Corporate governance in China

Abstract

This thesis addresses some important issues in corporate governance using data from Chinese stock markets. The thesis starts with a summary of relevant research in the area of corporate governance. Next, I describe the historic development of corporate governance in China and the corporate governance framework that is currently in place. These two introductory chapters are followed by my empirical research, which comprises three chapters. First, I analyse share price reactions and top-management turnover around announcements of negotiated block transfers between different State-ownership structures for a sample of State-controlled firms that are publicly traded on Chinese stock exchanges. I find that changes in firm value and CEO turnover are much greater when a government agency (GA) transfers a block of shares of a listed firm to a statecontrolled enterprise with a private joint venture partner (LPSOE) rather than to a solely state owned enterprise (SSOE). Second, using a sample of listed firms that issued debt guarantees to their large shareholders, I analyse the relation between firm- and ownership characteristics and the probability of expropriation of minority shareholders by controlling shareholders. I also analyse and validate the assumed relationship between ‘tunnelling’ and several financial measures of expropriation suggested in the literature. I find that, in a weak legal environment such as China, the issuance of related guarantees is more likely at firms with large private blockholders than at firms with the State as the largest blockholder, and that related guarantees are more likely at larger firms and firms with a single controlling blockholder. I also find that firms that issued related loan guarantees have significantly lower industry-adjusted measures of Tobin’s Q, profitability, and dividend yields and have significantly higher leverage. This evidence is consistent with the hypothesis that tunnelling by controlling shareholders can be very costly to minority shareholders. I find no evidence of higher bid ask spreads for firms that issued related guarantees. Finally, I study the monitoring role of blockholders in China as an alternative mechanism of corporate governance that might result in reduced expropriation of firm assets by the controlling blockholder. I find that non-controlling block holders contribute to firm value only when their ultimate owners are different from the controlling blockholder in terms of the public/private distinction. I attribute this result to the potential conflict of interests between controlling and non-controlling block holders in this case, reducing the opportunities to tunnel and improving monitoring of management. I also provide evidence of a substantial valuation discount if there are clear signals that suggest collusion between blockholders.