Available online at www.sciencedirect.com
Journal of Banking & Finance 33 (2009) 171–181
www.elsevier.com/locate/jbf
Does the type of ownership control matter?
Evidence from China’s listed companies q
Gongmeng Chen a,1, Michael Firth b,*, Liping Xu c,2
b
a
Antai School of Management, Shanghai Jiaotong University, Shanghai, China
Department of Finance and Insurance, Lingnan University, Tuen Mun, New Territories, Hong Kong
c
Department of Accounting, School of Business, Sun Yat-Sen University, Guangzhou, China
Received 12 February 2006; accepted 11 December 2007
Available online 1 January 2008
Abstract
By tracing the identity of large shareholders, we group China’s listed companies into those controlled by state asset management
bureaus (SAMBs), state owned enterprises (SOEs) affiliated to the central government (SOECGs), SOEs affiliated to the local government (SOELGs), and Private investors. We argue that these distinct types of owners have different objectives and motivations and this
will affect how they exercise their control rights over the firms they invest in. In particular, we contend that private ownership of listed
firms in China is not necessarily superior to certain types of state ownership. To test our arguments we investigate the relative efficiency
of state versus private ownership of listed firms and the efficiency of various forms of state ownership. The empirical results indicate that
the operating efficiency of Chinese listed companies varies across the type of controlling shareholder. SOECG controlled firms perform
best and SAMB and Private controlled firms perform worst. SOELG controlled firms are in the middle. The results are consistent with
our predictions.
Ó 2008 Elsevier B.V. All rights reserved.
JEL classification: G32; G34
Keywords: State versus private ownership; Large shareholders; Ownership structure
1. Introduction
China’s economy has undergone a significant transformation in the past quarter-century. Large swathes of industry have been reorganized as corporations and the
profitable operating arms of many state owned enterprises
(SOEs) have been privatized and listed on the stock market. Today, there are more than 1500 listed firms and Chi-
q
This paper was reviewed and accepted while Professor Giorgio Szego
was the Managing Editor of The Journal of Banking and Finance and by
the past Editorial Board.
*
Corresponding author. Tel.: +852 2616 8950.
E-mail addresses: cgm@sjtu.edu.cn (G. Chen), mafirth@ln.edu.hk (M.
Firth), xuliping@mail.sysu.edu.cn (L. Xu).
1
Tel.: +86 21 5230 1150.
2
Tel.: +86 20 8411 3648.
0378-4266/$ - see front matter Ó 2008 Elsevier B.V. All rights reserved.
doi:10.1016/j.jbankfin.2007.12.023
na’s market capitalization is the sixth largest in the world.
Many companies are becoming world leaders; as one example, PetroChina is now the largest listed company in the
world in terms of market capitalization. In many ways
the economic reforms can be regarded as a major success.
Annual economic growth has averaged 10% in the past decade, exports have increased many-fold, foreign reserves are
the largest in the world, and the marginal productivity of
labor has increased substantially. Despite these successes,
the profitability of listed firms has been poor (Chen et al.,
1998, 2006a) and this raises concerns about firms’ sustainability and financial distress.
Some studies have suggested that the state’s retained
shareholdings in listed firms have been responsible for their
poor profitability. However, these studies have shortcomings as they fail to properly identify and distinguish among
the different types of owners (Wang, 2003). In particular,
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G. Chen et al. / Journal of Banking & Finance 33 (2009) 171–181
prior research uses share type as a proxy for owner type but
we demonstrate that this assumption is not valid and can
lead to erroneous conclusions. The aim of this paper is to
remedy the shortcomings in prior research by providing
an in-depth examination of the relations between ownership structures and firms’ performance in China. A key feature of many of China’s privatized state owned enterprises
is that the state retains a significant ownership stake after
listing; in this sense privatized firms are actually partiallyprivatized. Although the state often retains substantial
ownership in listed firms, this ownership is scattered among
various agencies and each of these have different motivations and incentive structures. We argue that the different
forms of state ownership lead to different performance outcomes for the firms they have invested in. Thus the lumping
of all types of state ownership into one group, as has been
done in prior studies, obscures the real impact of the state
as a shareholder. We also argue that it is imperative to
determine who the real share owners are (i.e., go behind
nominee names), and what their motives are, rather than
rely on the legal definition of shares as a proxy for ownership type.
A distinct characteristic of Chinese listed firms is that
they have a single dominant shareholder whose ownership
far exceeds that of the second largest shareholder. We classify the dominant shareholder into those that are state
owned and those that are private. State ownership of firms
is frequently criticized because of political intervention and
the need to help achieve government objectives (Boycko
et al., 1996). These studies implicitly assume there is just
one type of state owner. However, in China, the state’s
ownership of firms is undertaken by different types of agencies and we argue that the objectives of these agency-types
dictate the extent of political intervention and the degree of
commercialization of the listed companies they invest in.
We classify state owners in China’s listed companies into
three major types based on their political and economic
interests: SAMBs (state asset management bureaus), SOECGs (SOEs affiliated to the central government), and SOELGs (SOEs affiliated to the local government). We argue
that these three types of state owners have very different
objectives when it comes to the listed firms they control.
We find that SOECG controlled listed firms excel in
almost every way when compared to other ownership
types. By contrast, listed firms controlled by SAMBs do
badly in almost every respect. SOELG controlled firms
are in the middle. We also find that Private investors, as
the dominant shareholders of public firms, are not much
better than SAMBs in terms of their associations with firm
performance. The performance of Private controlled listed
firms casts doubts on the claims that firms perform best
when the state is completely absent from ownership (Dewenter and Malatesta, 2001; Green, 2004; Megginson and
Netter, 2001; Shleifer, 1998), at least in the case of China.
This study contributes to the literature in several ways.
First, it contributes to the literature on state versus private
ownership. As we have Private controlled firms in our sam-
ple we can directly examine this issue in the context of
China.3 In a transitional economy with a weak legal environment, the governance mechanisms of state and private
ownership are different from those in either a planned
economy or a developed market economy. We find that
commercialized state ownership has its advantages in these
circumstances. Thus, certain types of state ownership can
be superior to private ownership when the institutional
environment is relatively underdeveloped and when law
enforcement is capricious and weak. Second, our study
supplements the literature on transition economies. The
type of privatization and the form of state ownership are
major concerns in these economies (Stiglitz, 1999). We provide empirical evidence that certain types of state ownership help improve firm performance.
Finally, our study contributes to the literature on ownership and control. Numerous studies address the relations
between ownership structure and firm performance (see
Denis and McConnell, 2003, for a review). We find that
the relation between large shareholders and firm performance depends on who the large shareholders are. We document an alignment effect where higher ownership of the
dominant shareholder is associated with better firm
performance.
The rest of the paper is organized as follows: Section 2
identifies the types of large shareholders in China’s listed
companies and describes firms’ ownership structures. Section 3 discusses the motivations and objectives of the different types of large shareholders. Section 4 explains the
research design and Section 5 reports the empirical results.
Section 6 tests reverse causality and Section 7 reports tests
for robustness and investigates the association between
ownership concentration and firm performance and the
role of outside blockholders. Section 8 concludes the study.
2. Ownership structure of China’s listed companies
According to China’s laws, a listed firm has six types of
shares: state, legal person, foreign, management, employee,
and individual shares. These shares have the same cash
flow rights (e.g., they are entitled to the same dividends)
and voting rights. Management, foreign, and employee
shares represent less than 2% of the outstanding shares
and so they do not constitute major voting blocks. State
and legal person shares are not tradable on the stock
exchange and they have concentrated ownership.4 In contrast, domestic individual shares are tradable and widely
held.
Prior studies have generally focused on the relations
between state shares, legal person shares, individual shares,
3
Prior studies that use data from the 1990s and early 2000s do not have
Private controlled firms in their samples.
4
China has recently undergone a share reform program where state and
legal person shares will become tradable after the end of a lock-up period.
For most firms the lock-up period will end in 2007/8 and the shareholders
can then sell up to 5% of their shares in the following six months.
G. Chen et al. / Journal of Banking & Finance 33 (2009) 171–181
173
and firm performance (Sun and Tong, 2003; Wei et al.,
2005). However, placing reliance on the legal definition of
shares to infer investor type is very simplistic and ignores
institutional realities (Green, 2004; Wang, 2003). Most
importantly, legal person shares can be owned by a number
of heterogeneous entities, ranging from solely state owned
enterprises to private firms. These entities have different
objectives and incentives and so grouping them together,
as done in previous studies, distorts the results and leads
to erroneous conclusions. Similarly, state shares can be
owned by different types of investors. Another problem
that has plagued prior research is the failure to identify
the dominant shareholder and who that entity (or person)
is. In this study, we investigate the ownership of China’s
listed companies based on the real identity of the large
shareholders.
Our detailed investigation uncovers four main types of
controlling shareholders in China’s listed companies. They
are state asset management bureaus (SAMBs), SOEs affiliated to the central government (SOECGs), SOEs affiliated
to the local government (SOELGs), and Private investors.
All of these investors exercise their control through the
ownership of state or legal shares.
SOE. SOELGs and SOECGs operate as profit-making
entities and they can invest in the ‘state’ and ‘legal person’
shares of listed firms.
2.1. The state asset management bureaus (SAMBs)
Firms that have a Private investor as their dominant
shareholder are actively monitored by that shareholder.
Indeed, the Private investors often install themselves or
their representatives as the CEO and the chairman of the
listed firm. A Private investor typically has detailed knowledge of the industry in which the firm operates and so they
can more easily enter into the management function or
more effectively monitor the hired managers. A Private
investor receives the cash dividends paid by the listed firm
and the investor (if it is a company) uses consolidated or
equity accounting to incorporate the listed firm’s earnings
into its own income statement. Agency problems associated
with the separation of ownership and management will be
small when a Private investor is the dominant shareholder.
A much bigger concern for the minority shareholders of
listed firms that are controlled by a Private investor is that
their income and assets could be diverted or expropriated
away by the dominant investor6 (Shleifer and Vishny,
1997). Unlike SAMBs and SOEs, Private investors are not
subject to monitoring by the state and so it is easier for a
controlling Private investor to expropriate (or tunnel) the
income and assets of the listed firm away from the minority
shareholders. Private controlled listed firms are therefore
subject to a greater risk of diversion of assets by large shareholders. Given these conflicting influences, we do not know
a priori whether firms controlled by Private investors perform better than those controlled by state entities.
While SAMBs and SOEs are ultimately owned by the
state, they are different in many respects. First, SAMBs
SAMBs typically own the state shares and sometimes
the legal person shares of the listed firms they invest in.
In most provincial cities, a state asset management bureau,
or the state asset operating company, has been established
to manage state assets. SAMBs are shareholding institutions that belong to the state.
2.2. SOEs affiliated to the central government (SOECGs)
SOECGs refer to the 157 SOEs controlled by the central
government under the State-owned Assets Supervision and
Administration Commission (SASAC). Branches of the
central government established these SOEs. Administratively, these SOEs belong to and are closely monitored by
the central government, but they are located across the
country and are involved in various industries. These companies are usually big and/or nation-wide companies, such
as Sinopec Corp., the China Merchants Group, and so on.5
They are subject to strict monitoring.
2.3. SOEs affiliated to local governments (SOELGs)
SOELGs are SOEs controlled directly by a local government. These SOEs constitute the largest group of controlling shareholders of listed companies in China. The listed
companies they control are typically spin-offs from the
5
These SOEs are owned by the state although they have substantial
autonomy over their activities. They are able to invest in listed firms and in
many cases they have a substantial shareholding that gives them outright
or de facto control.
2.4. Private investors
This group of large shareholders includes both private
firms and individuals. However, listed firms directly controlled by individuals only appear after 2001 when the
‘Tian Tong Corp.’ was listed, since prior to 1998 Chinese
laws prohibited natural persons from directly holding more
than 0.5% of the shares of a listed company. In most cases
a Private investor becomes the largest controlling shareholder through the acquisition of non-tradable shares of
the former large state shareholders either at the time of
the IPO or subsequently. More recently, there are cases
where a Private investor has built up a company and then
listed it on the stock exchange. The shares held by controlling Private investors are usually legal person shares and at
the time of our study they could not be traded on the stock
market.
3. Motivations of controlling shareholders
6
Recent publicized cases of expropriations by dominant Private
investors include the listed firms Beer Flower, Top Software, Jiangsu
Qionghua, Xinjiang Tunhe, ST Chundu, Yi’an Tech, and Hongzhi Tech.
174
G. Chen et al. / Journal of Banking & Finance 33 (2009) 171–181
and SOEs differ as owners of listed companies in terms of
the risk borne and benefits shared. Officials of SAMBs have
the right to select the boards of directors and managers of
SOEs, but bear no risks of the consequences of their selections (Zhang, 1998). Therefore, voting rights in their hands
are typically ‘cheap vote rights’ (Harris and Raviv, 1988).
The promotion of SAMB officials depends largely on
how well they execute the instructions of the central or
local government rather than on how much they contribute
to creating firm value and dividend revenues. Political
intervention is more likely if a listed firm is controlled by
a SAMB.
SAMB officials are civil servants paid by the government and their remuneration and rewards have nothing
to do with the performance of the listed companies they
oversee. The SAMBs collect the dividends distributed by
listed firms and deliver them to the state treasury. The officials have no right to use these dividend revenues. Therefore, the officials’ well-being is not tied to the
performance of the firms they are delegated to control.
The SAMB officials typically have no relevant industry
experience and so they lack the necessary skills to effectively monitor a firm’s managers and they lack the knowledge to provide strategic advice. This problem is
exacerbated as the officials have to look after the state’s
shareholdings in many firms and these firms are in a diverse
set of industries. In addition, SAMBs are prohibited from
being very close to the listed companies they control and
this increases information asymmetry. Of all the ownership
types, SAMBs are the least likely to expropriate wealth
away from the minority shareholders (Deng et al., 2007).
SOEs have both the motives and the expertise to monitor managers of the listed spin-off firms and to provide
strategic advice. Cash flows (dividends) and earnings (via
consolidated and equity accounting) of listed firms flow
through to the SOE investors and so they have incentives
to appoint good managers and to monitor them. The motivations of SOEs to expropriate assets from a listed firm,
and their ability to do so, lie somewhere between those of
SAMBs and Private investors. While SOEs can benefit
from expropriations, these investors are subject to monitoring by government ministries and state regulators. In
summary, compared with SAMBs, SOEs have better risk
bearing and benefit sharing mechanisms, exercise better
monitoring, and are subject to less political intervention.
Distinctions should be made among SOEs affiliated to
the central government (SOECGs) and those affiliated to
local governments (SOELGs). First they differ as to the
extent of the monitoring to which they are subject. SOECGs belong to the central government and are subject to
strict supervision and monitoring from a number of departments under the central government including the National
Audit Office (NAO). The chairmen of SOECGs are carefully chosen for their ability and many of them eventually
become Vice Ministers of the state. It is important that
these chairmen do well in their jobs so that they do not
jeopardize their move up the state hierarchy. Local govern-
ments manage the state’s assets (via SOELGs) according to
national law and regulations although they can also make
their own policies, especially in terms of designing the organization’s hierarchy. SOELGs are subject to the supervision and management either of the local government
directly, or of state asset management bureaus at the local
government level. SOECGs and SOELGs also differ in how
well they observe the laws and regulations of China. Laws
and regulations are more difficult to enforce the further
away the parties are from the center of power and so SOELGs are subject to weaker supervision and management.
Based on the motivations of SOEs and the degree of monitoring they face (by the government) we argue that SOECGs are more effective as dominant shareholders of listed
firms than are SOELGs.
4. Research design
4.1. Sample
For each listed firm in our sample we identify the major
shareholder and the other top 10 shareholders. We take
great care to identify the true owner of the shares (i.e.,
we go behind the nominee names) and to classify them into
shareholder types (SAMB, SOECG, SOELG, and Private).
The sample period is 1999–2004.7 We exclude firms for
which operating performance data are not available. The
final sample consists of 6113 firm-year observations. SOELG is the major controlling shareholder for 3065 (50.14%)
firm-year observations. Then follow Private with 1241
(20.3%) observations, SAMB with 968 (15.84%), and SOECG with 839 (13.72%). The industry distributions of the
sample firms are similar across the four ownership types.
Table 1, Panel A, shows the exact holdings by each of
the three largest shareholders. We find that the largest
shareholder contributes most to the concentrated ownership in China’s listed companies. Overall, the median of
the largest shareholder’s holding is 42.61%, but the median
of the second largest investor’s holding is just 5%, and the
third is 1.89%. If we define blockholders as shareholders
who own 5% or more of the shares of a company, we conclude that a typical Chinese firm has a single blockholder
(see Panels B and C, Table 1). This holds true for companies with SAMBs, SOECGs and SOELGs as the largest
shareholders. However, companies with a Private investor
as the largest shareholder typically have two blockholders,
although the second blockholder has only about one-third
the shares of the largest blockholder (means of 11.96% and
32.14%, respectively).
7
We choose 1999 as the starting year because in 1998 China’s listed
companies adopted new generally accepted accounting principles (GAAP).
Thus, prior to 1999, financial statement data are less consistent across
firms and across time. Chinese GAAP applies to all listed firms regardless
of who the dominant shareholder is.
G. Chen et al. / Journal of Banking & Finance 33 (2009) 171–181
175
Table 1
Ownership concentration for sample firm years
Panel A: Top three shareholdersa
Pct by largest shareholder
Pct by second largest shareholder
Pct by third largest shareholder
Combined ownership by
top three shareholders
SAMB (Obs. 968)
SOECG (Obs. 839)
SOELG (Obs. 3065)
Private (Obs. 1241)
ALL (Obs. 6113)
Mean
Mean
Mean
Mean
Mean
41.28
6.99
2.75
51.02
Median
38.56
4.46
1.75
51.23
Median
49.62
7.13
3.01
59.75
51.79
3.96
1.38
60.59
47.62
7.27
2.76
57.64
Median
49.18
3.55
1.40
59.31
32.14
11.96
5.13
49.24
Median
28.99
11.36
4.19
49.91
43.75
8.16
3.27
55.18
Median
42.61
5.00
1.89
56.31
SAMB (Obs. 968)
SOECG (Obs. 839)
SOELG (Obs. 3065)
Private (Obs. 1241)
ALL (Obs. 6113)
Mean
Mean
Mean
Mean
Mean
Median
Median
Median
Median
Median
b
Panel B: Ownership concentration after combining affiliated shareholders
Sum of ownership by all blockholdersc
Number of blockholders
Ownership by largest shareholder
Ownership by outside blockholders
Panel C: Number of blockholders
1
2
3
4 or above
Total
49.28
1.63
41.99
7.29
49.39
1.00
39.37
0.00
59.11
1.52
52.61
6.49
60.43
1.00
54.87
0.00
56.36
1.58
49.03
7.33
58.17
1.00
50.89
0.00
49.33
2.21
34.57
14.77
49.51
2.00
29.43
13.68
54.19
1.71
45.47
8.72
55.73
1.00
45.20
0.00
SAMB (Obs. 968)
SOECG (Obs. 839)
SOELG (Obs. 3065)
Private (Obs. 1241)
ALL (Obs. 6113)
N
Pct
N
Pct
N
Pct
N
Pct
N
Pct
553
271
98
46
968
57.13
28
10.12
4.75
100
539
200
68
32
839
64.24
23.84
8.1
3.82
100
1889
740
297
139
3065
61.63
24.14
9.69
4.54
100
323
500
288
130
1241
26.03
40.29
23.21
10.47
100
3304
1711
751
347
6113
54.05
27.99
12.29
5.67
100
a
The ownership calculation does not correct for the possibility that the large shareholders are affiliated with each other, or that the companies
themselves own the shares of its shareholders, or take account of pyramid structures.
b
Affiliated shareholders are combined as one. Affiliated shareholders refer to those shareholders belonging to the same parent or grandparent company,
or to shareholders where one shareholder belongs to another, or to shareholders who belong to each other (reciprocal ownership).
c
Blockholder is defined as shareholders that hold, directly or indirectly, 5% or more of the total outstanding shares of a firm.
We also investigate ownership after combining affiliated
investors as one shareholder.8 Here, affiliated investors
refer to investors belonging to the same parent company,
or to investors where one investor belongs to another, or
to investors who belong to each other (reciprocal ownership). Overall, the ownership by the largest shareholder
(including affiliated owners) is 45.47% (mean) and 45.2%
(median). A comparison of Panels A and B indicates that
including the shareholdings of affiliated investors increases
the mean ownership of the largest investor by about 1.72%
(43.75% to 45.47%) and increases the median by about
2.59%.
Table 1, Panel C, reports the number of blockholders
and the ownership mix matrix of sample firms. 54.05% of
sample firm years have a single blockholder, 27.99% have
two, 12.29% have three, and 5.67% have four or more
blockholders. Since the largest shareholder has far greater
ownership than the other blockholders, we refer to nonaffiliated blockholders other than the largest as outside
blockholders. Private controlled firms have more outside
blockholders than the other control-types; in 26.03% of
8
Otherwise, the concentration of ownership would be underestimated.
In our empirical tests reported later, we include shareholdings held by
affiliates in the large shareholder’s ownership. However, replications of the
tests using just the shareholder’s ownership yield similar conclusions.
cases there is just one blockholder (i.e., the Private controlling shareholder and no outside blockholder) and in
40.29% of cases there are two.
Although all shareholders have equal voting rights
(one-share, one-vote), our analysis clearly indicates that
the largest shareholder is generally able to control the
firm. The control feature of the largest stockholder is recognized in The Code of Corporate Governance for Listed
firms in China, issued by the China Securities Regulatory
Commission (CSRC). The Code states that the major
stockholder in a listed firm should be pro-active in making recommendations to the board. The motives and diligence of the largest shareholder is therefore a key
ingredient to the success of listed firms. We examine company records to determine who attends the general shareholders’ meeting and thus who gets to cast their votes.
From our analysis we conclude that large shareholders
are able to gain unbridled control over firms due to the
fact that small outside investors fail to attend the meeting
and exercise their voting rights. On average, the largest
shareholder constitutes 84% of the voting shares present
at the general meeting, which means that the largest
shareholder decides almost everything. Typically, the
shareholdings of all block shareholders who attend the
meeting constitute 93% of the voting shares. Although
all shareholders are able to express their views at the gen-
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G. Chen et al. / Journal of Banking & Finance 33 (2009) 171–181
eral shareholders’ meetings, the fact is that there is normally one shareholder with enough votes to exercise effective control. This characteristic prevents minority
shareholders from having an effective say in company
matters and so many of them are absentee share owners.
Given the characteristics outlined above, this study classifies the control of a listed firm according to its largest
shareholder.
4.2. Measuring operating performance
Following the literature, the measures of performance
that we use are: return on assets (ROA), cash flow return
on assets (CFOA), return on sales (ROS), productivity
(sales per employee, SEMP, and assets per employee,
AEMP), and Tobin’s Q. ROA and CFOA measure profitability in accounting income and cash flow income,
respectively. Return on sales (profit margin), ROS, is
used as an alternative measure of profitability. As state
firms are often criticized as being overstaffed and having
low productivity (Shleifer, 1998), productivity is also
investigated. Tobin’s Q is a market value measure of performance. We do not examine stock returns in this study
because market prices may already reflect the ownership
structure of a firm. Measures of performance are calculated as follows:
Measures
Profitability
Definitions
Operating earningst/average book
value of total assetst
CFOA Operating cash flowst/average
book value of total assetst
ROS
Operating earningst/net salest
ROA
Productivity SEMP Net salest/number of employeest
AEMP Average book value of total assetst/
number of employeest
Tobin’s Q
Q
The market value of total assets
deflated by the average book value
of total assets, where the market
value of total assets is the sum of
the market capitalization of equity
and total debts
where t indexes year, t = 1999, 2000, 2001, 2002, 2003,
2004. We use operating earnings rather than net income
because the latter measure is prone to manipulation
(Chen et al., 2008). Financial and employment data are
retrieved from the China Stock Market and Accounting
Research Database (CSMAR). In addition to the raw
performance measures, we also calculate industry adjusted measures (we use the prefix IA to denote industry
adjusted, i.e., IAROA). Here, the industry median is deducted from the raw number and this gives a relative per-
formance measure. We use the industry classifications
issued by the CSRC.
4.3. Comparison of corporate performance across controlling
investor groups
Six pairs of comparisons of mean and median results are
made for the four groups of firms controlled by SAMBs, by
SOECGs, by SOELGs, and by Private investors. In addition we also use regression analysis to control for firm characteristics, as follows:
IAOPit ¼ a0 þ a1 DSOECGit þ a2 DSOELGit
þ a3 DPRIVATEit þ b1 SIZEit1
þ b2 LEVit1 þ b3 IOSit þ b4 EFNit
þ b5 MarketI þ eit
ð1Þ
where IAOP is the industry adjusted performance measure;
DSOECG is a dummy variable coded 1 for firm years
whose biggest shareholder is a SOECG; DSOELG is a
dummy variable coded 1 for firm years whose biggest
shareholder is a SOELG; DPRIVATE is a dummy variable
coded 1 for firm years whose biggest shareholder is a Private investor. The owner-type dummy variables capture
the differences in operating performance between SAMB
and SOECG, SOELG, and Private controlled firms
(SAMB is the omitted ownership type in regression Eq.
(1)). We define SIZE as the logarithm of the book value
of total assets at the beginning of the year. SIZE controls
for the economies of scale or size effect. LEV is the ratio
of total debts to total assets at the beginning of the year
and this captures the capital structure effect. In addition,
firm performance can be influenced by the investment
opportunity set (IOS) it faces (Hutchinson and Gul,
2003). Therefore, we control for IOS and use the total assets growth ratio to measure it. We also control for external
finance need (EFN). EFN is a dummy variable for firm
years in which rights issues or seasoned equity issues are
made in the following three years. Finally, there are significant differences in regional development and we control
for this using a composite index of market development
(MarketI). This index constructed by China’s National
Economic Research Institute (see Fan and Wang, 2004)
has been used in other China research to control for regional effects (e.g., Chen et al., 2006b).
5. Empirical results
Table 2 reports the mean and median operating performance for firms with different types of largest shareholders
and tests the significance of differences between the groups.
The table shows that operating performance does differ for
firms with different types of largest shareholders. For example, the mean (median) industry adjusted ROA for SAMBs
is 2.96% (1.07%) (see, Table 2, Panel B) whereas the
mean (median) industry adjusted ROA for SOECGs is
G. Chen et al. / Journal of Banking & Finance 33 (2009) 171–181
0.88% (0.54%). Therefore, SOECG controlled firms have
higher industry adjusted ROAs than SAMB controlled
firms. Statistical significances of the differences in means
and medians across different comparisons are shown in
Panels C and D, Table 2. For example, the t-statistic (Z-statistic) of 9.05 (9.90) in the comparison of SOECG versus
SAMB (see Panel C, Table 2) shows that the mean (median)
ROA is significantly higher for SOECG controlled firms
than for SAMB controlled firms. The results in Panels C
and D of Table 2 can be summarized as follows. SOECG
controlled firms are better than SAMB controlled firms in
every respect except Tobin’s Q where the difference is not
statistically significant. Compared with firms controlled by
SAMBs, firms controlled by SOELGs perform better across
all performance measures except Tobin’s Q. Compared with
firms controlled by SAMBs, Private controlled firms have
higher sales per employee and Tobin’s Q. However, the
results from a comparison of profit ratios are inconsistent.
Firms controlled by SAMBs show higher cash flow returns
(CFOA), while Private controlled firms show better earnings (ROA). SOECG controlled firms are superior to Private and SOELG controlled firms in all the measures
except Tobin’s Q (for the Private comparison). Finally,
the comparisons between Private and SOELG show that
SOELGs have better performance measures except for sales
per employee and Tobin’s Q. In summary, the simple comparisons of means and medians of raw and industry
adjusted performance indicate that firms controlled by
SOECGs do best, those controlled by SAMBs and Private
do worst, and those controlled by SOELGs are in-between.
Table 3 reports the regression results for Eq. (1). The
main foci of Table 3 are the ownership coefficients (Panel
A) and differences in the ownership coefficients (Panel B).
Because a company may appear up to six times in the dataset (once per year for six years for some firms) the observations are not independent and the errors are potentially
serially correlated leading to inflated t-statistics. To overcome this problem we cluster observations by company
and compute robust standard errors (Rogers, 1993). These
robust standard errors correct for potential heteroskedasticity and potential time series autocorrelation within each
company.9 DSOECG has the highest coefficient of all the
owner-types for the IAROA, IACFOA, IAROS, IASEMP,
and IATobin’s Q performance measures. For example,
SOECGs have an industry adjusted ROA that is 1.8%
higher than SAMB controlled firms, 0.7% higher than
SOELGs (0.018 0.011), and 1.2% higher than Private
controlled firms (0.018 0.006). These differences are economically significant. Furthermore, the F-statistics shown
in Panel B indicate the DSOECG coefficients (a1) are significantly higher than the other ownership types except
for the productivity measures. SOELG controlled firms
have higher IAROA and Tobin’s Q than SAMB controlled
177
firms while Private controlled firms have lower IAROS and
higher IAAEMP and Tobin’s Q than SAMB firms. SOELG controlled firms have significantly higher return on
sales than Private firms (F-statistic = 9.83).
To summarize the results from Tables 2 and 3, SAMBs
demonstrate the poorest performance of the four groups of
controlling shareholders of China’s listed companies while
SOECGs perform the best. SOELGs are in between SAMBs and SOECGs while Private controlled firms do little better than SAMB firms. The results are consistent with our
expectations which are based on the motivations of the different types of owners (Section 3).
6. Tests of reverse causality
A potential problem with our results is endogeneity or
reverse causality. It is conceivable that when the government decides to privatize the productive units of SOEs,
they allocate the more profitable ones to a specific type
of owner. If this is the case, then it will be difficult to
ascribe a firm’s performance to the influence of its dominant shareholder. To test whether initial ownership types
are influenced by firm performance, we construct a sample
of 540 IPO firms that were listed in the period 1998–2004
and extract their operating performances for the first year
after they were listed. We then use multinominal logit
regression models to explore whether their operating performances influences the initial choice of ownership type.
The models follow Schmidt and Strauss (1975).
The untabulated results from the multinomial logit
regressions show that the coefficients on operating performance are not significant. This indicates that the choice
of initial ownership type for a Chinese listed company is
not influenced by the company’s operating performance
at that time and so reverse causality does not appear to
be a problem. Our evidence is consistent with Aivazian
et al. (2005), Wei et al. (2005), Wang (2003, 2005), and
Deng et al. (2007) who, in different contexts, conclude that
the Chinese government does not use the profitability of
SOEs as a criterion in deciding which SOEs to corporatize
and what the initial ownership structure should be.
7. Regulated industries, ownership concentration, and outside
blockholders
We check the robustness of the results by partitioning
the sample on the basis of industry structure, ownership
concentration, and outside blockholders.10 There may be
significant industry effects due to regulation and monopoly.
To examine this we divide the sample into the manufacturing industry, where regulation and monopoly are largely
absent, and non-manufacturing. The regression results
are broadly the same across the two sub-samples and so
9
We also use yearly regressions to get around the problem of serial
correlation. The annual regressions yield similar results to those shown in
Table 3.
10
For the sake of brevity we do not tabulate the results of these tests in
the paper except for the percentage ownership analysis.
178
Table 2
Operating performance for firms with different types of largest shareholders
SAMB
Obs.
968
968
964
946
947
968
Median
0.42%
4.53%
7.32%
1.797
0.931
2.792
Obs.
SOELG
Mean
Median
Obs.
Private
Mean
All
Median
Obs.
Mean
Median
Obs.
Mean
Median
2.00%
4.24%
3.35%
0.608
0.310
2.446
839
839
838
827
828
839
4.43%
6.20%
7.13%
2.399
1.849
2.865
4.12%
5.52%
6.21%
0.893
0.522
2.419
3065
3065
3042
3009
3006
3065
3.19%
5.13%
2.68%
2.082
1.054
2.705
3.56%
4.86%
6.41%
0.650
0.319
2.351
1241
1241
1209
1221
1209
1241
0.75%
3.18%
13.11%
2.696
1.045
3.293
3.06%
3.42%
6.92%
0.873
0.312
2.616
6113
6113
6053
6003
5990
6113
2.43%
4.79%
1.45%
2.206
1.143
2.860
3.29%
4.52%
5.97%
0.715
0.341
2.422
1.07%
0.03%
2.10%
0.080
0.043
0.018
839
839
838
827
828
839
0.88%
1.49%
0.96%
1.452
1.457
0.326
0.54%
0.54%
0.38%
0.150
0.168
0.005
3065
3065
3042
3009
3006
3065
0.40%
0.32%
5.38%
1.170
0.680
0.194
0.06%
0.01%
0.07%
0.015
0.002
0.048
1241
1241
1209
1221
1209
1241
2.12%
0.60%
19.37%
1.524
0.594
0.796
0.19%
0.12%
0.86%
0.016
0.043
0.179
6113
6113
6053
6003
5990
6113
0.98%
0.27%
8.99%
1.225
0.743
0.341
0.00%
0.00%
0.21%
0.000
0.001
0.003
Panel B: Industry median adjusted
ROA
CFOA
ROS
AEMP
SEMP
Tobin’s Q
2.96%
0.16%
14.33%
0.816
0.512
0.236
968
968
964
946
947
968
SOECG vs SAMB
a
a
Private vs SAMB
b
a
SOECG vs SOELG
b
a
Mean
Median
Mean
Median
Mean
Median
8.408***
1.876*
5.300***
1.303
0.911
1.615
9.624***
2.510**
9.396***
2.775***
2.467**
1.660*
0.618
3.266***
1.607
3.139***
0.788
5.101***
4.702***
2.877***
6.732***
7.309***
1.443
3.488***
4.179***
3.039***
2.833***
1.217
4.386***
2.825***
Panel D: Test of industry median adjusted differences
9.761***
7.892***
ROA
8.865***
3.261***
0.529
CFOA
3.254***
ROS
5.612***
6.365***
4.802***
SEMP
2.339**
8.628***
1.865*
***
***
12.407
1.250
AEMP
4.018
Tobin’s Q
1.418
1.112
0.935
8.619***
0.870
7.522***
4.987***
5.977***
0.570
1.563
1.838*
1.399
2.581***
0.571
6.110***
6.806***
0.991
7.540***
4.313***
0.343
6.517***
4.588***
3.466***
2.869***
1.128
4.321***
2.724***
Mean
Median
SOELG vs SAMB
b
Panel C: Test of RAW differences
9.900***
ROA
9.050***
CFOA
3.930***
3.891***
ROS
6.025***
7.866***
9.053***
SEMP
2.121**
AEMP
3.884***
10.871***
Tobin’s Q
0.999
0.237
SOECG vs Private
b
a
SOELG vs Private
Meana
Medianb
5.636***
6.344***
0.989
1.760*
9.649***
2.961***
7.166***
6.196***
7.391***
2.769***
0.080
9.206***
4.127***
6.038***
0.834
6.397***
0.763
6.069***
3.337***
4.142***
1.687*
4.022***
11.757***
5.082***
5.131***
2.987***
6.588***
1.682*
0.749
10.340***
0.069
2.113**
2.812***
0.659
5.616***
9.166***
Mean
Median
2.999***
2.426**
0.336
8.370***
10.975***
1.848*
7.115***
6.699***
6.142***
0.911
3.832***
4.065***
3.877***
3.115***
0.385
6.151***
10.337***
1.908*
5.914***
4.797***
5.591***
0.235
4.143***
4.793***
b
Notes: The table reports both raw (RAW) and industry median adjusted (IA) measures of operating performance. ROA/CFOA is operating earnings/cash flows deflated by the average book value of
the total assets. ROS is operating earnings deflated by net sales. AEMP is the ratio of the average book value of total assets to the number of employees in RMB millions. SEMP is the ratio of net sales
to the number of employees in RMB millions. Tobin’s Q is market value of total assets deflated by the average book value of total assets, where market value of total assets is the sum of monthly average
market capitalization and average total debts. For some measures, the numbers of observations are slightly smaller than the sample sizes due to missing values.
*** **
, , and * represent statistically different from 0 in T-test for means and in the Mann-Whitney U-test for medians at the 1%, 5%, and 10% levels, respectively.
a
t-value from the T-test of differences in means.
b
Z-value from the Mann-Whitney U-test of differences in medians.
G. Chen et al. / Journal of Banking & Finance 33 (2009) 171–181
Panel A: Raw
ROA
CFOA
ROS
AEMP
SEMP
Tobin’s Q
SOECG
Mean
G. Chen et al. / Journal of Banking & Finance 33 (2009) 171–181
179
Table 3
Pooled OLS regression analysis of industry adjusted operating performance on types of largest shareholders
Dependent
IAROA
IACFOA
IAROS
IAAEMP
IASEMP
IATobin’s Q
0.020 (1.48)
0.018 (3.45***)
0.011 (2.62***)
0.006 (1.11)
0.013 (7.41***)
0.076 (6.35***)
0.091 (6.01***)
0.021 (6.64***)
0.008 (1.53)
0.2218
58.41
0.035 (3.20***)
0.009 (1.84*)
0.001 (0.31)
0.003 (0.70)
0.011 (6.27***)
0.003 (0.64)
0.001 (0.18)
0.014 (4.35***)
0.017 (3.24***)
0.0235
11.27
0.055 (0.72)
0.049 (1.90*)
0.028 (1.08)
0.066 (1.69*)
0.054 (6.18***)
0.351 (4.82***)
0.329 (5.01***)
0.083 (6.73***)
0.022 (0.75)
0.0979
26.17
2.755 (2.79***)
0.399 (0.72)
0.432 (1.12)
0.986 (2.01**)
0.727 (4.28***)
0.277 (0.98)
0.412 (1.56)
0.147 (0.55)
1.683 (3.34***)
0.0212
4.25
1.778 (2.76***)
0.747 (1.86*)
0.195 (0.87)
0.284 (1.22)
0.619 (4.02***)
0.368 (2.11**)
0.634 (3.16***)
0.069 (0.41)
0.992 (3.01***)
0.0311
4.37
0.897 (2.63***)
0.582 (4.37***)
0.240 (2.39**)
0.317 (2.82***)
0.911 (13.21***)
1.211 (2.01**)
0.224 (3.05***)
0.094 (1.72*)
0.347 (3.04***)
0.3102
28.62
6113
6113
6053
6003
5990
6113
3.61*
1.17
2.85*
3.12*
14.94***
9.83***
0.52
1.25
4.04**
0.00
1.03
1.59
3.47*
0.75
1.49
1.94
1.43
0.18
19.08***
5.70**
7.93***
16.09***
5.13**
0.72
Panel a: Regressions
Constant
DSOECG
DSOELG
DPRIVATE
SIZE
LEV
IOS
EFN
MarketI
R2
Model Fstatistic
OBS.
Panel B: Test of equality in coefficients (F-statistics)
a0
a0
a0
a1
a1
a2
vs.
vs.
vs.
vs.
vs.
vs.
a1
a2
a3
a2
a3
a3
11.92***
6.87***
1.24
3.16*
6.56**
1.97
3.40*
0.10
0.48
3.31*
5.73**
1.22
Notes:
The Model:
IAOPit ¼ a0 þ a1 DSOECGit þ a2 DSOELGit þ a3 DPRIVATEit þ b1 SIZEit1 þ b2 LEVit1 þ b3 IOSit þ b4 EFNit þ b5 MarketIit þ eit
where IAOP represents the industry adjusted performance measures, including IAROA, IACFOA, IAROS, IAAEMP, IASEMP, and IATobin’sQ.
DSOECG is a dummy variable coded 1 for firms whose biggest shareholder is a SOE affiliated to the central government. DSOELG is a dummy variable
coded 1 for firms whose biggest shareholder is a SOE affiliated to the local government. DPRIVATE is a dummy variable coded 1 for firms whose biggest
shareholder is a Private investor. SIZE is the logarithm of the book value of total assets in billions at the beginning of the year. LEV is the ratio of total
debts to total assets at the beginning of the year. IOS is the total asset growth rate (this controls for the investment opportunity set). EFN is a dummy
variable for right issues or seasoned issues made within the following three years (this controls for external financing needs). MarketI is the log of the
NERI (National Economic Research Institute, China Reform Foundation) Index of marketization of China’s provinces. The table reports OLS regression
with robust standard errors adjusted for clusters in firms. t-statistics are reported in brackets, where ***, ***, and * represent statistical significances at the
1%, 5%, and 10% levels, respectively.
our findings are not dependent on regulated or monopolistic industries. The results are consistent with those shown
in Tables 2 and 3.
The analyses so far have concentrated on who is the largest shareholder. However another intriguing question is
whether the percentage of shares owned by the largest investor has any bearing on performance. A larger ownership may
better align the incentives of the dominant owner with the
preferences of the minority investors. However, a high percentage ownership may make it easier to expropriate assets
from the firm but it also makes it less worthwhile to do so.
To explore the percentage of ownership issue we run the
following regression model:
IAOPit ¼ c0 þ c1 PSAMBit þ c2 PSOECGit
þ c3 PSOELGit þ c4 PPRIVATEit
þ v1 SIZEit1 þ v2 LEVit1 þ v3 IOSit
þ v4 EFNit þ v5 MarketIit þ eit
ð2Þ
where PSAMB (PSOECG, PSOELG, PPRIVATE) is the
percentage of shares owned by the different types of owners
(plus affiliates) if that owner is the largest shareholder in
the listed firm. The results are shown in Table 4. Positive
and generally significant coefficients are reported for all
the owner-types for IAROA, IACFOA, IAROS, and IATobin’s Q. This shows that the larger the share ownership of
the controlling investor, the better the firm’s performance.
Thus there is an alignment effect. The IAAEMP regression
has negative and mostly significant coefficients on the owner type variables.
Some prior research has concluded that there are nonlinear relations between ownership concentration and operating performance in China’s listed firms (Wang, 2005; Wei
et al., 2005). To test this on our data, we add squared terms
for each of the ownership variables (e.g., PSAMB2). However, the model specifications are rather weak when the
squared terms are included and so the results are not tabulated in the paper. The evidence for a non-linear effect is
weak.
The behavior of large shareholders may be influenced by
outside blockholders since some studies have shown that
they provide monitoring functions of insider blockholders
and managers (Shleifer and Vishny, 1986). To test for the
effect of outside blockholders we amend Eq. (2) by adding
a variable that represents the percentage ownership of outside blockholders. The untabulated results show that the
180
G. Chen et al. / Journal of Banking & Finance 33 (2009) 171–181
Table 4
Pooled OLS regression analysis of ownership concentration and operating performance for China’s listed firms
Dependent
Constant
PSAMB
PSOECG
PSOELG
PPRIVATE
SIZE
LEV
IOS
EFN
MarketI
R2
Model F-statistic
OBS.
IAROA
IACFOA
***
0.034 (2.76 )
0.027 (2.16**)
0.058 (5.99***)
0.050 (6.16***)
0.054 (4.32***)
0.012 (6.53***)
0.073 (6.09***)
0.090 (5.95***)
0.019 (6.31***)
0.009 (1.61)
0.2281
53.38
6113
IAROS
***
0.049 (4.52 )
0.028 (2.38**)
0.049 (4.39***)
0.030 (3.52***)
0.030 (2.39**)
0.010 (5.65***)
0.002 (0.35)
0.001 (0.08)
0.014 (4.22***)
0.017 (3.23***)
0.0277
11.57
6113
IAAEMP
**
0.132 (1.97 )
0.188 (2.02**)
0.217 (3.65***)
0.206 (3.36***)
0.076 (0.82)
0.055 (5.72***)
0.351 (4.90***)
0.325 (4.98***)
0.082 (6.65***)
0.018 (0.61)
0.0987
22.65
6053
1.223 (1.16)
3.069 (2.25**)
2.011 (1.81*)
2.221 (2.42**)
1.574 (1.31)
0.778 (4.33***)
0.144 (0.51)
0.488 (1.81*)
0.122 (0.46)
1.646 (3.36***)
0.0238
3.77
6003
IASEMP
IATobin’s Q
**
1.389 (2.20 )
0.782 (1.15)
0.673 (0.80)
0.416 (0.85)
0.357 (0.58)
0.647 (4.12***)
0.306 (1.79*)
0.664 (3.31***)
0.083 (0.48)
1.015 (3.28***)
0.0312
3.87
5990
1.038 (3.17***)
0.402 (1.64)
1.388 (6.02***)
0.760 (4.07***)
1.061 (4.05***)
0.946 (13.31***)
1.256 (2.08**)
0.232 (3.23***)
0.117 (2.21**)
0.352 (3.08***)
0.3164
15.98
6113
Notes: The model:
IAOPit ¼ c0 þ c1 PSAMBit þ c2 PSOECGit þ c3 PSOELGit þ c4 PPRIVATEit þ v1 SIZEit1 þ v2 LEVit1 þ v3 IOSit þ v4 EFNit þ v5 MarketIit þ eit
where IAOP represents the industry adjusted operating performance measures, including IAROA, IACFOA, IAROS, IAAEMP, IASEMP, and IATobin’s Q. PSAMB (PSOECG, PSOELG, PPRIVATE) is the percentage ownership by the different types of owner (plus affiliates) if that owner is the largest
owner. SIZE is the logarithm of the book value of total assets in billions at the beginning of the year. LEV is the ratio of total debts to total assets at the
beginning of the year. IOS is the total asset growth rate (this controls for the investment opportunity set). EFN is a dummy variable for right issues or
seasoned issues made within the following three years (to control for external financing needs). MarketI is the log of the NERI (National Economic Research Institute, China Reform Foundation) Index of marketization of China’s provinces. The table reports OLS regression with robust standard errors
adjusted for clusters in firms. t-values are reported in brackets, where ***, ***, and * represent statistically different from 0 at the 1%, 5%, and 10% levels,
respectively.
outside blockholder coefficients are positive but they are
only marginally significant for firms where the major shareholders are SAMBs and SOELGs.
8. Conclusions
This study investigates the relations between types of
large shareholders, ownership structure, and firm performance. We find that state shareholders differ in their management and monitoring effectiveness. The bureaucratic
SAMBs perform worst, the SOECGs perform best, and
the SOELGs are in-between. Private controlled listed firms
are not superior to SOE controlled companies and are only
marginally better than SAMB control. Our results contrast
with prior research studies (e.g., Sun and Tong, 2003; Wei
et al., 2005) that conclude that state ownership is harmful
to listed firms. The difference in findings is due to our focus
on who actually owns the shares rather than the share type.
Furthermore, we go to great lengths to explain the different
objectives of the different types of owners and how this
impacts on firm performance. We find no evidence to suggest that the initial choice of controlling shareholder (usually a choice made by, or with the blessing of, the state) is
dependent on a firm’s performance. In additional tests, we
find that ownership concentration is positively related to
the operating performance of the firms but there are no significant non-linear effects. A variety of robustness checks
confirm the results.
The results provide support for our argument that listed
firms controlled by SAMBs have poorer performance than
other types of ownership. The virtual absence of incentives
and the lack of skills of the SAMBs (and their officials) to
closely monitor the listed firms they control leave those
firms bereft of leadership and oversight. In contrast to
much received wisdom (Dewenter and Malatesta, 2001;
Green, 2004; Megginson and Netter, 2001; Shleifer,
1998), we find that, in the context of China, listed firms that
are controlled by Private investors do not perform the best.
Our results are consistent with the suggestion of Stiglitz
(1999) that market oriented state shareholders may be the
most suitable controlling owners of firms in countries with
weak institutional environments.
Acknowledgement
The authors thank the referees and the editors (Professor Giorgio Szego and Professor Fariborz Moshirian) for
constructive comments and suggestions. The authors also
thank Guochang Zhang, Paul Brockman, and seminar participants at the Hong Kong Polytechnic University and
Sun Yat-Sen University for helpful discussions and suggestions. Firth acknowledges the financial support of an earmarked grant from the Research Grants Council of the
Hong Kong Special Administrative Region, China
(LU340307).
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