Abstract
Building upon the property rights theory, this paper develops a theoretical framework that shows that in emerging markets where large shareholders’ shares are non-transferable and the legal protection for property rights is weak, large shareholders’ dominance over the board of directors is endogenously determined by their pursuit of benefits of control. We use a natural experiment, the compulsory introduction of independent directors in August 2001 by the China Securities Regulatory Commission (CSRC), to empirically test the effect of large shareholders’ benefits of control on the dynamics of board structure adjustment. Consistent with our argument that large shareholders minimise monitoring from independent directors, who should comprise at least a third of board members according to the CSRC’s requirement, we make the following findings: (1) Firms with more large shareholders’ private benefits are more likely to decrease the number of non-independent directors to meet the requirement; (2) such firms are also more likely to delay compliance; and (3) descriptive statistics show that directors from the largest shareholder make up a higher proportion of a board after the adjustment, thus increasing the largest shareholder’s control over the board. The policy implication of this paper is that the corporate governance of Chinese listed firms is largely determined by large shareholders’ pursuit of private benefits. However, one rule does not fit all firms.
Article PDF
Similar content being viewed by others
References
Adams, R., and Ferreira, D. (2007), ‘A theory of Friendly Boards’, Journal of Finance 62 (1): 217–250.
Adams, R., and Ferreira, D. (2009), ‘Strong Managers, Weak Boards?’, CESifo Economic Studies 55 (3–4): 482–514.
Adams, R., Hermalin, B., and Weisbach, M. (2010), ‘The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey’, Journal of Economic Literature 48 (1): 58–107.
Alchian, A. (1965), ‘Some Economics of Property Rights’, Reprinted in Alchian, Economic Forces at Work, Indianapolis: Liberty Press.
Bae, K., Kang, J. and Kim, J. (2002), ‘Tunneling or value added? Evidence from mergers by Korean business groups’, Journal of Finance 57 (6): 2695–2740.
Baker, M. and Gompers, P. (2003), ‘The Determinants of Board Structure at the Initial Public Offering’, Journal of Law and Economics 46 (2): 569–598.
Barclay, M. and Holderness, C. (1989), ‘Private benefits from control of public corporations’, Journal of Financial Economics 25 (2): 371–395.
Barzel, Y. (1974), ‘A Theory of Rationing by Waiting’, Journal of Law and Economics 17 (1): 73–95.
Becht, M., Bolton, P., and Röell, A. (2003), ‘Corporate Governance and Control’, In Handbook of the Economics of Finance, Vol. 1A (Corporate Finance), London and New York: Elsevier, North Holland.
Boone, A., Field, L., Karpoff, J., and Raheja, C., (2007), ‘The determinants of corporate board size and composition: An empirical analysis’, Journal of Financial Economics 85 (1): 66–101.
Cheung, S. (1974), ‘A Theory of Price Control’, Journal of Law and Economics 17 (1): 53–71.
Cheung, S. (1983), ‘The Contractual Nature of the Firm’, Journal of Law and Economics 26 (1): 1–21.
Cheung, Y., Rau, P., and Stouraitis, A. (2006), ‘Tunneling, propping, and expropriation: Evidence from connected party transactions in Hong Kong’, Journal of Financial Economics 82 (2): 343–386.
Coase, R. (1960), ‘The Problem of Social Cost’, Journal of Law and Economics 3 (1): 1–44.
Coles, J., Daniel, N., and Naveen, L. (2008), ‘Boards: Does One Size Fit All?’, Journal of Financial Economics 87 (2): 329–356.
Corporate Governance Research Center in Nankai University (2008), ‘Zhongguo Gongsi Zhili Pingjia yu Zhishu Baogao - Jiyu 2007nian 1162jia Shangshi Gongsi’ (Reporton Chinese Coporate Governance Evaluation and Index - Based on 1162 Listed Companies in 2007), Guanli Shijie (Management World), Issue 1: 145–151.
Dang, J., Zeng, Y., and He, J. (2006), ‘Gaizhi Moshi Yingxiang Dongshihui Tezheng Ma?’ (Will the System Change Affect Characteristics of the Board of Directors?), Kuaiji Yanjiu (Accounting Research), Issue 11: 82–88.
Demsetz, H. (1967), ‘Towards a Theory of Property Rights’, American Economic Review 57 (2): 347–359.
Demsetz, H. and Lehn, K. (1985), ‘The Structure of Corporate Ownership: Causes and Consequences’, Journal of Political Economy 93 (6): 1155–1177.
Duchin, R., Matsusaka, J., and Ozbas, O. (2010), ‘When are outside directors effective?’, Journal of Financial Economics 96 (2): 195–214.
Dyck, A. and Zingales, L. (2004), ‘Private Benefits of Control: An International Comparison’, Journal of Finance 59 (2): 537–600.
Gao, J. (2006), ‘Zhongguo Shangshi Gongsi Duli Dongshi Zhidu Yanjiu’ (A Study on the System of Independent Directors in Chinese Listed Companies), Doctoral Dissertation, Shandong University.
Gao, L., He, S., and Huang, Z. (2006), ‘Gongsi Zhili yu Taokong’ (Corporate Governance and Tunnelling), Jingjixue Jikan (China Economic Quarterly), Issue 4: 1157–1178.
Grossman, S. and Hart, O. (1988), ‘One Share-One Vote and the Market for Corporate Control’, Journal of Financial Economics 20 (1-2): 175–202.
Hao, Y. and Zhou, Y. (2010), ‘Dongshihui Jiegou Gongsi Zhili yu Jixiao - Jiyu Dongtai Neishengxing Shijiao de Jingyan Zhengju’ (Board Structure, Corporate Governance, and Performance - Empirical Evidence Based on the Perspective of Dynamic Endogeneity), Guanli Shijie (Management World), Issue 5: 110–120.
Harris, M. and Raviv, A. (1988), ‘Corporate Governance: Voting Rights and Majority Rules’, Journal of Financial Economics 20 (1-2): 203–235.
Harris, M. and Raviv, A. (2008), ‘A Theory of Board Control and Size’, Review of Financial Studies 21 (4): 1797–1832.
Hermalin, B. and Weisbach, M. (1988), ‘The Determinants of Board Composition’, RAND Journal of Economics 19 (4): 589–606.
Hermalin, B. and Weisbach, M. (1998), ‘Endogenously Chosen Boards of Directors and Their Monitoring of the CEO’, American Economic Review 88 (1): 96–118.
Hermalin, B. and Weisbach, M. (2003), ‘Boards of directors as an endogenously determined institution: A survey of the economic literature’, Economic Policy Review 9 (1): 7–26.
Huang, Z., Xu, X., and Yue, Y. (2006), ‘Zhongguo Shangshi Gongsi Dongshihui Jiegou Fenxi’ (An Analysis on the Board Structure of Listed Companies in China), Guanli Shijie (Management World), Issue 11: 128–134.
Jian, M. and Wong, T. (2010), ‘Propping through related party transactions’, Review of Accounting Studies 15 (1): 70–105.
Jiang, G. and Yue, H. (2005), ‘Dagudong Zhanyong Shangshi Gongsi Zijin yu Shangshi Gongsi Gupiao Huibaolu Guanxi de Yanjiu’ (A Study on the Relationship between Large Shareholders’ Appropriation of Listed Companies’ Funds and the Returns on Listed Company Shares), Guanli Shijie (Management World), Issue 9: 119–126.
Jiang, G., Lee, C., and Yue, H. (2010), ‘Tunneling through intercorporate loans: The China experience’, Journal of Financial Economics 98 (1): 1–20.
Johnson, S., La Porta, R., Lopez-de-Silanes, F., and Shleifer, A. (2000), ‘Tunneling’, American Economic Review Papers and Proceedings 90: 22–27.
Kroszner, R. and Strahan, P. (2001), ‘Bankers on Boards: Monitoring, Conflicts of Interest, and Lender Liability’, Journal of Financial Economics 62 (3): 415–452.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., and Vishny, R. (1997), ‘Legal Determinants of External Finance’, Journal of Finance 52 (3): 1131–1150.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., and Vishny, R. (1998), ‘Law and Finance’, Journal of Political Economy 106 (6): 1113–1155.
Lehn, K., Patro, S., and Zhao, M. (2009), ‘Determinants of the Size and Composition of U.S. Corporate Boards: 1935-2000’, Financial Management 38 (4): 747–780.
Li, H. and Zhang, J. (2006), ‘Shangshi Qiye Zhili yu Jixiaojian de Neishengxing Chengdu’ (The Level of Endogeneity between Governance and Performance of Listed Companies), Guanli Shijie (Management World), Issue 5: 121–135.
Li, J. (2007), ‘Woguo Guquan Fenzhi Gaige Tisheng Shangshi Gongsi Jiazhi Yanjiu’ (A Study on the Increase in Listed Firms Value after the Split Share Structure Reform), Doctoral Dissertation, Shanghai Jiao Tong University.
Li, Z., Sun, Z., and Wang, Z. (2004), ‘Taokong yu Suoyouquan Anpai - Laizi Woguo Shangshi Gongsi Dagudong Zijin Zhanyong de Jingyan Zhengju’ (Tunnelling and Ownership Arrangement - Empirical Evidence from Large Shareholders’ Appropriation of Funds of Chinese Listed Companies), Kuaiji Yanjiu (Accounting Research), Issue 12: 3–13.
Li, Z., Yu, Q., and Wang, X. (2005), ‘Taokong, Zhichi yu Binggou Chongzu - Laizi Woguo Shangshi Gongsi de Jingyan Zhengju’ (Tunnelling, Support and M & A Restructuring - Empirical Evidence from Chinese Listed Companies), Jingji Yanjiu (Economic Research Journal), Issue 1: 95–105.
Linck, J., Netter, J., and Yang, T. (2008), ‘The Determinants of Board Structure’, Journal of Financial Economics 87 (2): 308–328.
Linck, J., Netter, J., and Yang, T. (2009), ‘The Effects and Unintended Consequences of the Sarbanes-Oxley Act on the Supply and Demand for Directors’, Review of Financial Studies 22 (8): 3287–3328.
Liu, H., Li, Z., and Sun, Z. (2010), ‘Konggu Gudong de Chanquan Shouyi Shixian Fangshi yu Liyi Shusong Zhuanxiang’ (Realisation of Controlling Shareholders’ Property Gains and Redirection of Benefits Transfer), Caijing Yanjiu (Journal of Finance and Economics), Issue 4: 56–67.
Liu, H., Tang, S., and Lou, J. (2010), ‘Duli Dongshi: Jiandu Haishi Zixun?’ (Independent Directors: Monitoring or Advising?), Guanli Shijie (Management World), Issue 1: 141–156.
Qian, Y. (2003), ‘Zhengfu yu Fazhi’ (Government and Rule of Law), in Wu, J. (ed.), Bijiao (Comparison), 5th Series, Beijing: China Citic Press.
Raheja, C. (2005), ‘Determinants of Board Size and Composition: A Theory of Corporate Boards’, Journal of Financial and Quantitative Analysis 40 (2): 283–306.
Shleifer, A. and Vishny, R. (1986), ‘Large shareholders and corporate control’, Journal of Political Economy 94 (3): 461–488.
Song, F. and Thakor, A. (2006), ‘Information Control, Career Concerns, and Corporate Governance’, Journal of Finance 61 (4): 1845–1896.
Stigler, G. (1971), ‘The Theory of Economic Regulation’, Bell Journal of Economics 2 (Spring): 3–21.
Tang, Q. and Luo, D. (2006), ‘Sheli Duli Dongshi de Xiaoguo Fenxi - Laizi Zhongguo Shangshi Gongsi Duli Dongshi de Wenjuan Diaocha’ (An Analysis on the Effect of Implementing the System of Independent Directors - A Questionaire Survey of Independent Directors of Chinese Listed Companies), Zhongguo Gongye Jingji (China Industrial Economics), Issue 1: 120–127.
Wang, H. and Huang, Z. (2006), ‘Jingyingzhe Guquan Jili, Dongshihui Zucheng yu Qiye Jiazhi - Jiyu Neishengxing Shijiao de Jingyan Fenxi’ (Executive Equity Incentives, Board Composition, and Firm Value - Empirical Analysis Based on the Perspective of Endogeneity), Guanli Shijie (Management World), Issue 9: 101–116.
Williamson, O. (1985), The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting, New York: The Free Press.
Wu, B. and Weng, K. (2003), ‘Jiyu Kongzhiquan Shouyi de Dagudong yu Gongsi Zhili Guanxi Fenxi: Wenxian Zongshu’ (An Analysis on the Relationship between Large Shareholders with Control Rights Gains and Corporate Governance: Literature Review), Shijie Jingji Wenhui (World Economic Papers), Issue 2: 71–80.
Wu, Y. (2004), ‘Woguo Duli Dongshi Gongxu Maodun de Jingjixue Fenxi’ (An Economic Analysis on the Demand and Supply Conflict of Independent Directors in China), Qiye Jingji (Enterprise Economy), Issue 12: 223–224.
Xie, X. (2009), ‘Jingying Fuzaxing, Suoyouquan Tezheng yu Dongshihui Jiegou de Neisheng Jueding - Jiyu Zhuchengfen Fenxi de Jingyan Zhengju’ (Business Complexity, Ownership Characteristics, and Endogenous Decisions on Board Structure - Empirical Evidence from Main Component Analyses), Jingji Pinglun (Economic Review), Issue 1: 77–92.
Ye, K., Lu, Z., and Zhang, Z. (2007), ‘Duli Dongshi Nengfou Yizhi Dagudong de Taokong?’ (Can Independent Directors Prevent Large Shareholders from Tunnelling?), Jingji Yanjiu (Economic Research Journal), Issue 4: 101–111.
Ye, K., Zhu, J., Lu, Z., and Zhang, R. (2011), ‘Duli Dongshi de Dulixing: Jiyu Dongshihui Toupiao de Zhengju’ (Independence of Independent Directors: Evidence from Board Voting), Jingji Yanjiu (Economic Research Journal), Issue 1: 126–139.
Zhang, J. (1997), Zhongguo Falu de Chuantong yu Jindai Zhuanxing (Traditions and Contemporary Transformations of Law in China), Beijing: Law Press•China.
Zhou, J., Liu, X., and Yu, W. (2008), ‘Gongsi Zhili Jizhi Hudong de Shizheng Yanjiu’ (An Empirical Study on Corporate Governance Mechanism Interaction), Guanli Kexue (Journal of Management Science), Issue 1: 2–13.
Zhu, H. and Wang, H. (2004), ‘Guquan Zhiheng Keyi Gaishan Gongsi Zhili Ma? - Hongzhi Keji Gufen Youxian Gongsi Kongzhiquan Zhi Zheng de Anli Yanjiu’ (Can Power Balance of Equity Improve Corporate Governance? - A Case Study on the Control Rights Struggle of Wholewise Science & Technology Co., Ltd.), Guanli Shijie (Management World), Issue 10: 114–123.
Zhu, H., Chen, J., and Yu, L. (2006), ‘Zhongyang Zhengfu, Difang Zhengfu he Guoyou Qiye Liyi Fenqi Xia de Duochong Boyi yu Guanzhi Shixiao - Yutong Keche Guanliceng Shougou Anli Yanjiu’ (The Multi-level Game and Regulatory Inefficiency under a Divergence of Interest between the Central Government, Local Government, and State-owned Enterprises - A Case Study on the Management Buyout of Yutong Bus), Guanli Shijie (Management World), Issue 4: 115–129.
Zingales, L. (2009), ‘The Future of Securities Regulation’, Journal of Accounting Research 47 (2): 391–425.
Author information
Authors and Affiliations
Corresponding author
Additional information
CLC Codes: F272, F230, F832
This paper is the initial research result of a project supported by the National Natural Science Fund (Nos. 71202002, 71172141, and 71272238) and the Major Research Project of Key Research Institute of Ministry of Education (No. 12JJD790033). It is funded by the National Accounting Leading (Substitute) Talents Project (Academic) launched by the Ministry of Finance. The authors would like to thank Professor Nancy Lixin Su, the executive editor of China Accounting and Finance Review, and the two anonymous referees for their valuable comments. We also would like to thank Professor Zengquan Li from the School of Accountancy, Shanghai University of Finance and Economics for his valuable help and suggestions. We also thank Ms. Hongqi Liu, PhD candidate at Baruch College, for her efforts in polishing the writing. All errors are our own.
Hao Liu, Associate Professor, Institute of Accounting and Finance, Shanghai University of Finance and Economics; mailing address: No. 777, Guoding Road, Shanghai, 200433; email: wiseliu@263.net. Liangyu Zhao, PhD candidate, School of Accountancy, Shanghai University of Finance and Economics. Fenfen Liu, Research Assistant, School of Accountancy, The Chinese University of Hong Kong.
Rights and permissions
Open Access This article is distributed under the terms of the Creative Commons Attribution 2.0 International License ( https://creativecommons.org/licenses/by/2.0 ), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
About this article
Cite this article
Liu, H., Zhao, L. & Liu, F. Private Benefits of Control and Dynamics of Board Structure Adjustment - Evidence from the CSRC’s Compulsory Introduction of Independent Directors. China Account Financ Rev 15, 7 (2013). https://doi.org/10.7603/s40570-013-0007-6
Received:
Accepted:
Published:
DOI: https://doi.org/10.7603/s40570-013-0007-6