Governance Role of Different Types
of State-Share Holders:
Evidence from China’s Listed Companies
By
Jiwei Wang
Ph.D. Candidate
16 JUNE 2003
Outline
•
•
•
•
Brief summary
Motivation: why is the topic import?
Literature review
Type of state-share holders and firm
performance
• Type of state-share holders and top
management turnover
• Conclusions
Brief summary of this thesis
• Difference from existing literature: this thesis
focuses on the identity of state-share holders rather
than the state shareholding per se.
• Classification of state-share holders:
– bureaucratic state-share holder (BSH)
– corporate state-share holder (CSH)
• Main tests: effects of types of state-share holders on
– Firm performance
– Monitoring of top management
• Results: CSHs play better than BSHs and no worse
than non-state shareholders.
Example of state-share holder
Shanghai Bureau of Finance
8.26%
Bureaucratic
State-Share Holder
The largest one
Shanghai Pudong
Development Bank Co. Ltd.
Example of state-share holder (cont.)
Huizhou City
Municipal Government
Corporate
State-Share Holder
……
TCL Holdings
100%
TCL Industrial Holdings
51.82%
TCL International Holdings
Why the types of shareholders important?
• Effectiveness of privatization depends on
the existence of the institutional
underpinnings of capitalism (Nellis, 1999).
• Delay privatization and use “better
management contracts” to make state-share
holders act like private owners in the
absence of institutions (Stiglitz, 1999)
Why the types of shareholders important?
• Chinese approach:
– Under gradual privatization strategy, Chinese
government maintains a large portion of state-owned
shares in listed companies (Table 1).
1993
1994
1995
1996
1997
1998
1999
2000
32.48% 32.34% 31.83% 33.81% 36.51% 37.65% 38.93% 38.54%
– The government delegates various types of state-share
holders to control this portion of state-owned shares.
• The success of this approach depends on the
effective governance role of these different types of
state-share holders in China’s listed companies.
Literature review
Detrimental role of state shareholdings:
• Political and managerial perspectives
• Political perspective: government interference
– Government intervention would be detrimental if it is not a
social welfare maximizing government. (Sappington and
Stiglitz, 1987).
– Rational individual politicians have their own goals, such
as maximizing their political base. (Shleifer and Vishny,
1994).
– The interference of government and individual politicians
would also lead to distortion of manager’s investment
decision and result in suboptimal investment. (Laffont and
Tirole, 1993).
Literature review (cont.)
Detrimental role of state shareholdings:
• Managerial perspective: agency cost
– Principal-Agent problems arise when there is separation of
ownership and control (voluminous literature).
– “absence of principal” causes higher degree of principalagent problems for state ownership.
– Thus state shareholders have less incentive to remove nonperforming top management.
Literature review (cont.)
• State ownership and firm performance in China
– Weakly negative correlation: the detrimental role of
state ownership (Xu and Wang, 1999, Chen, Firth,
and Rui (2003), and Sun and Tong, 2003).
– U-shaped relationship: grabbing (detrimental) and
helping (supportive) role of state ownership (Tian,
2001).
– Inverted U-shaped relationship: nonlinear
positively correlated (Sun, Tong, and Tong, 2002)
– They do not differentiate the type of state-share
holders
Literature review (cont.)
• Top management turnover in China
– Chairperson is fired for poorly performing: Firth,
Fung, and Rui (2002) examine the determinants of
chairperson turnover in China’s listed companies
and find that performance based on accounting data
is a key determinant of forced chairperson turnover.
– They do not examine the effect of the type of stateshare holders on the sensitivity between the
likelihood of chairperson turnover and poor firm
performance.
Classification of state-share holders
• Classification basis: degree of government intervention
• Five types of state-share holders are classified as BSHs:
–
–
–
–
–
Central government ministries and commissions
National industrial companies
Local government bureaus
Local state assets management bureaus
Local state assets operating companies
• All other types of state-share holders are CSHs: mostly
they are SOEs.
• Three groups of shareholders:
– BSHs, CSHs, non-state (holder of legal-person shares)
Type of shareholders and firm performance
• Main prediction: BSHs play worse than CSHs.
– Higher degree of government intervention will be
more detrimental to firm performance
– In addition, CSHs have better incentive contract than
BSHs (World Bank, 1997), which makes CSHs
behave more like market-oriented entities than BSHs.
• Hypotheses:
– H1a: performance of firms with BSHs < that
of other type of firms
– H1b: performance of firms with CSHs < that
of firms without state-owned shares
Type of shareholders and firm performance
• Dependent variable: firm performance
– Both accounting and market performance measures (CROAI
and MARET)
• Independent variable: type of shareholders
– STATED, BURD, BLARGE
• Control variables (Caves and Barton, 1990):
–
–
–
–
–
–
Organizational factors: SIZE, LISTAGE
Capital intensity: TANGIBLE
Dynamic disturbances: INTRY, SALESG
Government and regulatory policies: LEVERAGE
Ownership concentration: HERF (Demsetz and Lehn, 1985)
Other control variables: EXCHANGE, INST%, and Year
Dummies
Type of shareholders and firm performance
• Data source: Genius, TEJ, and CSRC
• Sample: firms issued A shares (RMB
denominated) and listed in Shanghai or
Shenzhen stock exchanges for at least one year
from 1994 through 2000, excluding firms in
banking and financial industry. It includes 918
listed companies and 3725 firm-year
observations. (Table 4)
• Outlier: I trim the top and bottom 0.5% of the
sample, which results in a total sample of 900
firms with 3468 firm-year observations.
Types of shareholders and firm performance
Regression of performance (CROAI and MARET) on Shareholder
Dummies and other controls (Table 7)
Strong Evidence: BSHs play worse than others and CSHs do not
play worse than non-state shareholders.
CROAI
Eq. (1)
STATED
BURD
*STATED
BLARGE
*STATED
Eq. (2)
-0.0036
(-1.24)
-0.0104
(-4.23)***
Eq. (3)
Eq. (4)
0.0008
(0.27)
0.0020
(0.67)
-0.0106
(-4.05)***
-0.0169
(-6.20)***
Types of shareholders and management turnover
• A more direct indication of governance role of
shareholders: monitoring of top management.
• Managerial perspective predicts that stateshare holders have less incentive to monitor
top management.
Types of shareholders and management turnover
• H2a: correlation of probability of top
management turnover and prior firm
performance < 0.
• H2b: sensitivity of top management turnover
to poor firm performance in firms with stateowned shares < that in firms without stateowned shares.
Types of shareholders and management turnover
• Different types of state-share holders have
different incentives to monitor managers.
• H2c: the sensitivity in firms with BSHs <
that in other types of firms.
• H2d: the sensitivity in firms with CSHs <
that in firms without state-owned shares.
Types of shareholders and management turnover
• Top management turnover sample (Table 9)
– Hand-collected turnover sample from announcements
– Delete non-forced turnover, such as:
•
•
•
•
Retirements and healthy reasons
Promotions
Illegal operations
Large shareholder changed
• Control sample
– Firms listed for at least one year and not experienced
any management changes from 1994 to 1998
• Total sample: 327 turnovers representing 270 firms;
502 non-turnovers representing 239 firms
Types of shareholders and management turnover
• Dependent variable: management turnover
– TURNOVER
• Independent variable: firm performance
– Accounting and market performance measures
(ROAI, MARETI)
• Control variables, such as:
–
–
–
–
–
–
Firm size (SIZE): Huson et al. (2001)
Tenure (TENURE): Goyal and Park (2001)
Ownership concentration (HERF)
Board size (BSIZE): Jensen (1993)
Management age (CEOAGE): Goyal and Park (2001)
Year dummies
Types of shareholders and management turnover
Logit analysis: Table 12
ROAI
STATED * ROAI
BURD * ROAI
CORPD * ROAI
Eq. (7)
Eq. (8)
Eq. (9)
Eq. (10)
-9.0808
(<.0001)
-13.4428
(<.0001)
-16.9348
(<.0001)
-14.5715
(<.0001)
15.0384
is(<.0001)
fired
12.7330
(0.0001)
6.5628
(0.0484)
Management
for poor
performance
-5.2539
(0.2468)
Analysis of turnover probability (Table 12)
ROAI
STATED * ROAI
Eq. (7) play no
Eq. (8)
CSHs
worse
than non-state
-9.0808
-13.4428
shareholders
(<.0001)
(<.0001)
Eq. (10)
-16.9348
(<.0001)
-14.5715
(<.0001)
15.0384
(<.0001)
12.7330
(0.0001)
6.5628
(0.0484)
BURD * ROAI
CORPD * ROAI
Eq. (9)
Only BSHs reduce the
sensitivity
-5.2539
(0.2468)
Conclusions
• Results: Different types of state-share holders play
different governance roles in China’s listed
companies. Firm performance is determined by
the incentive of state-share holders, rather than
state ownership per se.
• Implications:
– State-owned shares held by BSHs in China’s listed
companies should be released first.
– For transitional economies without institutional
underpinnings of capitalism, introduction of “corporate
state-share holders” acting like “private owners” could
be considered.
Governance Role of Different Types
of State-Share Holders:
Evidence from China’s Listed Companies
Thank you very much!