機構投資者在集中股權結構下之公司治理角色定位─以高階主管異動為例

國 立 交 通 大 學

財 務 金 融 研 究 所

碩 士 論 文

機構投資者在集中股權結構下之公司治理角色

定位─以高階主管異動為例

Institutional investors and top management

turnovers in a market with concentrated

ownership control: Evidence from Taiwan

研究生 ： 齊孝慈

指導教授 ： 鍾惠民 博士

機構投資者在集中股權結構下之公司治理角色

定位─以高階主管異動為例

Institutional investors and top management

turnovers in a market with concentrated

ownership control: Evidence from Taiwan

研 究 生：齊孝慈

Student : Hsiao-Tzu Chi

指導教授：鍾惠民 博士 Advisor: Dr. Huimin Chung

國立交通大學

財務金融研究所

碩士論文

A Thesis Submitted to Graduate Institute of Finance

National Chiao Tung University

in partial Fulfillment of the Requirements

for the Degree of

Master of Science in

Finance

機構投資者在集中股權結構下之公司治理角色

定位─以高階主管異動為例

學生：齊孝慈 指導教授： 鍾惠民 博士

國立交通大學財務金融研究所

中華民國九十八年六月

中文摘要 台灣證券集中市場以家族集中持有為主，加上透過交叉持股金字塔結構，使 得管理階層在公司內之權威更加集中，相對之下機構投資人之投資比重偏低。本 論文透過機構投資人在高階主管異動前後持股之變動研究股權機中度是否影響 機構投資人在公司治理中扮演的角色。研究結果有三：第一，考量股權集中下直 接參與之成本效益，機構投資人傾向透過出售股票的方式來影響公司決策及管理 階層之行為。第二，利用外部繼承與內部繼承後之機構投資人相反之持股變動說 明上述機構投資人出售股票之真正意圖為影響公司決策及管理階層之行為，而非 交易策略。第三，經由機構投資人意圖透過出售股票來影響決策之公司，本文透 過董事會有效性之研究僅能部分支持日後公司治理有改善之現象。本論文之結論 為，相較於歐美等已開發國家中相對多數之機構投資人，考量市場及公司特性， 機構投資人參與公司治理的角色也隨之改變，以台灣為例，機構投資人形成一種 透過股權持有影響公司治理之消極參與角色。 關鍵詞 公司治理、機構投資人、高階主管異動、台灣

Institutional investors and top management

turnovers in a market with concentrated

ownership control: Evidence from Taiwan

Student: Hsiao-Tzu Chi Advisor: Dr. Huimin Chung

Graduate Institute of Finance

National Chiao Tung University

June 2009

ABSTRACT

This paper examines the role of institutional investors in corporate governance under the market where concentrated family control is the most widespread form of ownership, namely Taiwan. By investigating how institutional investors behave around top management turnovers, for instance, chairman of board and CEO replacements, the results suggest institutional investors are more likely to abandon a stock while turnovers come up in firms under concentrated ownership structure. Furthermore, the intention of institutional selling to influence corporate decisions is illustrated by different directions of institutional holding changes between outside succession and inside succession following forced top management turnovers in family-controlled firms. However, the evidence only partially supports those intended selling from institutional investors can lead to corporate governance improvement after top management turnovers.

KEYWORDS

誌 謝

本論文得以完成首先需感謝鍾惠民博士之悉心指導，亦得力於口試委員林美 珍博士、陳偉朋博士及李漢星博士之不吝賜教，給予我許多寶貴的意見，此外財 金所諸多教授春風化雨之教導皆使我受益良多，使我在浩瀚之研究領域中得到啟 發，其言教身教亦是我終生之楷模。同時也要感謝一起努力奮鬥論文的所長幫同 學文均、怡婷、祥霈以及taco，在cfa準備之際有你們的陪伴是我得以完成論文 的最大動力，加上財金所最man的嘉紋不時的給我鼓勵，常被我麻煩的烜榕給我 wording上的hint，經常提點我的茹雲，以及熱心幫忙的阿芬幫同學彥霖、育嬋、 昭華、秋香與經銓。兩年的時光匆匆，留下許多美好的回憶，非常感謝這兩年中 受到96級同學許多的照顧及幫忙，還有我的大學同學們的陪伴，特別是慷慨提供 我論文資料的可新小姐，另外謝謝辛苦幫我整理資料的冠文跟玫竹學妹，最後也 是最重要的要感謝我的家人，因為你們的愛和支持，才有今天的我。 孝慈 二零零九年六月 謹誌於 新竹交大

TABLE OF CONTENTS

中文摘要... I

ABSTRACT ... II TABLE OF CONTENTS ... III LIST OF TABLES AND FIGURES ... IV

1. INTRODUCTION ... 1

2. CORPORATE GOVERNANCE IN TAIWAN ... 5

3. RELATED LITERATURE AND HYPOTHESIS ... 8

4. DATA AND METHODOLOGY ... 13

5. EMPIRICAL EVIDENCE ... 17

6. CONCLUSION ... 29

REFERENCE ... 31

LIST OF TABLES AND FIGURES Table 1 ... 7 Fig 1 ... 15 Table 2 ... 16 Table 3 ... 19 Table 4 ... 24 Table 5 ... 26 Table 6 ... 28

1. INTRODUCTION

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

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

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

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,

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.

2. CORPORATE GOVERNANCE IN TAIWAN

The basic regulatory model of corporation in Taiwan is a two-tier structure that

consists of Board of director, Supervisor(s) and shareholders. Shareholders, as owners

of the corporation, elect directors and supervisor(s) by Shareholder’s Meeting. The

the functions of management. Shareholders retain the power to reshuffle the director

who abuses the delegate discretionary power that meant to maximize the shareholders

interest (Taiwan Securities and Futures Institute, 2008).

However, the market structure Taiwan is not like US or UK, according to Taiwan

Stock Exchange, individual investors constitute almost 60% of trading volume are the

major participants of Taiwan stock market. Even though the growing role of

institutional investors in recent years, they still count for relatively small portion of

the market. Due to either their overly small shareholding or to less cohesiveness

among the majority of the small shareholders, it is rare to find cases where these

individuals would voice their right to participate in corporate operation. Generally

speaking, individual investors are mostly superficial and easily affected by market

sentiment in which results a high turnover rate in the market. Moreover, due to either

their overly small shareholding or to less cohesiveness among the majority of the

small shareholders, it is rare to find cases where these individuals would voice their

right to participate in corporate operation.

In Taiwan, family-controlled enterprises and affiliated business groups are the

main organization in economic activities (see Claessens et al., 2000). Yet this is not a

unique case around the world, the influential power of family-controlled firms over

Table 1

The Number and percentage of family/group control firms in Taiwan listed market, 2002-2007 Number of listed firms Number of family/group control firms Percentage of family/group control firms is listed firms

2002 638 495 77.59 2003 669 500 74.74 2004 697 500 71.74 2005 691 505 73.08 2006 699 509 73.98 2007 698 508 72.78

affiliated firms constituting over 70% in Taiwan listed market. Moreover, Yeh (2002)

reports that boards of Taiwan corporations are populated with insiders and controlling

owners are more likely to insert family members on boards, which results substantial

control of ultimate controller over decision-making in Shareholders Meetings. This is

deemed as erosion of shareholders’ right as Shlefier and Vishny (1997), La Porta et al.

(1990) and Johnson et al. (2000) point out under concentrated ownership structure, the

conflicts of interests arise between minority shareholders and the controlling

shareholder.

Before 2001, there was no provision prohibiting cross shareholding between

parent and subsidiary companies in Taiwan’s Company Law; therefore, manipulation of the legal framework sometimes occurs (Taiwan Securities and Futures Institute,

2008). Claessens et al. (2000) reveals that control is enhanced through pyramid

structures and cross-holdings among firms in all the East Asian countries studied

including Taiwan. These ownership arrangements often create wedges between the

ultimate owners’ cash flows and their voting rights which result the expropriation of minority shareholders, as the controlling party allocates some corporate resources to

the production of private benefits (Fan and Wong, 2001). In addition, the law does not

restrict different representatives of the same institutional shareholders from being

elected director and supervisor irrespectively. Actually, having the same institutional

shareholder as director and supervisor can greatly compromise the fundamental

function of supervision as management without sufficient monitoring would likely fail

to meet its fiduciary duty to act in the interest of shareholders.

3. RELATED LITERATURE AND HYPOTHESIS

The issue of corporate governance has experienced a long time development

from early principal-agency theory (Jensen and Meckling, 1976) and entrenchment

theory (Jensen and Ruback, 1983). Corporate governance is a mechanism which

alleviates the conflict interest between managers and shareholders. Denis and

McConnel (2003) characterized governance mechanism as internal or external to the

both of internal and external mechanism. The internal governance mechanisms of

primary interest are the board of directors and the equity ownership structure of the

firm (Denis and McConnell, 2003). On the other side, takeover market is a major

source of external control (Huson, Parrino and Starks, 2001).

Another feature is top management turnovers. According to Kang and

Shivdasani (1995) 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. Besides, the mechanism of

managerial replacement protects shareholders rights from management exploitation.

For example, Lausten (2002) finds the threat of turnover ensures CEO acts in the

interest of the shareholders in Danish firms.

Several aspects surrounding top management replacement and corporate

governance have been documented in years, yet most of the articles focus on firm

performance assessment. As Kaplan (1994a, b) state, the relationship between

manager turnovers and firm performance is a good way to appraise the viability of a

firm’s governance system. The evidence generally indicates that manager turnovers

and firm performance are negatively related (Denis and Denis, 1995; Graziano and

Parigi, 2003; Kaplan and Minton, 2006). Aivazian, Ge, Qiu (2004) present the firm

state-owned enterprises.

While a negative relation between firm performance and the likelihood of CEO

turnovers has been well documented, there is relatively little evidence about how

turnover decisions are made. Some evidence suggests that turnover decisions are

affected by board composition (Weisbach, 1988) and CEO stock ownership (Salancik

and Pfeffer, 1980; Allen, 1981; Denis and Denis, 1995), but many other factors that

affect these decisions have not been examined, for instance, the role of institutional

investors.

The institutional investors have long been regard as large shareholders in the

firm with better information advantages and stronger incentives to undertake

monitoring activities (Shleifer and Vishny, 1986; Huddart, 1993). Gillan and Starks

(2000) indicate that institutional investors with large debt or equity positions in a

company have been motivated to actively participate in the company's strategic

direction. Although large institutional investors can be very effective in solving

agency problems in theory, empirical research provide ambiguous evidence for

successful changes in corporate decisions. On the other hand, it is also costly. Such

monitoring requires independent sources of information concerning managerial

actions and there are also potential liquidity costs (Kahn and Winton, 1998; Maug,

Hart, 1980). In addition, governance characteristics can determine how effectively

managers are monitored and howmuch influence a shareholder can exert (Parrino et

al., 2003). For example, CEOs who are members of a firm’s founding family tend to

control relatively large blocks of stock either directly or indirectly. This type of

control makes it more difficult to remove such CEOs (Morck et al., 1989; Parrino,

1997).

Thus, there is another theory of voting with their feet (Parrino et al., 2003), often

termed as “Wall Street Rule”. They believe selling of shares may be the most common

action taken by institutional investors to voice their opinions considering the cost of

direct involvement. Despite the passive nature of institutional selling, such selling

behavior seems to be another alternative of monitoring activities. For example,

because the amount holdings institutions hold, a shift in ownership structure is likely

to have a meaningful impact on corporate decisions (Parrino et al., 2003). Brickley et

al. (1988) report evidence that some shareholders are pressure-sensitive due to

business relationships with the company.

Hirschman (1970) terms “voice behavior” as the use of ownership power to

change the company’s actions, “exit” implies voting with your feet, and “loyalty”

implies remaining quiet and not selling. The possibility that exit by a large

In fact, the financial logic tends to favor exit behavior, that is, the institutional

investors does not want to be stuck in corporate governance bodies, but wants to be

free to make reallocations in the portfolio at any time (Hellman, 2005). Similarly,

Palmiter (2002) suggests that large shareholders may be able to affect managerial

decisions through the “threat (actual or implied) of selling their holdings and driving down the price of the targeted company.” Some studies even claim the “wall street walk” can be regard as another form of shareholder activism.

The principal aim of this paper is to examine the potential passive role of

institutional investors under concentrated ownership by observing changes in

shareholdings around top management turnovers and its impact on the issue of

corporate governance. Considering dominant individual investors, concentrated

family control, and possible cross-holding scenario in Taiwan listed corporations, the

main hypothesis tested is whether institutional investors tend to sell their shares prior

forced top management turnovers because they believe concentrated corporate

structure make direct actions (i.e., trying to influence corporate decisions) too costly

(H1). To further explore the intention under institutional selling, the forced turnover

samples are recategorized as outside succession or inside succession due to the

possibility that outside successors are better able to change the direction of a firm

selling actions prior to top management replacements, they shall repurchase their

shares for the fulfilled purpose after the turnovers (H2). Finally, this paper examines

whether intended institutional selling prior top management turnovers can result in

better corporate governance in terms of board efficiency (H3).

4. DATA AND METHODOLOGY

The data used in this paper primarily come from Taiwan Economic Journal Great

China Database (TEJ)1 and Taiwan Market Observation Post System (M.O.P.S)2. The

empirical analysis begins by first collecting samples from M.O.P.S regarding all

chairman of board and CEO turnovers over the period 2002 to 2007 in Taiwan listed

firms. Because of the decision to increase or decrease institutional holdings is likely to

be more significant in firms with substantial holdings, the analysis focuses on firms

with minimum institutional investment of one percent. With one by one checking for

chairman/CEO turnovers on M.O.P.S, the date of announcement, name and resume of

replaced chairman/CEO, name and resume of new chairman/CEO, reason for change

and effect date of new appointment of 296 chairman turnovers and 474 CEO

turnovers samples are collected. After checking for both availability of institutional

holdings and industry institutional holdings data, this procedure identifies 253

chairman turnovers and 385 CEO turnovers samples in total.

Samples are further classified based on three steps as followed (see Fig 1). First,

classify each turnover as forced or nonforced according to the reason for change

posted on M.O.P.S. The term “forced” covers all kinds of turnover except for

retirements and deceased, including election, quit, personal leave, fired, changed the

juristic-person representative, new hire, reallocation, separation of chairman and CEO

roles and others. In total, firstly identifies 562 forced and 76 nonforced turnovers.

Table 2 shows the number and frequency of forced top management turnovers over

the period 2002-2007 in Taiwan listed firms. The forced turnover firms represent

somewhere between 10% and 25% of total listed firms. Second, classify forced and

nonfoced samples separately by family-controlled or nonfamily-controlled types with

the definition stated on TEJ Database. This step leaves 461 forced samples in

family-controlled firms and 101 in nonfamily-controlled firms; 58 nonforced samples

in family-controlled firms and 18 in nonfamily-controlled firms. Finally, reclassify

forced samples in family-controlled firms by outside succession or inside succession.

The outside successor is defined specifically with (1) new successor had not been

employed at firm and family related firms before the succession or (2) new successor

and old one are not relative or (3) new successor is not presenting for the same

Fig. 1 Procedure of data classification are as followed. First, classify all turnover samples of 638 as forced (562) or nonforced (76) according to the reason for change posted on M.O.P.S. Second, classify forced and nonfoced samples separately by family control or nonfamily control types with the definition stated on TEJ Corporate Governance Database. There are 46 forced samples in family control firms and 101 in nonfamily control firms; 58 nonforced samples in family control firms and 18 in nonfamily control firms. Finally, reclassify forced samples in family control firms by outside succession or inside succession. In total, 81 samples in forced outside succession of family control firms and 380 samples in forced inside succession of family control firms.

definition, the relationship between successors and old chairman/CEOs has been

further investigated by searching both names of them using google. Based on this

schedule, 81 samples are left with forced outside succession and 380 samples with

Chairman/CEO turnover samples 638 Forced 562 Family control firms 461 Outside succession 81 Inside succession 380 Nonfmily control firms 101 Nonforced 76 Family control firms 58 Nonfamily control firms 18

Table 2

The number and frequency of forced board of chairman and CEO turnovers in Taiwan listed firms, 2002-2007.

Number of listed firms with minimum institutional investment of 1% Number of listed firms with chairman turnovers Number of listed firms with CEO turnovers Percentage of chairman/CEO experience turnovers 2002 507 23 47 13.81 2003 548 41 69 20.07 2004 569 55 73 22.50 2005 576 43 73 20.14 2006 605 48 67 19.01 2007 641 55 91 22.78 Total 265 420

forced inside succession in family-controlled firms.

Data on daily institutional holdings are collected from TEJ for the year before

and after the announcement date. The institutional investors here are composed of

foreign investors, securities investment trust companies and dealers, who are the most

influential institutions in Taiwan security market. Also, the daily institutional holdings

data used in the analysis are sum of these three institutions. In addition, in order to

control for industry effects, I subtract industry changes form changes in institutional

holdings over multiple quarters using data from TEJ.

Several corporate governance and firm characteristic variables are also used in

to the controlled family in the board. Board size refers to the number of directors in

the board. Manager holdings are percentage hold by firm managers and group

associate managers. Board holdings are percentage hold by directors in the board.

Natural log of total asset controls for the firm size. Accounting earnings before

interest and taxes scaled by total assets (EBIT/assets) is used as measure of

accounting performance. All of them are extracted from TEJ.

5. EMPIRICAL EVIDENCE

CHANGES IN INSTITUTIONAL HOLDINGS

To exam the possibility that institutional investors tend to sell their shares instead

of taking direct actions to influence corporate decisions through top management

replacement because they believe under concentrated ownership structure it too costly.

I begin the analysis by computing industry-adjusted changes in the fraction of shares

held by institutional investors for two years around top management turnovers. To test

whether ownership structure affects institutional investors’ behavior in corporate

decision intervention, by design, this analysis focuses on the forced chairman of

board/CEO turnovers in family-controlled and nonfamily-controlled firms. In addition,

due to small portion of institutional holdings in Taiwanese market, the daily variance

quarters to examine the institutional trading behavior around the chairman and CEO

turnovers. Panel A in Table 3 reports the mean industry-adjusted institutions holding

changes, Panel B in Table 3 reports the mean industry-adjusted foreign investors

holding changes, Panel C in Table 3 reports the mean industry-adjusted securities

investment trust companies holding changes and Panel D in Table 3 reports the mean

industry-adjusted dealers holding changes in forced turnovers in family-controlled

versus nonfamily-controlled firms including a year prior the turnovers and a year

following the turnovers. Quarter 0 defined as the day in which the replacement is

announced on M.O.P.S. T-statistics for test of difference between mean value of

family-controlled samples and nonfamily-controlled samples are reported below. The

mean values include all institutional holdings data available during 2002-2007.

Result of Panel A in Table 3 shows in the first quarter prior the forced turnover,

family-controlled firms experience negative institutional selling of -0.51%

(statistically significant at 1% level), on average. This result consists with Parrino et

al. (2003) showing declines holdings in institutional holdings preceding the CEO

turnovers. In contrast, institutional investors increase their holdings of 0.02%

(although not statistically significant) instead of selling in nonfamily firms. This result

Table 3

Industry-adjusted changes in institutions ownership in two years around chairman/CEO turnovers

This table shows mean change in percentage ownership by all institutional investors of forced turnover in family control firms and forced turnover in nonfamily control firms (Panel A), forced outside succession in family control firms and forced inside succession in family control firms (Panel E). Panel B, Panel C and Panel D report mean change in percentage ownership by foreign investors, securities investment trust companies and dealers separately. T-statistics provided in the third and seventh rows of each panel test difference between mean value of family control samples and nonfamily control samples or outside succession samples and inside succession samples. T-statistics reported in parentheses test the hull hypothesis that the mean value do not differ from zero. The turnovers occurs in quarter t=0.

Quarters

[-4,0] [-4,-3] [-3,-2] [-2,-1] [-1,0] [0,1] [1,2] [2,3] [3,4] [0,4] Panel A : Mean change in percentage institutional ownership (%)

Forced turnover in family control firms -1.83 -0.74 -0.41 -0.17 -0.51 -0.23 -0.32 -0.34 -0.51 -1.40 (-5.78) (-3.84) (-2.57) (-0.97) (-2.83) (-1.17) (-1.83) (-2.04) (-3.40) (-4.44)

*** *** *** *** * ** *** ***

Forced turnover in nonfamily control firms -0.72 -0.62 -0.29 0.17 0.02 -0.62 -1.14 -0.55 -0.30 -2.61 (-0.77) (-2.22) (-0.90) (0.39) (0.02) (-0.95) (-3.72) (-1.45) (-1.07) (-2.91)

** *** ***

t-statistic(H0: forcedfamily = forcednonfamily) -1.38 -0.29 -0.32 -0.79 -1 0.77 2.06 0.54 -0.62 1.54

[-4,0] [-4,-3] [-3,-2] [-2,-1] [-1,0] [0,1] [1,2] [2,3] [3,4] [0,4] Panel B : Mean change in percentage foreign investors ownership (%)

Forced outside succession in family control firms -1.54 -0.6 -0.32 -0.3 -0.32 -0.13 -0.26 -0.31 -0.36 -1.05

*** *** ** ** ** * ** *** ***

(-5.42) (-3.61) (-2.42) (-2.18) (-1.94) (-0.74) (-1.63) (-2.38) (-2.72) (-3.54) Forced inside succession in family control firms -1 -0.63 -0.41 -0.04 0.09 -0.2 -0.79 -0.6 -0.12 -1.71

*** *** * **

(-1.18) (-2.86) (-1.54) (-0.17) (0.12) (-0.35) (-3.82) (-1.94) (-0.52) (-2.05)

t-statistic(H0: forcedoutsider = forcedinsider) -0.75 0.07 0.28 -0.81 -0.82 0.17 1.54 0.93 -0.81 0.89

Panel C : Mean change in percentage securities investment trust companies ownership (%)

Forced outside succession in family control firms -0.32 -0.17 -0.14 0.1 -0.12 -0.14 0.07 0 -0.13 -0.34

** * * ** ** ***

(-2.35) (-1.07) (-1.73) (1.07) (-1.24) (-1.96) (-1.08) (-0.05) (-2.09) (-3.24) Forced inside succession in family control firms 0.17 0.02 0.09 0.15 -0.09 -0.33 -0.32 -0.03 -0.14 -0.81

** (0.47) (0.13) (0.37) (0.49) (-0.36) (-1.06) (-1.44) (-0.12) (-1) (-2.2)

t-statistic(H0: forcedoutsider = forcedinsider) -1.46 -0.84 -1.12 -0.2 -0.11 0.9 1.48 0.1 0.06 1.66

[-4,0] [-4,-3] [-3,-2] [-2,-1] [-1,0] [0,1] [1,2] [2,3] [3,4] [0,4] Panel D : Mean change in percentage deals ownership (%)

Forced outside succession in family control firms 0.03 0.03 0.05 0.02 -0.07 0.04 0 -0.03 -0.02 -0.01 **

(0.64) (0.86) (1.61) (0.82) (-2.06) (1.28) (0.17) (-0.94) (-0.62) (-0.13) Forced inside succession in family control firms 0.11 -0.01 0.03 0.06 0.02 -0.09 -0.03 0.07 -0.04 -0.1

(1.27) (-0.18) (0.92) (1.1) (0.42) (-2.08) (-0.67) (1.01) (-0.87) (-1.12)

t-statistic(H0: forcedoutsider = forcedinsider) -0.72 0.5 0.28 -0.54 -1.19 1.94 0.58 -1.35 0.28 0.81

** Panel E : Mean change in percentage institutional ownership (%)

Forced outside succession in family control firms -2.60 -1.11 -0.62 0.17 -1.03 0.97 -0.03 -1.09 -0.22 -0.38

(-2.74) (-1.85) (-1.84) (0.37) (-2.94) (1.24) (-0.07) (-2.98) (-0.70) (-0.48)

*** * * *** ***

Forced inside succession in family control firms -1.67 -0.67 -0.37 -0.25 -0.39 -0.48 -0.38 -0.18 -0.57 -1.61 (-5.10) (-3.37) (-2.03) (-1.26) (-1.94) (-2.94) (-2.07) (-0.97) (-3.39) (-4.74)

*** *** ** ** *** ** *** ***

t-statistic(H0: forcedoutsider = forcedinsider) -1.12 -0.88 -0.61 0.88 -1.37 2.87 0.75 -2.1 0.89 1.49

*** **

shares prior forced top management turnovers because of the possibility that direct

involvement in corporate decision under concentrated corporate structure making it

too costly. However, even though institutional holdings dose not decrease in

nonfamily-controlled samples, there is limited evidence regards to the active

participation in nonfamily-controlled firms prior forced turnovers.

Consistent with the pattern of shareholding changes a quarter prior forced

turnovers, institutional holdings declines, on average, 1.83% (statistically significant

at 1% level) a year prior forced turnover in family-controlled. Further investigating

institutional holding changes a year after forced turnovers, I find that institutional

holdings continue to decline, on average, 1.4% (statistically significant at 1% level) in

family-controlled firms. On the other hand, shareholding changes in

nonfamily-controlled firms are reversed and start showing negative changes of

-2.61% (statistically significant at 1% level). This result provides no support for the

intention of institutional selling prior forced top management turnovers. If

institutional investors tend to sell their shares to influence the corporate decisions by

replacing top managers, they shall regain their shares following the turnovers for the

fulfilled purpose. But neither family-controlled nor nonfamily-controlled firms

provide the evidence.

By reexamining all 562 forced turnovers samples on date of announcement,

name and resume of replaced chairman/CEO, name and resume of new

chairman/CEO, reason for change, I surprisingly find that there are substantial

successors, especially in family-controlled firms, either employed at firm prior the

turnovers or related to replaced managers. By reclassifying the forced turnovers

samples in family-controlled firms as outside succession or inside succession post

chairman/CEO turnovers, Table 4 shows the percentage of forced outside succession

following chairman/CEO turnovers in family-controlled firms over 2002 to 2007. The

evidence in this table reports less than 20% of family-controlled firms experience an

outside succession. Thus, there is a large chance that negative changes in institutional

holdings after forced turnovers is caused by unhappy result from unchanged ultimate

controller even after management replacement. Since outside successors are better

able to change the direction of a firm (Parrino, 1997), institutional investors would

better content with outside succession if they have intention to influence corporate

decisions by top managers replacement.

To further investigate, I assume if the selling behavior prior top management

turnovers is to influence corporate decisions, institutional investors shall behave

differently on outside appointments which appear to be more likely to substantially

Table 4

The number and frequency of forced outside succession after chairman/CEO turnovers in listed family control firms, 2002-2007.

Number of listed family control firms experience forced management turnovers Number of outsider succession of chairman turnover in listed family control firms Number of outsider succession of CEO turnover in listed family control firms Percentage of outsider succession in listed family control firms 2002 41 4 4 19.51 2003 77 8 6 18.18 2004 82 6 9 18.29 2005 86 8 5 15.12 2006 76 10 5 19.74 2007 99 8 8 16.16 Total 461 44 37

institutions holdings changes of the outside succession and inside succession after

forced top management turnovers in family-controlled firms including a year prior the

turnovers and a year following the turnovers. In the first quarter post turnovers, the

institutional holdings stop declining, instead, increase 0.97% (but not significant), on

average. As to inside succession firms, institutional investors are still selling their

shares of 0.48% (statistically significant at 1% level). Moreover, the t-statistics for

tests of differences in mean holdings changes between outside succession and inside

the intention of institutional investors to influence corporate decisions by selling their

shares prior forced turnovers. Even though changes of institutional holdings a year

post the turnovers are still negative in both outside and inside succession, only

significant in insider succession firms.

ROBUST TEST

Furthermore, this section testifies the robustness of the relation between

ownership structure and changes in institutional ownership prior forced turnovers by

regressing the changes in institutional holdings during a year preceding the turnovers

on forced turnover samples in family-controlled firms (Model 1) and in

nonfamily-controlled firms (Model 2) while controlling other governance variables:

outside succession dummy and the fraction of shares held by managers, see Table 5.

Additional variables are included in the regression to control for firm specific

characters including industry-adjusted stock return, operating performance

(EBIT/assets) and firm size (the log nature of assets).

Results in table 5 show that family-controlled firms experience statistically

significant declines in institutional holdings (at 5% level) prior forced chairman/CEO

turnovers. Instead, institutional investors increase their shares in nonfamily-controlled

firms (statistically significant at 5% level) prior forced turnovers. Overall, the

Table 5

Regression of changes in institutional ownership on governance variables and other variables This table reports results from OLS regressions of changes in institutional ownership in a year prior to forced turnover on governance characteristics, including outside succession dummy (one if the successor is outsider) and the fraction of shares held by managers. The change in institutional ownership represented by industry-adjusted changes in institutions ownership during a year prior the forced turnover in family control firms (Model 1) and in nonfamily control firms (Model 2). The firm characteristics include forced family dummy variable (one if the family control firm experience forced turnovers), nonforced family dummy variable (one if the nonfamily control firm experience forced turnovers), industry-adjusted stock return a year prior turnovers, operating performance (EBIT/assets) a year prior turnovers and firm size (the log nature of assets). T-statistics are reported in parentheses.

Explanatory variable Dependent variable Model 1 Model 2 △ % institutional ownership △ % institutional ownership Constant -7.17 -8.70 (-1.83) * (-2.12) ** Forced family dummy -1.41

(-2.07) **

Forced nonfamily dummy 1.69

(1.99) ** Forced outside succession dummy -1.25 -1.47

(-1.61) (-1.89) * % manager holding -0.22 -0.24 (-2.00) ** (-2.08) ** Industry-adjusted return -0.10 -0.09 (-0.92) (-0.79) EBIT/assets -0.06 -0.07 (-1.44) (-1.48) Log (assets) 0.46 0.48 (1.87) * (1.92) * N 638 638 R2 0.03 0.03

consideration of ownership structure tend to sell their shares forced chairman and

CEO turnovers.

CORPORATE GOVERNANCE AFTER TOP MANAGEMENT TURNOVERS

This section investigates whether institutional selling prior to top management

turnovers can lead to improved corporate governance (H3). The indicators of

corporate governance used here are focused on the board efficiency including the

percentage of outside directors and supervisors on the board, board size and board

holdings. These indicators help determine the influence to the functioning of the

board with respect to its monitoring ability. For example, evidence suggests that the

board effectiveness in its monitoring function is determined by its independence, size,

and composition ( John and Senbet, 1998). In order to investigate how the changes in

institutional ownerships can influence firm’s corporate governance in terms of board

efficiency through top management turnovers, I estimate frequencies of the

percentage of outside directors and supervisors changes, board size changes and board

holdings changes while institutional holdings decline prior to forced turnovers, forced

turnovers in family-controlled firms and turnovers with outside succession in

family-controlled firms (Table 6). In this table, even though the evidence shows

higher frequencies of percentage of outside directors and supervisors increase, board

Table 6

Frequencies of board efficiency indicators including the percentage of outside directors and supervisors on the board, board size and board holdings during a year post top management turnovers. Turnovers are classified as forced turnovers, forced turnovers in family-controlled firms and turnovers with outside succession in family-controlled firms.

All samples Forced turnovers Forced turnover in family- controlled firms Family- controlled firms with outside succession Percentage of outside directors& supervisors on the board Increase N 169 152 127 26 Percentage of total 89.94% 75.15% 15.38% Decrease N 108 96 73 19 Percentage of total 88.89% 67.59% 17.59% χ 2 0.08 1.87 0.24 Board size Increase N 109 93 77 17 Percentage of total 85.32 70.64% 15.60% Decrease N 105 99 87 22 Percentage of total 94.29% 82.86% 20.95% χ 2 4.66 ** 4.46 ** 1.03 Board holdings Increase N 128 114 100 24 Percentage of total 89.06% 78.13% 18.75% Decrease N 261 230 182 36 Percentage of total 88.12% 69.73% 13.79% χ 2 0 3.03 * 1.62

when institutional holdings declined prior forced turnovers and forced turnovers in

family-controlled firms; marginal significant in board holdings increase following

forced turnovers in family-controlled firms. As a result, there is only limited support

for the H3 that institutional selling can influence firms toward better corporate

governance through top management turnovers. Even though institutional investors

have intention to influence corporate activities through top management turnovers, the

power of institutional selling is not strong enough to affect governance attribute after

all.

6. CONCLUSION

This paper examines the role of institutional investors in corporate governance under

concentrated ownership structure by investigating the changes of shareholding around

chairman of board and CEO turnovers in Taiwan listed market. The result reveals

that institutional investors are more likely to sell their shares as passive shareholders

to influence corporate decisions in firms under concentrated family control.

Furthermore, considering the ability of outside successors in altering the directions of

a firm, the intention of institutional selling prior top management turnovers is

illustrated by different ownership change patterns between outside succession versus

institutional investors post top management turnovers. Empirical tests relating the

changes in institutional holdings and corporate governance attributes indicate only

partially support for institutional selling power to significantly influence corporate

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