As an important external governance mechanism, the institutional environment plays a crucial role in restraining major shareholders’ encroachment behaviors and mitigating corporate governance issues. This paper takes Shanghai and Shenzhen A-share listed Companies from 2013 to 2019 as the research subjects, explores the impact and mechanism of the institutional environment on major shareholders’ encroachment behaviors, and further tests the moderating role of the mediating effect. The results show that the improvement of the institutional environment and the enhancement of the quality of corporate internal control can both suppress the degree of encroachment by major shareholders, and the quality of internal control plays a mediating role in the effect of the institutional environment on the encroachment by major shareholders. Further research finds that the mediating transmission mechanism of internal control only exists in state-owned enterprises or enterprises with lower ownership by actual controllers, and there is a substitution effect between the institutional environment and informal institutions.