuities and other arm's-length financial arrangements with corporations. The hope is that these individuals may, through the influence of a model of responsibility, become active investors and beneficiaries interested in corporate practices that impact on climate change and, encourage others to do likewise.