Corporate governance and firm efficiency: evidence from China's publicly listed firms

Abstract

This paper applies a two-stage, double bootstrapping data envelope analysis approach to investigate whether and to what extent various distinctive corporate governance practices affect productive efficiency in a sample of 461 publicly listed manufacturing firms in China between 1999 and 2002. We find that firm efficiency is negatively related to state ownership while positively related to public and employee share ownership. In addition, the relationship between ownership concentration and firm efficiency is U-shaped, indicating the presence of tunneling activities by the largest shareholder. Among three types of controlling shareholder, state exerts the most negative impact on firm efficiency, followed by state-owned legal entities. These results provide strong evidence that political interferences have reduced firm efficiency. It shows that the proportion of outside directors and the number of board meetings are positively associated with firm efficiency, suggesting that board of directors can be an effective internal governance mechanism. Furthermore, provincial market development, a proxy for the strength of external governance mechanism, is positively related to firm efficiency. Overall, our findings illustrate that restructuring state-owned enterprises via improvements in corporate governance has enhanced firm efficiency, but partial privatization without transfer of ownership and control from the state to the public remains a major source of inefficiency in corporate China. Copyright © 2008 John Wiley & Sons, Ltd.

The impact of corporate governance on state-owned and non-state-owned firms efficiency in China

“…Liu and Lu (2007) report a non-linear relationship between the largest shareholder's holdings and firms' management activities among Chinese listed firms. Lin et al (2009) report a similar result of a U-shaped relationship between the shareholding of the largest shareholder and firm efficiency. Further, Tian and Estrin (2008) find a U-shaped relationship between government ownership and firms' corporate value as measured by Tobin's Q and return on assets (ROA).…”

“…Firth et al (2007) provide evidence that the larger and more active supervisory boards help to raise the quality of accounting information. However, Lin et al (2009) suggest that the supervisory committee is more decorative than functional since the board of supervisors has not been given the right to vote on executive decisions and the right to electing directors, managers, and financial officers. Chen et al (2009) find that supervisory boards cannot contribute significantly to firm efficiency.…”

“…When ownership of shares is widely dispersed, increasing ownership concentration is likely to mitigate the free-rider problem and enhance firm efficiency. However, when the fractional ownership of the largest shareholder exceeds a certain threshold, increasing ownership concentration raises the likelihood of tunneling and decreases firm efficiency (Lin et al, 2009). But when the largest shareholder' holding reaches a high level, the incentive to divert the firm's wealth may decrease, since the net gain of 'tunneling' is no longer significant (Liu & Lu, 2007).…”

Internal Governance Mechanisms and Value Creation of the Company: A Study of Large and Small and Medium Enterprises in Cameroon

“…They follow those of Cotter et al (1997) who concluded that the increase in shareholder dividends is conditioned by the strong presence of independent directors. Lin et al (2009) came to similar conclusions when they pointed out that corporate governance through its mechanisms intervene to neutralize the agency costs , protect the interests of all stakeholders, allow shareholders to increase their return on investment and achieve high performance.…”

“…Lin et al (2009) similarly note that companies governance through its mechanisms intervenes to neutralize the agency costs, to protect the interests of all stakeholders, allow shareholders to increase their return on investment and therefore to achieve high performance. Moreover, Schiehll and Bellavance (2009) argue that independent directors better promote value creation within companies unlike interns.…”