Abstract
Our study analyses the relations among agency costs, ownership structure, and governance mechanisms in Chinese listed firms. We find that firms with foreign shareholders incur higher agency costs. Legal person shareholders, our proxy for institutional investors, and government ownership have no impact on the level of agency costs. We also find that boards with a majority of outside directors are not associated with lower agency costs. There is some evidence that concentrated ownership is associated with lower agency costs. Although Chinese listed firms have engaged in ownership and governance reform, this has not manifested itself in a reduction in agency costs.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
There were, however, no formal corporate governance guidelines until 2001.
Note, however, that the recent corporate scandals in Europe and the US often involve firms that, on paper at least, have good governance mechanisms and are actively monitored by debt and capital markets. Thus, the industrialised nations are not immune to governance structures that prove ineffective in real-world settings.
The Code of Corporate Governance for Listed Companies in China was issued in 2001. The Code is published by The China Securities Regulatory Commission (CSRC), which is the official regulator of listed firms in China.
Additional analyses, however, that include managerial shareholdings show them to be non-significant.
Since 2001, the Chinese Securities and Regulatory Commission has requested that listed firms appoint at least two independent directors, and this became a requirement in 2003.
Other forms of compensation, such as share options, are not common in China; if they do occur, they are not disclosed. Because of non-linearity issues and the presence of outliers, we transform compensation by using its natural logarithm.
Here, the industry medians are deducted from the agency costs and so we have relative agency costs (ie relative to the industry median).
References
Agrawal, A. and Mandelker, G. N. (1990) ‘Large Shareholders and the Monitoring of Managers: The Case of Anti-Takeover Charter Amendments’, Journal of Financial and Quantitative Analysis, 25, 143–161.
Anderson, C. W., Jandik, T. and Mahija, A. (2001) ‘Determinants of Foreign Ownership in Newly Privatized Companies in Transitional Economies’, The Financial Review, 37, 161–176.
Ang, J. S., Cole, R. A. and Lin, J. W. (2000) ‘Agency Costs and Ownership Structure’, Journal of Finance, 55, 81–106.
Bathala, T., Moon, K. and Rao, R. (1994) ‘Managerial Ownership, Debt Policy and the Impact of Institutional Holdings: An Agency Perspective’, Financial Management, 23, 38–49.
Berger, P. G., Ofek, E. and Yermack, D. L. (1997) ‘Managerial Entrenchment and Capital Structure Decisions’, Journal of Finance, 52 (4), 1411–1438.
Berle, A. and Means, G. (1932) The Modern Corporation and Private Property, Macmillan, New York.
Boardman, A., Shapiro, D. and Vining, A. (1994) ‘The Role of Agency Costs in Explaining the Superior Performance of Foreign MNE Subsidiaries’, International Business Journal, 6, 295–317.
Broadman, H. G. (1999) ‘The Chinese State as Corporate Shareholder’, Finance and Development, 36, 52–56.
Cadbury, A. (1992) Report of the Committee on the Financial Aspects of Corporate Governance, Gee Publishing, London.
Chen, G. M., Firth, M. and Rui, O. M. (2006) ‘Have China's Enterprise Reforms Led to Improved Efficiency and Profitability for Privatized SOEs?’ Emerging Markets Review, 7 (1), 82–109.
Chen, G. M., Firth, M. and Xu, L. (2008) ‘Does the Type of Ownership Control Matter? Evidence from China’s Listed Companies’, Journal of Banking and Finance, forthcoming.
Doukas, J. A., McKnight, P. J. and Pantzalis, C. (2002) ‘Security Analysis, Agency Costs and U.K. Firm Characteristics’, Working Paper, Cardiff Business School.
Firth, M., Fung, P. and Rui, O. M. (2006) ‘Corporate Governance and CEO Compensation in China’, Journal of Corporate Finance, 12 (4), 693–714.
Firth, M., Lin, C. and Wong, S. M. (2008) ‘Leverage and Investment Under a State-Owned Bank Lending Environment: Evidence from China’, Working Paper, Lingnan University.
Greene, W. H. (1997) Econometric Analysis, 3rd edn, Prentice-Hall, Upper Saddle River, NJ.
Grossman, S. and Hart, O. D. (1982) ‘Corporate Financial Structure and Managerial Incentives’, in McCall, J. (ed.), The Economics of Information and Uncertainty, University of Chicago Press, Chicago.
Hart, O. (1995) ‘Corporate Governance: Some Theory and Implications’, The Economic Journal, 105, 678–689.
Hermalin, B. and Weisbach, M. (1988) ‘The Determinants of Board Composition’, Rand Journal of Economics, 19, 589–606.
Hsiao, C. (1986) Analysis of Panel Data, Cambridge University Press, Cambridge.
Jensen, M. C. (1986) ‘Agency Costs of Free Cash Flow, Corporate Finance and Takeovers’, American Economic Review, 76, 323–329.
Jensen, M. C. and Meckling, W. (1976) ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’, Journal of Financial Economics, 3, 305–360.
LaPorta, R., Lopez-de-Silanes, F. and Shleifer, A. (1999) ‘Corporate Ownership Around the World’, Journal of Finance, 54, 471–517.
Lin, J., Cai, F. and Li, Z. (1998) ‘Competition, Policy Burdens and State-Owned Enterprises’, American Economic Review, 88, 422–427.
Mayers, D., Shivdasani, A. and Smith, C. W. (1997) ‘Board Composition and Corporate Control: Evidence from the Insurance Industry’, Journal of Business, 70, 33–63.
Naughton, B. (1995) Growing Out of the Plan: China’s Economic Reform 1978–1993, Cambridge University Press, Cambridge.
Nolan, P. and Wang, X. (1999) ‘Beyond Privatization: Institutional Innovation and Growth in China's Large State-Owned Enterprises’, World Development, 27, 169–200.
Pound, J. (1988) ‘Proxy Contests and the Efficiency of Shareholder Oversight’, Journal of Financial Economics, 20, 237–265.
Shleifer, A. (1998) ‘State Versus Private Ownership’, Journal of Economic Perspectives, 12 (4), 133–150.
Shleifer, A. and Vishny, R. W. (1986) ‘Large Shareholders and Corporate Control’, Journal of Political Economy, 94, 461–488.
Shleifer, A. and Vishny, R. W. (1994) ‘Politicians and Firms’, Quarterly Journal of Economics, 109, 995–1025.
Shleifer, A. and Vishny, R. W. (1997) ‘A Survey of Corporate Governance’, Journal of Finance, 52, 737–783.
Singh, M. and Davidson, W. N. (2003) ‘Agency Costs, Ownership Structure and Corporate Governance Mechanisms’, Journal of Banking and Finance, 27, 793–816.
Acknowledgements
We acknowledge financial support from the Hong Kong Polytechnic University and the University Grants Committee of the Hong Kong SAR (research grants G-V910, G-T074 and PolyU5208/01H).
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Firth, M., Fung, P. & Rui, O. Ownership, governance mechanisms, and agency costs in China’s listed firms. J Asset Manag 9, 90–101 (2008). https://doi.org/10.1057/jam.2008.13
Received:
Revised:
Published:
Issue Date:
DOI: https://doi.org/10.1057/jam.2008.13