Types of large shareholders, corporate governance, and firm performance : evidence from China's listed companies

Abstract

This study investigates the impact of various types of large shareholders, in a large transitional economy with a weak legal environment, on firm performances and corporate governance practices. I trace the ultimate shareholders of Chinese listed firms and identify, based on political and economic interest, four major types of large shareholders in China: three types of state shareholders, SAMBs (state asset-management bureaus), SOECGs (state-owned enterprises (SOEs) affiliated to the central government), and SOELGs (SOEs affiliated to the local government); and private entities. In transitional economies with weak legal environments, the role of the state is of particular importance in preventing the excessive expropriation of assets by private shareholders who hold large, controlling stakes. At the same time, the efficiency of state ownership differs depending on how ownership is exercised. The results of this study indicate that state institutions as shareholders of Chinese listed companies are associated with different operating efficiency and corporate governance arrangements. SOECG-controlled listed firms excel in almost every way. By contrast, listed firms controlled by SAMBs do badly in almost every aspect. Finally, SOELG-controlled firms are in the middle. These results are consistent with my hypothesis based on the analysis of the behaviours of state institutions as large shareholders, where risks bearing, benefits sharing, and monitoring are most important determinants of the relatively efficiency of various state shareholders. I also find that private entities, as shareholders of public firms, are just as good as the middle performer of state institutions in terms of corporate governance and firm performance. The lower-than-best performance of privately controlled listed firms indicates that the agency conflict between outside investors and controlling shareholders seriously hampers the efficiency of public firms. This finding shows the importance of constructing a sound legal framework, together with effective enforcement, in transitional economies. This study contributes to the literature by emphasizing the role of the legal environment on the relative efficiency of state vs private ownership.