Institutional monitoring, coordination and corporate acquisitions in China

Abstract

Within the context of corporate acquisition decisions of China's Publicly Listed Corporations (PLCs), this paper investigates the monitoring and coordination behaviour of institutional shareholders. Institutional shareholders are divided into four groups: large outsider, large insider, small outsider and small insider. The outsider and insider categorization, respectively, represents the absence of significant business links with relevant PLCs. In China, institutional shareholders tend to either monitor the acquisitions decisions of PLCs or coordinate their response with the controlling shareholders (coordination in the present context amounts to cooperation). Using micro data from China's stock market over the 2003–2008 period, we find that (through ex-ante coordination with the controlling shareholders) the insider institutional investment tends to increase the likelihood of PLC acquisitions. However, through ex-ante monitoring of the PLC acquisition offers, the outsider institutional investment tends to decrease the acquisition likelihood. We find that, through ex-post monitoring of PLC acquisitions, institutional investors with large shareholdings can help improve the post-acquisition performance of Chinese PLCs. On the other hand, institutional investors with small shareholdings tend to coordinate their actions with the controlling shareholders. Accordingly, small institutional shareholders cannot affect the post-acquisition performance of China's PLCs. Finally, we find that the so-called ‘cherry-picking effect’ exists only in the case of large outsider institutional investors