Financial Modeling of Common Institutional Ownership’s Governance Effect on Corporate Leverage Manipulation

Shiqi Liu (), Xiaoyu Wang, Cong Li and Yuchen Zhang
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Shiqi Liu: Department of Management and Economics, Tianjin University, Tianjin 300000, China
Xiaoyu Wang: School of Economics, Qingdao University, Qingdao 266100, China
Cong Li: School of Economics, Qingdao University, Qingdao 266100, China
Yuchen Zhang: Department of Management and Economics, Tianjin University, Tianjin 300000, China

Mathematics, 2024, vol. 13, issue 1, 1-25

Abstract: Common institutional ownership, as a pivotal link of equity interconnection among diverse enterprises and a vital medium of information dissemination, possesses enhanced motivation and capability of decision-making in the course of business operation and development. This paper examines the effect of common institutional ownership on corporate leverage manipulation by applying panel data analysis method based on a sample of Chinese A-share listed companies from 2007 to 2021. We find that firms with high levels of common institutional ownership significantly reduce leverage manipulation. We also find that common institutional ownership can significantly reduce corporate leverage manipulation by improving internal capital management capabilities and external audit environment. At the same time, we find that the synergistic governance effect of common institutional equity has heterogeneity in the aspects of capacity utilization rate, equity nature, leverage manipulation motivation, and macro industry environment. These conclusions collectively highlight the important role of institutional cross-holdings in enhancing internal management levels and facilitating information transmission within the same industry. They also demonstrate that, under circumstances where internal agency problems are prominent, financial stress is high, and external risks are increasing, institutional cross-holdings play a supervisory and mitigating role in corporate financial management. This can not only contribute to the existing literature on the factors that positively constrain corporate leverage manipulation and the economic implications of common institutional ownership, but also has implications for how to enhance corporate governance and promote high-quality economic development in China’s context.

Keywords: common institutional ownership; corporate leverage manipulation; capital management ability; audit environment (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2024
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