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The governance role of institutional investors in management compensation: evidence from China

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  • Song Zhu
  • Haijie Huang
  • William Bradford

Abstract

This study examines whether and how institutional investors play a corporate governance role in executive pay in China. Based on a sample of Chinese listed firms from 2005 to 2015, we find that higher institutional investor ownership is negatively related to excessive management compensation; this indicates that institutional investors play a governance role in listed firms’ decisions on management payment. Institutional investors are more likely to have an influence on executive compensation through their representatives on the corporate board or by conducting site visits, especially when their ownership is high. They will also react, as in the US, by ‘voting with their feet’; that is, holding fewer shares than they would otherwise, if firms pay excessive executive compensation, especially when their ownership is low. Cross‐sectional analyses show that the negative impact of institutional ownership on excess management compensation is more evident when firms are not owned by the government, monitored by fewer analysts, and located in regions of China with weak legal investor protection. Our results indicate that institutional investors in China can play an important governance role, especially for firms with characteristics such as location and analyst coverage, for which outside monitoring mechanisms will be in high demand.

Suggested Citation

  • Song Zhu & Haijie Huang & William Bradford, 2022. "The governance role of institutional investors in management compensation: evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(S1), pages 1015-1063, April.
    • Handle: RePEc:bla:acctfi:v:62:y:2022:i:s1:p:1015-1063
    DOI: 10.1111/acfi.12817
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    Cited by:

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    3. Jing Wu & Chee Yoong Liew, 2024. "Revisiting the nexus between corporate social responsibility and corporate value: Evidence from China," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(3), pages 2066-2085, May.
    4. Philip Teng Lin & Yanhui Jin & Fei Gao & Ruifeng Yang & Qian Lin, 2023. "Institutional Investors, CSR Report Readability and the Moderating Role of ESG Performance," SAGE Open, , vol. 13(4), pages 21582440231, November.
    5. Anisa Safiah Maznorbalia & Muhammad Aiman Awalluddin & Ardzlyn Hawatul Yuhanis Ayob, 2023. "Exploring the role of institutional investors in voting, monitoring and dialogue engagement in mitigating agency conflict in Malaysia’s public listed companies," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-9, December.
    6. Zhang, Yifu, 2024. "Capital market liberalization and accounting quality: Evidence from China," Finance Research Letters, Elsevier, vol. 64(C).
    7. Lu, Jing & Qiu, Yuhang, 2024. "Does minority shareholder activism reduce stock idiosyncratic risk?," Research in International Business and Finance, Elsevier, vol. 67(PA).
    8. Zhihao Wang & Kezhi Liao & Sisi Wang, 2024. "Institutional investor horizons, ownership structure and investment efficiency in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(1), pages 739-782, March.
    9. Fengguang Lyu & Zhiping Zhang & Guangxin Fu & Zhangxin (Frank) Liu & Sirimon Treepongkaruna, 2024. "Multiple shareholding institutional investors and green governance of heavy‐polluting industries," Business Strategy and the Environment, Wiley Blackwell, vol. 33(4), pages 3569-3587, May.

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