Corporate ownership, equity risk and returns in the People's Republic of China

Abstract

A large body of literature has examined how managerial ownership affects corporate strategy and risk-taking. The present study extends this literature by investigating the effect of other forms of corporate ownership on a firm’s equity risk (measured as the volatility of a company’s stock returns) and stock returns in the People’s Republic of China (PRC) – an important emerging economy that is rich in various forms of corporate ownership. We find that the various types of corporate ownership appear to have important but different impacts on equity risk and returns. In particular, companies with more state ownership tend to have higher stock volatility and lower stock returns; in contrast, companies with more legal-person ownership tend to have lower stock volatility and higher stock returns. Foreign and managerial ownership are found to have little effect on firms’ equity risk and returns. These findings support the predictions of agency theory – for example, that state ownership increases agency conflicts in companies because bureaucrats and state agencies do not have the same economic incentives to maximize the value of firms. We believe that our study contributes to the international business literature on investment strategy and risk assessment in developing markets such as China, and as a result our findings could have important implications for international investors. Journal of International Business Studies (2008) 39, 1149–1168. doi:10.1057/palgrave.jibs.8400394

State ownership effect on firms' FDI ownership decisions under institutional pressure: a study of Chinese outward-investing firms

“…An important feature of Chinese firms is state ownership (Chen & Young, 2010;Morck et al, 2008). While the role of state ownership in the domestic operation and governance of Chinese firms has been extensively researched (Ding, Zhang, & Zhang, 2007;Young, Peng, Ahlstrom, Bruton, & Jiang, 2008;Zou & Adams, 2008), limited attention has been paid to the role of state ownership in the internationalization of Chinese firms (Chen & Young, 2010). Our study addresses this research gap by revealing the role of state ownership in Chinese firms' FDI ownership decisions.…”

“…As a result, these firms are under strict scrutiny by host country regulatory institutions, especially in relation to their potential influences on the local economy of host countries. Chinese firms owned or controlled by the state are suspected of carrying political objectives that do not necessarily benefit the commercial interests of shareholders (Chen & Young, 2010;Zou & Adams, 2008). They can also be criticized for being heavily subsidized by the government, both directly and indirectly.…”

“…A high level of state ownership leads to acute agency problems due to the separation of control and cash flow rights of owners (Zou & Adams, 2008). The cash flow rights of state ownership in Chinese firms rest with the central or local government.…”

“…For example, in firms with high levels of state ownership, governments usually appoint top management positions to former bureaucrats, who typically do not have professional business and management backgrounds (Firth, Fung, & Rui, 2007;Zou & Adams, 2008). Such managerial position arrangements reduce operational efficiency of firms and are detrimental to firm performance (Zou & Adams, 2008).…”

“…For example, in firms with high levels of state ownership, governments usually appoint top management positions to former bureaucrats, who typically do not have professional business and management backgrounds (Firth, Fung, & Rui, 2007;Zou & Adams, 2008). Such managerial position arrangements reduce operational efficiency of firms and are detrimental to firm performance (Zou & Adams, 2008). Although an increasing number of Chinese SOEs are undergoing substantial transformation of their operations and management, the outcome is still not evident enough to change the general image of Chinese SOEs as perceived by host country local constituents (He & Lyles, 2008).…”