CORPORATE GOVERNANCE AND CORPORATE FINANCE: EVIDENCE FROM CHINESE LISTED COMPANIES

Abstract

This thesis explores the linkages between corporate governance and corporate finance, making use of a large panel of Chinese listed firms over the period 2003-2010. We investigate three main themes.
First, we examine the impact of managerial ownership and other corporate governance variables on firms’ exporting decisions, which are characterized by considerable risk and information asymmetries. We document that both export propensity and intensity increase with managerial ownership up to a point of around 23%-27%, and decrease thereafter. We also find a negative association between state ownership and export intensity. Furthermore, we observe that the larger the board size, the lower the firm’s export propensity and intensity, and that firms with a higher proportion of independent directors in the board are generally less likely to export. These findings are driven by privately controlled firms during the post-2006 split share structure reform period.
Second, we examine the relationship between managerial ownership and corporate investment decisions. We find that investment decisions are systematically related to managerial ownership in two ways. Firstly, managerial ownership exerts a positive direct effect on corporate investment decisions, by aligning management’s incentives with the interests of shareholders. Secondly, we document that, by acting as a form of collateral to lenders, managerial ownership helps to reduce the degree of financial constraints faced by firms.
Third, we examine the impact of ownership and corporate governance on agency costs. We measure the latter in two ways: using the sales to assets ratio, and the general administration and selling expenses scaled by assets. We find that, especially in the post-2006 split share structure reform period, increased managerial ownership and debt financing work as effective corporate governance mechanisms, by mitigating agency problems. We also find evidence that while legal person shareholding helps to mitigate agency costs for privately controlled firms in the post-reform period, large boards of directors are associated with higher agency costs in government controlled firms.
From a policy perspective, our findings suggest that the Chinese government’s recent policies aimed at reforming ownership structure and encouraging managerial ownership in listed firms have helped to reduce agency and asymmetric information problems, thereby enabling firms to enhance investment efficiency and international activities. Our study recommends that greater attention should therefore be paid to compensation contracts of the management team and to board characteristics, and that state ownership should be further reduced. This would help further enhance resource allocation efficiency and sustain high levels of economic growth.