Institutional shareholders' monitoring and control over corporate decisions: evidence from JSE listed companies.

Abstract

This thesis seeks to intensify our understanding of the responsibility of the institutional shareholders in corporate governance. Whereas several studies have investigated the efficacy of institutional shareholders' monitoring and have considered the diversity of their investment, there is a dearth of research on the effect of limited attention caused by distraction on their monitoring intensity and particularly on the reaction of the corporate executives regarding corporate decisions to the temporarily relaxed monitoring intensity in emerging market space. As a result of a shift in institutional shareholders' attention occasioned by exogenous shocks to an unrelated firm in their portfolios, the intensity of their monitoring of corporate activities dropped. The executives make decisions beneficial to them and harmful to institutional shareholders' interest and the firm's value. The study considers corporate decisions on executive remuneration, earnings management, investment inefficiency and mergers and acquisitions (M&A). These decisions are crucial to the growth of firms and return to institutional shareholders. However, due to agency problems, corporate executives' decisions on these activities tend to be for personal interest at the detriment of institutional shareholders' interest and firm value. Effective institutional shareholders' monitoring seems to be the antidote against opportunistic executives. But the intensity of their monitoring is affected by distraction caused by the external shocks to another firm in their portfolios. When this distraction occurs, the executives maximise the space to make decisions on their remuneration, manipulate earnings, invest in the unprofitable venture, and uncontrolled acquisition sprees that is of private benefits. The first empirical analysis in this thesis examines the impact of institutional shareholders' distraction on executive remuneration. The study shows that when shareholders are distracted and their monitoring intensity drops, the executives are inclined to manipulate their remuneration without considering institutional shareholders' interest and firm performance. The second empirical analysis examines the relationship between the relaxed institutional shareholders' monitoring intensity and executive decision on earnings management. The study reveals that the executives tend to manipulate both the discretional accruals earnings and real activities earnings for personal interest. The third empirical analysis indicated that executives could invest in projects with negative net present value (NPV) when the institutional shareholders monitoring is not sufficient. The final empirical research relates to the intensity of institutional shareholders’ monitoring to M&A executive decisions. The finding reveals that the executives could engage in an uncontrolled acquisitions spree of personal interest, jeopardise institutional shareholder’s investment and fail to improve the firm's value. The overall findings indicated that when institutional shareholders' attention is shifted, their monitoring intensity drops. The executives engage in corporate decisions that will not be in the shareholders' best interest and promote the firm's growth. These findings support the hypothesis that institutional shareholders monitoring intensity has a positive influence on corporate decisions. This insight has an implication for stakeholders and value-creating corporate governance mechanism. The study employed the more robust Generalised Method of Moments (Sys-GMM) estimation approach to analyse the data collected for firms listed on the Johannesburg Stock Exchange (JSE) covering the period 2004-2019.