Abstract
This paper empirically investigates how the identity of multiple large shareholders (MLS) affects principal-agent and principal–principal conflicts of interests in Chinese listed privately controlled firms during 2006–2017, by distinguishing between state-owned and non-state-owned MLS. We find that the presence of non-state-owned MLS significantly mitigates the principal-agent conflict of interests as manifested in a lower selling, general, and administrative expenses scaled by total sales (SG&A ratio) of Chinese listed privately controlled firms. However, this effect is not observed when state-owned entities serve as MLS. Although we do not observe a strong impact of non-state-owned MLS in reducing principal–principal conflict of interests, i.e., a lower ratio of related-party transactions (RPT), the presence of financial non-state-owned MLS helps to alleviate RPT in Chinese listed privately controlled firms. Conversely, state-owned MLS do not mitigate principal–principal conflict of interests but worsen it, as evidenced by a higher ratio of RPT. Additionally, the presence of state-owned MLS is associated with a large magnitude of overinvestment by and increased government subsidies to Chinese listed privately controlled firms. Finally, the entry of non-state-owned MLS enhances the performance of these firms, while the presence of state-owned MLS does not engender a performance-enhancement effect.
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Notes
For example, Maury and Pajuste (2005) analytically suggest that it is less likely for financial institutions to collude with family controlling shareholder because the cost of getting caught for private benefit extraction is extremely high for financial institutions, such as the heavy loss of reputation and the strict ex ante responsibility they have.
As an example, Attig et al. (2013) show that the presence of the state as the second largest shareholder is not associated with an effective monitoring of the controlling shareholder, which aims to enhance the valuation of cash holding. They attribute this finding to outside investors’ perception of the potential misuse of excess cash when the government is one of the large shareholders; however, they but do not conduct an in-depth investigation of this matter.
In September 2015, the Central Committee of the Communist Party of China and the State Council issued the Opinions on Deepening the Reform of State-Owned Enterprises, which proposed “promoting the reform of mixed ownership to amplify the function of state-owned capital and to improve the efficiency of state-owned assets.” This reform not only encourages state-owned enterprises to introduce non-state-owned capital but also pushes state-owned capital to invest in privately controlled firms.
Cheung et al. (2010) classify related-party transactions into three categories: (1) transactions that are a priori likely to result in the expropriation of the listed firm’s minority shareholders; (2) transactions likely to benefit the listed firm’s minority shareholders; 3) transactions that could have strategic rationales and perhaps are not expropriation.
The outcomes of all additional tests that are discussed but not shown in the paper can be obtained from the authors upon request.
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Acknowledgements
We would like to thank the editor and the anonymous reviewers for suggestions that substantially improved the article. We also would like to thank Shaoqing Kang, Zheng Qiao, Wenzhou Qu, Zhe Shen, Shinong Wu, Yuhui Wu, Yujia Yi, Yevgeny Mugerman, Fang Wan, Gady Jacoby, and participants of the 2019 cross country perspectives in finance conference for their suggestions and comments on an earlier draft of this article. Lihong Wang acknowledges the Chinese National Funding of Social Sciences (19BGL075), Humanities and Social Science Fund of Ministry of Education of China (18YJC630181), and the National Natural Science Foundation of China (71502150) for financial support. Sen Lin acknowledges the National Natural Science Foundation of China (NSFC-71790601, 71532012) for financial support.
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Appendix
Appendix
Pre-match | Post-match | |
|---|---|---|
Panel A: Probit regression used to calculate the propensity score | ||
Intercept | 0.683 | 0.632 |
(1.07) | (0.86) | |
Size | − 0.144*** | − 0.120*** |
(− 5.36) | (− 3.91) | |
EBIT | − 1.238*** | − 0.429 |
(− 2.67) | (− 0.70) | |
Top1 | 0.366*** | 0.144 |
(2.75) | (0.94) | |
Lev | 0.847*** | 0.521*** |
(6.50) | (3.07) | |
Sales growth | − 0.005 | − 0.063 |
(− 0.09) | (− 0.92) | |
Tangi | − 0.115 | 0.321 |
(− 0.42) | (0.91) | |
MB | 0.056 | 0.071 |
(1.49) | (1.57) | |
SOE | − 0.097** | 0.047 |
(− 2.13) | (0.84) | |
Pseudo R2 | 0.071 | 0.055 |
N | 17,246 | 3583 |
Variable | Mean value of treated firm | Mean value of benchmark firm | Mean-diff |
|---|---|---|---|
Panel B: Test of the effectiveness of PSM | |||
Size | |||
Pre-match | 21.930 | 21.913 | 0.017 |
Post-match | 21.930 | 21.930 | − 0.000 |
EBIT | |||
Pre-match | 0.050 | 0.059 | − 0.010*** |
Post-match | 0.050 | 0.052 | − 0.003 |
Top1 | |||
Pre-match | 0.401 | 0.409 | − 0.008* |
Post-match | 0.401 | 0.431 | − 0.030*** |
Lev | |||
Pre-match | 0.471 | 0.449 | 0.021*** |
Post-match | 0.471 | 0.485 | − 0.014** |
Sales growth | |||
Pre-match | 0.216 | 0.195 | 0.022** |
Post-match | 0.216 | 0.198 | 0.019 |
Tangi | |||
Pre-match | 0.929 | 0.939 | − 0.011*** |
Post-match | 0.929 | 0.939 | − 0.011*** |
MB | |||
Pre-match | 0.984 | 0.943 | 0.041* |
Post-match | 0.984 | 0.939 | 0.044 |
SOE | |||
Pre-match | 0.407 | 0.490 | − 0.084*** |
Post-match | 0.407 | 0.421 | − 0.015 |
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Lin, S., Chen, F. & Wang, L. Identity of multiple large shareholders and corporate governance: are state-owned entities efficient MLS?. Rev Quant Finan Acc 55, 1305–1340 (2020). https://doi.org/10.1007/s11156-020-00875-z
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DOI: https://doi.org/10.1007/s11156-020-00875-z
Keywords
- Multiple large shareholders
- Agency problems
- Costs of political control
- State-owned entity
- Shareholder heterogeneity