An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Rongli Yuan
Cardiff University

Jason Zezhong Xiao
Cardiff University

Hong Zou
Lingnan University Hongkong

Abstract: This study empirically tests the impact of institutional ownership by investment banks and mutual funds on firm performance in China, using a large sample of 3,273 firm-year observations for the period of 2001—2003. We find that equity ownership by mutual funds has a positive impact on firm performance (measured by both Tobin’s Q and return on assets), while investment banks’ shareholdings are not significantly related to firm performance. The results are robust to various estimations including a simultaneous equation procedure. Our findings indicate that mutual funds seem to have started to affect firm perforemance in China, supporting the recent regulatory effort promote them as a corporate governance mechanism. Our results also suggest that pooling diffuse minority individual shareholders who are prone to free-rider problems via mutual funds is value increasing in China.

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