State Control, Legal Investor Protection, and Ownership Concentration: Evidence from China

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: To control for the omitted-variables and aggregation biases problem existing in previous crosscountry studies, our paper investigates the relationship of ownership concentration and legal investor protection across regions and over time in one emerging economy, China, during the period 1992 to 2003. Moreover, this paper examines whether state control affects this relationship. Research Findings/Results: For state-controlled firms, we cannot find the typical inverse relationship between ownership concentration and legal investor protection documented by La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1998), since state per se works as a substitute for formal legal investor protection in protecting property rights by exploiting political power. However, for non-state-controlled firms, the inverse relationship does hold. Theoretical Implications: Our findings suggest that the nature of the controlling shareholder should be taken into account when examining the relationship between ownership concentration and legal investor protection. Moreover, our findings give new insights, especially to the study on other emerging economies that share similar characteristics with China in terms of legal development and government control. Finally, the cross-region study within one country provides a new perspective on the research in this area. Practitioner Implications: First, to provide a level playing field for different types of investors, the state's dual role of controlling shareholder and political power holder should be separated. Second, it is important to build up a good legal system to protect investors in order for a country to develop its capital markets, especially for the development of the non-state sector.

Does Corporate Governance Affect Stock Liquidity in the Tunisian Stock Market?

“…State ownership may be considered as a substitute for legal investor protection in emerging markets (Wu et al, 2009). Hence, the presence of this owner decreases expropriation fear.…”

“…Many categories of owner behave differently, according to their interests and preferences (Pederson and Thomsen, 2000 and Thomsen and Pederson, 2003). In emerging economies, owner identity is more important than ownership concentration (Dyck, 2000;Firth et al 2007;Omran et al 2008;Wu et al 2009 andChi and). We consider dummies proxies to distinguish three owner groups: family (CFAM), State (CSTA) and foreign investor (CFOR) such that:…”

“…We notice that these firms may be controlled by State, or family or even foreign investors. So we test if the corporate governance scheme depends on the shareholder's identity (in Chinese market, it is closely related to this identity, see among others Firth et al, 2007;Chi and Wang, 2009;Wu et al 2009). …”

Empirical Research on Corporate Governance in China: A Review and New Directions for the Future

“…There are 59 studies that include ownership concentration in empirical analysis, but only one study (Wu, Xu, & Yuan, 2009) treats it as a dependent variable (DV) and investigates the impact of legal protection of investors on it over time and across regions. The remaining 58 studies are interested in its impact, using it either as an independent variable (IV, 47 studies) or a control variable (CV, 11 studies).…”

“…The Chinese government, particularly the CSRC, has been constantly promulgating new laws and regulations that are intended to improve legal protection of minority shareholders from expropriation by managers and controlling shareholders Wu, Xu, & Yuan, 2009). Some of these regulations are found to be the primary driving forces in the adoption of organization practices that are in the interest of shareholders, such as auditor independence and auditing standards patterned after the International Standards on Auditing (DeFond, Wong, & Li, 2000), harmonization of accounting practices with the IFRS (Chen & Cheng, 2007), performance-enhancing asset restructuring activities (Cheng et al, 2010), and appointments of independent directors (Chen & Al-Najjar, 2012).…”