This study analyzes corporate ownership as a corporate governance mechanism and its role in creating firm value. Previous research shows that there is no convergence on the firm-value corporate ownership relationship. Most research in this area takes a cross national approach ignoring the uniqueness of each institutional setting particularly those of emerging nations. Using a unique firm level dataset, we investigate how corporate control nature and ownership concentration affect the value of Chinese listed firms. First, non-state owned control is associated with a higher Tobin’s Q while a negative premium is found for state owned. Using the hybrid and the correlated random effects model we confirm a U-shaped non-linear relationship between ownership concentration and Tobin’s Q, implying that firm value first decreases and then increases as block holders own more shares. Further investigation reveals that the negative effect of ownership concentration is weaker when a firm equity nature is non-state owned enterprises (non-SOEs) compared to state-owned enterprises (SOEs). While ownership concentration appears to be an efficient mechanism for corporate governance its effect is weaker for SOEs compared to non-SOEs. The results support privatization of SOEs, sound reforms such as the split share structure reform as crucial for the development of China’s stock market.
As corporations expand, the owners (principals) delegate managers (agents) to manage their wealth on their behalf. Ceding the management authority to others means shareholders must institute mechanisms that keep their interests aligned with those of managers. One of such corporate governance mechanism that helps with the interest alignment goal is the compensation of Chief Executive Officers (CEOs). Although there are some previous studies on CEOs' compensation, results from these studies are mixed. Most corporate governance studies suffer from endogeneity problems. Resultantly, the current study uses the dynamic panel system generalized methods of moments (SGMM) estimator to examine the moderation effect of SOE reforms on the nexus between firm performance and CEO compensation using a sample of 1265 non-financial public limited companies on the China Stock Market from 2010 to 2016. The result from the study shows that both current and past firm performances positively influence executive compensation contracts. Although the Renewed Mixed-Ownership Reform was launched at the 18th National Congress of the Chinese Communist Party in 2012, its influence on executive compensation began to have material effect after issuing the operational guidelines in 2015. State ownership continued to decrease but remaining high only in strategic sectors. Finally, the extensive reforms positively influenced state ownership as an important governance mechanism in CEO compensation contracts after 2015.
Corporate governance is widely suggested by economists and regulators as a solution to reduce agency problems and improve firm performance. However previous studies have failed to generate consistent results. Using a dynamic panel system GMM estimator to alleviate endogeneity concerns we determine the effect of corporate board structure on the performance of a panel of 1265 Chinese firms listed on the Shanghai and Shenzhen stock exchanges from 2010 to 2016. We compare the dynamic system GMM estimator to some commonly used estimators; ordinary least squares (OLS), fixed effects (FE) and the dynamic OLS, and show that these estimates are biased due to endogeneity. The dynamic system GMM estimator incorporates the dynamic nature of internal governance choices to provide valid and powerful instruments that address unobserved heterogeneity and simultaneity. Our results show support for the board model corporate governance mechanism. We find that board size is positive and significantly related to both return on assets and total net profit margin. In addition board independence is positive and significantly related to return on assets but insignificantly related to total net profit margin. Duality was found to have a negative but statistically insignificant relation with firm performance.
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