Abstract

Whereas prior research shows that the involvement of institutional investors, such as mutual funds, helps mitigate agency conflicts through monitoring in industrialized economies, there is a doubt about their monitoring role played in public companies listed in emerging markets due to a lower level of market efficiency and the lack of legal protection. Using the information from Chinese capital markets, we investigated the effects of fund involvement on two types of agency conflicts by considering its influences on the informativeness of earnings for the agency problems between majority and minority shareholders and those on the executive compensation for the agency problems between owners and managers. Our findings suggest that in Chinese markets, mutual funds have not been able to serve as an effective monitor, since in general, their involvement lowers the corporate transparency but increases the levels of executive compensations. To further address the subtle effects of fund involvement in Chinese publicly listed companies, we also examine the role played by bank-controlled funds and that played by state-owned-bank-controlled funds. Results show that, while state-owned-bank-controlled funds do not behave as well as funds controlled by joint-equity banks, bank-controlled funds can be considered as better monitors than non-bank-controlled ones.