In recent years, the issue of corporate governance in Taiwan has become a topic one. Along with the growing importance of institutional investors, the debate regarding institutional shareholder activism has become controversial. However, the role of institutional investors in Taiwan seems to be a passive one compared to those in developed countries such as US and UK, where large institutional investors usually are major participant and appear to be much more active in corporate governance (see Davis, 2002). Yeh, Lee and Woidtke (2001) indicate Taiwan listed companies are characterized as mostly family controlled with a high degree of ownership. According to Claessens et al. (2000), there is a relationship between the ownership structure of the corporate sector and the level of institutional development. Moreover, firm characteristics can be another attribute affect an institutional shareholder’s decision to intervene and the implications of this intervention for firm ownership structure (Kahn and Winton, 1998).
Accordingly, the main objective of this paper is to investigate the implications of concentrated ownership structure for institutional investors’ involvement in corporate governance by examining the changes in institutional holding around forced top management turnovers in Taiwan listed companies. Based on Gillan and Starks (2003), institutional investors have the potential to influence management’s activities
directly through their ownership, and indirectly by trading their shares. Moreover, top executive succession events provide a natural setting to examine the functioning of governance mechanisms because the decision to remove top managers is both extreme and highly visible (Kang and Shivdasani, 1995). Murray (1989), Michel and Hambrick (1992), and Wiersema and Bantel (1992) suggest the mechanism of top management replacement, for instance, chairman of board and CEO replacement, has important influence on strategic and performance issues. They are the highest authority in the corporate structure as they responsible for strategizing and managing all financial, business development and operation issues in the company. Thus, the investigation of institutional holding changes around potential or actual replacement of the chairman or CEO can be one of the effective ways to test the role of institutional investors’ involvement in corporate decisions changes.
While most companies in Taiwan are characterized as family controlled and have highly concentrated ownership structures (Yeh, Lee and Woidtke, 2001), empirical researches begin with an analysis of changes of institutional holdings in different ownership structure e.g. family-controlled firms versus nonfamily-controlled firms. After controlling industry trend in institutional holding changes, the result shows strong evidence that institutional ownership declines in family-controlled firms prior forced top management turnovers, suggests the concerns of institutional
investors in corporate decisions intervention under concentrated ownership structure.
However, there is limited evidence on institutional holdings increase in nonfamily-controlled firms prior forced top management turnovers.
Although selling behavior is only been observed in family-controlled firms prior forced top management turnovers, there is no evidence shows it leads to an increase in institutional holdings after the turnovers. If institutional investors intend to influence corporate decisions by top management replacements with preceding intended selling, they shall regain their shares for the fulfilled purposes afterward. Instead, ownership of institutional investors in both types of firms still decreases following the turnovers.
Thus, the result shows ambiguous evidence on the intention of institutions selling prior forced top management replacement.
In order to further examine the continued declines in institutional holdings post intended selling behavior, the samples are recategorized due to the possibility that merely classify turnover samples as forced or nonforced may ignores the fact that there are substantial inside successions following the turnovers, especially in family-controlled firms. In fact, Parrino (1997) states that outside successors are better able to change the direction of a firm. Similarly, Helmich and Brown (1972) find that the rate of organizational change, as proxied by departures and personnel shifts at the level below that of the CEO, is greater following outside appointments.
Therefore, institutional investors, who have the intention to changes corporate decisions by selling shares prior top management turnovers, shall repurchase their shares following outside successions which are more likely to substantially alter firm policies. The evidence still shows decreasing institutional holdings following the turnover in insider successions but outsider successions. This opposite trading behavior between outside successions and inside successions in family-controlled firms supports the hypothesis that institutional investors, who hold relatively small holdings under concentrated family ownership, have intention to passively influence corporate decisions through selling shareholdings prior top management turnovers.
Finally, as noted by Gillan and Starks (2003), the potential downward price pressure and negative information signal associated with heavy institutional selling can lead to changes in corporate governance even in the absence of direct institutional monitoring (Brown and Brooke, 1993; Parrino, Sias and Starks, 2003). This paper examines whether intended institutions selling can subsequently lead to better corporate governance through top management turnovers by improved board efficiency. In order to investigate how the changes in institutional holdings can potentially influence firm’s corporate governance in terms of board efficiency, I estimate frequencies of the percentage of outside directors and supervisors changes, board size changes and board holdings changes following top management. However,
the result shows only partially support for the intended institutional selling can lead to better corporate governance after top management turnovers.
In sum, institutional investors concern with the ownership structure before taking actions on influencing corporate decisions and the intention under selling behavior prior turnovers to influence corporate decisions is illustrated by different trading behavior between outside and successions inside successions in family-controlled firms. However, only limited evidence shows the correlation between intended institutional selling prior top management turnovers and corporate governance improvement exits.
The remainder of the paper is organized as follows. Section 2 illustrates the corporate governance background in Taiwan. Section 3 reviews the literatures.
Section 4 draws the data and methodology. The empirical results are presented in Section 5. Section 6 draws the conclusions.