5

Ownership structure as a corporate governance mechanism1

Introduction

In Chapter 4, we studied the relationship between large, controlling shareholders and small, outside shareholders, based on the theory of corporate control rights and associated private benefits. A related corporate governance issue is the 'agency problem' arising from the conflict of interests between the firm's management, as the agent, and its shareholders as the principals. This is caused by the separation of ownership by the investors, and effective control by the management, in publicly listed corporations. Furthermore, the agency problem is exacerbated when ownership is widely dispersed, due to the inability and/or the unwillingness of relatively small shareholders to police the behaviour of the management. The monitoring of management is also weakened by the 'free-rider problem'- the monitoring shareholders have to pay 100 per cent of the monitoring costs, but only gain an increased return in proportion to their shareholdings. Other, usually small, shareholders enjoy the rest of the improved gain but without making any effort. A consequence is that the residual control rights fall into the hands of management, instead of the residual cash flow claimants.

There is an increasing body of research that shows that the structure of share ownership can be an important source of incentives for management, for Boards of Directors, and for outside shareholders (Milgrom and Roberts, 1992). The pattern and amount of stock ownership can influence managerial behaviour, corporate performance, and stockholder voting patterns in election contests (Grossman and Hart, 1988). However, the interrelationship between ownership structure, firm characteristics, and corporate performance requires further investigation, both in developed economies and particularly in transitional economies. In this chapter, we will investigate the relationship between firm performance and ownership structure, using a sample of 434 manufacturing firms listed on SHSE and SZSE. The study involves two tests: the first on the link between corporate performance and ownership concentration, and the second on the link between corporate performance and different types of shareholdings.

The structure of this chapter is as follows. The next section is 'Review of the literature'. The section 'The model' discusses the theories related to ownership and corporate performance. The section termed 'The data' introduces the data

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Corporate Governance in China
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Figures x
  • Tables xi
  • Preface xiii
  • Acknowledgements xiv
  • Abbreviations xv
  • 1 - Introduction 1
  • 2 - Theoretical Approaches to Corporate Governance 10
  • 3 - The Evolution of Corporate Governance in China 31
  • 4 - The Effect of Ownership Structure on the Underpricing of Initial Public Offerings 62
  • 5 - Ownership Structure as a Corporate Governance Mechanism 88
  • 6 - The Determinants of Capital Structure 105
  • 7 - Chinese Corporate Groups 123
  • 8 - General Conclusions and Future Work 146
  • Notes 153
  • References 157
  • Index 170
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