Asia Pacific Journal of Management

, Volume 27, Issue 4, pp 727–749

Internal governance mechanisms and firm performance in China

Article

Abstract

Corporate governance issues arising from concentrated ownership structure in emerging economies have received growing attention. Adopting a principal–principal perspective, this paper employs structural equation modeling to evaluate the independent and interdependent effects of internal governance mechanisms in enhancing firms’ value in China. Based on a 3-year dataset covering 304 publicly listed companies over 2003–2005, our findings suggest that ownership concentration has the most significant governance effect and has impacted negatively on firm performance. Furthermore, the governance role of the board of directors and supervisory boards is found to have been hindered by ownership concentration, rendering them unable to improve firm performance at present.

Keywords

Internal governance mechanisms Ownership concentration Controlling shareholder Board of directors Supervisory board 

References

  1. Agrawal, A., & Knoeber, C. R. 1996. Firm performance and mechanisms to control agency problems between managers and shareholders. Journal of Financial and Quantitative Analysis, 31(3): 377–397.CrossRefGoogle Scholar
  2. Andres, P. D., Azofra, V., & Lopez, F. 2005. Corporate boards in OECD countries: Size, composition, functioning and effectiveness. Corporate Governance: An International Review, 13(2): 197–210.CrossRefGoogle Scholar
  3. Bai, C., Liu, Q., Lu, J., Song, F. M., & Zhang, J. 2004. Corporate governance and market valuation in China. Journal of Comparative Economics, 32(4): 599–616.CrossRefGoogle Scholar
  4. Berglöf, E., & Claessens, S. 2006. Enforcement and good corporate governance in developing countries and transition economies. The World Bank Research Observer, 21(1): 123–150.CrossRefGoogle Scholar
  5. Berkman, H., Cole, R., & Fu, J. 2002. From state to state: Improving corporate governance when the government is a large block holder. Working paper, University of Auckland.Google Scholar
  6. Buck, T., Filatotchev, I., Demina, N., & Wright, M. 2003. Insider ownership, human resource strategies and performance in a transition economy. Journal of International Business Studies, 34(6): 530–549.CrossRefGoogle Scholar
  7. Chang, E. C., & Wong, S. M. L. 2004. Political control and performance in China’s listed firms. Journal of Comparative Economics, 32(4): 617–636.CrossRefGoogle Scholar
  8. Chen, J. 2001. Ownership structure as corporate governance mechanism: Evidence from Chinese listed companies. Economics of Planning, 34(1–2): 53–72.CrossRefGoogle Scholar
  9. Chen, G., Firth, M., Gao, D. N., & Rui, O. M. 2006. Ownership structure, corporate governance and fraud: Evidence from China. Journal of Corporate Finance, 12(3): 424–448.CrossRefGoogle Scholar
  10. China Company Law. 1994. The Company Law of the People’s Republic of China.Google Scholar
  11. Chung, K. H., & Pruitt, S. W. 1994. A simple approximation of Tobin’s Q. Financial Management, 23(3): 70–74.CrossRefGoogle Scholar
  12. Claessens, S., Djankov, S., Fan, J. P. H., & Lang, L. H. P. 1999. Expropriation of minority shareholders: Evidence from East Asia. Policy Research working paper no. 2088, World Bank.Google Scholar
  13. Claessens, S., Djankov, S., & Lang, L. H. P. 2000. The separation of ownership and control in East Asian corporations. Journal of Financial Economics, 58(1,2): 81–112.CrossRefGoogle Scholar
  14. Claessens, S., Djankov, S., Fan, J. P. H., & Lang, L. H. P. 2002. Disentangling the incentive and entrenchment effects of large shareholdings. Journal of Finance, 57(6): 2741–2771.CrossRefGoogle Scholar
  15. CSRC. 2001. Guidelines for introducing independent directors to the board of directors of listed companies. People’s Republic of China: China Securities Regulatory Commission.Google Scholar
  16. CSRC. 2002. Code of corporate governance for listed companies in China. People’s Republic of China: China Securities Regulatory Commission.Google Scholar
  17. CSRC. 2003. Guidelines on contents and formats of information disclosure of annual report for listed companies—2002 version (gongkai faixing zhenquan de gongsi xingxi pilu neirong yu geshi zhunze—2002 nian xiouding gao). People’s Republic of China: China Securities Regulatory Commission.Google Scholar
  18. Dahya, J., Karbhari, Y., Xiao, J. Z., & Yang, M. 2003. The usefulness of the supervisory board report in China. Corporate Governance: An International Review, 11(4): 308–321.CrossRefGoogle Scholar
  19. Dalton, D. R., Daily, C. M., Ellstrand, A. E., & Johnson, J. L. 1998. Meta-analytic reviews of board composition, leadership structure, and financial performance. Strategic Management Journal, 19(3): 269–290.CrossRefGoogle Scholar
  20. Dharwadkar, R., George, G., & Brandes, P. 2000. Privatization in emerging economies: An agency theory perspective. Academy of Management Review, 25(3): 650–669.CrossRefGoogle Scholar
  21. Ding, Y., Zhang, H., & Zhang, J. 2007. Private vs. state ownership and earnings management: Evidence from Chinese listed companies. Corporate Governance: An International Review, 15(2): 223–238.CrossRefGoogle Scholar
  22. Djankov, S. 1999. Ownership structure and enterprise restructuring in six newly independent states. Policy Research working paper no. 2047, World Bank.Google Scholar
  23. Dong, X. L., & Gao, F. 2002. Ownership structure of the listed companies: Questions and solutions. Modern Economics Research (Dangdai Jingji Yanjiou), 3: 24–28.Google Scholar
  24. Ees, H. V., Postma, T. J. B. M., & Sterken, E. 2003. Board characteristics and corporate performance in the Netherlands. Eastern Economic Journal, 29(1): 41–58.Google Scholar
  25. Faccio, M., Lang, L. H. P., & Young, L. 2001. Dividends and expropriation. The American Economic Review, 91(1): 54–78.CrossRefGoogle Scholar
  26. Fama, E. F., & Jensen, M. C. 1983. Separation of ownership and control. Journal of Law and Economics, 26(2): 301–325.CrossRefGoogle Scholar
  27. Haleblian, J., & Finkelstein, S. 1993. Top management team size, CEO dominance, and firm performance: The moderating roles of environmental turbulence and discretion. Academy of Management Journal, 36(4): 844–863.CrossRefGoogle Scholar
  28. Heidrick, & Struggles. 2007. Benchmarking corporate governance in China. Chicago: Heidrick & Struggles International.Google Scholar
  29. Heugens, P. P. M. A. R., van Essen, M., & van Oosterhout, J. 2009. Meta-analyzing ownership concentration and firm performance in Asia: Towards a more fine-grained understanding. Asia Pacific Journal of Management, 26. doi:10.1007/s10490-008-9109-0.
  30. Hillman, A. J., & Dalziel, T. 2003. Boards of directors and firm performance: Integrating agency and resource dependence perspectives. Academy of Management Review, 28(3): 383–396.CrossRefGoogle Scholar
  31. Hovey, M., Li, L., & Naughton, T. 2003. The relationship between valuation and ownership of listed firms in China. Corporate Governance: An International Review, 11(2): 112–122.CrossRefGoogle Scholar
  32. Jensen, M. C., & Meckling, W. H. 1976. Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3(4): 305–360.CrossRefGoogle Scholar
  33. Johnson, J. L., Daily, C. M., & Ellstrand, A. E. 1996. Board of directors: A review and research agenda. Journal of Management, 22(3): 409–438.CrossRefGoogle Scholar
  34. Kato, T., & Long, C. 2006. CEO turnover, firm performance, and enterprise reform in China: Evidence from micro data. Journal of Comparative Economics, 34(4): 796–817.CrossRefGoogle Scholar
  35. Lang, L. H. P., & Stulz, R. 1994. Tobin’s Q, corporate diversification, and firm performance. Journal of Political Economy, 102(6): 1248–1280.CrossRefGoogle Scholar
  36. Mallin, C. A. 2007. Corporate governance. New York: Oxford University Press.Google Scholar
  37. Nee, V., Opper, S., & Wong, S. 2007. Developmental state and corporate governance in China. Management and Organization Review, 3(1): 19–53.CrossRefGoogle Scholar
  38. O’Regan, K., & Oster, S. M. 2005. Does the structure and composition of the board matter? The case of nonprofit organizations. The Journal of Law, Economics, & Organization, 21(1): 205–227.CrossRefGoogle Scholar
  39. Peng, M. W. 2004. Outside directors and firm performance during institutional transitions. Strategic Management Journal, 25(5): 453–471.CrossRefGoogle Scholar
  40. Peng, M. W., Zhang, S., & Li, X. 2007. CEO duality and firm performance during China’s institutional transitions. Management and Organization Review, 3(2): 205–225.CrossRefGoogle Scholar
  41. Peng, M. W., Wang, D. Y., & Jiang, Y. 2008. An institutional-based view of international business strategy: A focus on emerging economies. Journal of International Business Studies, 39(5): 920–936.CrossRefGoogle Scholar
  42. Pfeffer, J., & Salancik, G. R. 1978. The external control of organizations: A resource dependence perspective. New York: Harper and Row.Google Scholar
  43. Rediker, K. J., & Seth, A. 1995. Board of directors and substitution effects of alternative governance mechanisms. Strategic Management Journal, 16(2): 85–99.CrossRefGoogle Scholar
  44. Shleifer, A., & Vishny, R. W. 1997. A survey of corporate governance. The Journal of Finance, 52(2): 737–783.CrossRefGoogle Scholar
  45. Su, Y., Xu, D., & Phan, P. H. 2008. Principal–principal conflict in the governance of the Chinese public corporation. Management and Organization Review, 4(1): 17–38.CrossRefGoogle Scholar
  46. Sun, Q., Tong, W. H. S., & Tong, J. 2002. How does government ownership affect firm performance? Evidence from China’s privatization experience. Journal of Business Finance and Accounting, 29(1/2): 1–27.CrossRefGoogle Scholar
  47. Tam, O. K. 1999. The development of corporate governance in China. Cheltenham: Edward Elgar.Google Scholar
  48. Tam, O. K., & Hu, H. W. 2006. Supervisory boards in Chinese corporate governance. In L. S. Ho & R. Ash (Eds.). China, Hong Kong and the world economy: Study on globalization: 327–347. US: Macmillan.Google Scholar
  49. Tam, O. K., & Tan, M. G.-S. 2007. Ownership, governance and firm performance in Malaysia. Corporate Governance: An International Review, 15(2): 208–222.CrossRefGoogle Scholar
  50. Tenev, S., & Zhang, C. 2002. Corporate governance and enterprise reform in China: Building the institutions of modern markets. Washington: World Bank.Google Scholar
  51. Tian, J. J., & Lau, C. 2001. Board composition, leadership structure and performance in Chinese shareholding companies. Asia Pacific Journal of Management, 18(2): 245–263.CrossRefGoogle Scholar
  52. Tian, L., & Estrin, S. 2008. Retained state shareholding in Chinese PLCs: Does government ownership always reduce corporate value? Journal of Comparative Economics, 36(1): 74–89.CrossRefGoogle Scholar
  53. Tong, C. K. 1996. Centripetal authority, differentiated networks: The social organization of Chinese firms in Singapore. In G. G. Hamilton (Ed.). Asian business networks. Berlin: Walter de Gruyter.Google Scholar
  54. Uzun, H., Szewczyk, S. H., & Varma, R. 2004. Board composition and corporate fraud. Financial Analysts Journal, 60(3): 33–43.CrossRefGoogle Scholar
  55. Vafeas, N. 1999. Board meeting frequency and firm performance. Journal of Financial Economics, 53(1): 113–142.CrossRefGoogle Scholar
  56. van den Berghe, L., & Levrau, A. 2004. Evaluating boards of directors: What constitutes a good corporate board? Corporate Governance: An International Review, 12(4): 461–478.CrossRefGoogle Scholar
  57. Wei, Z., & Varela, O. 2003. State equity ownership and firm market performance: Evidence from China’s newly privatized firms. Global Finance Journal, 14(1): 65–82.CrossRefGoogle Scholar
  58. Xiao, J. Z., Dahya, J., & Lin, Z. 2004. A grounded theory exposition of the role of the supervisory board in China. British Journal of Management, 15(1): 39–55.CrossRefGoogle Scholar
  59. Xu, X. N., & Wang, Y. 1997. Ownership structure, corporate governance, and corporate performance: The case of Chinese stock companies. Policy Research working paper no. 1794, World Bank.Google Scholar
  60. Yeh, Y. H., Lee, T. S., & Woidtke, T. 2001. Family control and corporate governance: Evidence from Taiwan. International Review of Finance, 2(1/2): 21–48.CrossRefGoogle Scholar
  61. Yermack, D. 1996. Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 40(2): 185–211.CrossRefGoogle Scholar
  62. Yiu, D., Bruton, G. D., & Lu, Y. 2005. Understanding business group performance in an emerging economy: Acquiring resources and capabilities in order to prosper. Journal of Management Studies, 42(1): 183–206.CrossRefGoogle Scholar
  63. Yoshikawa, T., & McGuire, J. 2008. Change and continuity in Japanese corporate governance. Asia Pacific Journal of Management, 25(1): 5–24.CrossRefGoogle Scholar
  64. Young, M. N., Peng, M. W., Ahlstrom, D., Bruton, G. D., & Jiang, Y. 2008. Corporate governance in emerging economies: A review of the principal–principal perspective. Journal of Management Studies, 45(1): 196–220.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  • Helen Wei Hu
    • 1
  • On Kit Tam
    • 2
  • Monica Guo-Sze Tan
    • 3
  1. 1.Department of Management and MarketingUniversity of MelbourneMelbourneAustralia
  2. 2.RMIT UniversityMelbourneAustralia
  3. 3.Deloitte Touch TohmatsuMelbourneAustralia

Personalised recommendations