Regulatory reforms are not “one-size fits all”
All countries aim to have institutions that work efficiently, with a regulatory framework that ensures adequate investor protection and satisfactory market efficiency. What can be done when this does not happen? Could solutions that worked in some countries be applied worldwide? This is the topic of a research undertaken by Domenico Campa, a professor of accounting at the International University of Monaco (INSEEC U.). The author took advantage of a reform implemented by the Chinese government in 2005 to enhance the competitiveness of companies through a series of initiatives aimed at reducing the level of state shareholdings and improving the efficiency of the market (Yeh et al., 2009). Did this initiative give a new shape to the entities and to the relationship between company performance and ownership structure of firms?
Past research focused on the Chinese market almost unanimously confirmed that firms with higher ownership concentration, or controlled by legal persons or companies that are not owned by the government exhibited better performance. These findings are in line with the explanation of Shleifer and Vishny (1986) who suggest that when markets are underdeveloped their monitoring role is weakened and it is substituted for control by the owners through an increase in their stake in the company in order to have the power and the incentives to ensure such a control. Accordingly, in countries with weak investor protection and underdeveloped markets, like China, ownership concentration is considered an efficient corporate governance mechanism since it mitigates agency problems. In such contexts, the market for corporate control is inefficient and investors have no other choice than acting as firm monitors themselves. However, only the ownership of a significant amount of shares gives investors the incentives and the power to monitor and influence managers’ decisions (e.g. Shleifer and Vishny, 1986) and to use their voting rights if managers do not act in their interests (Pursey et al., 2009). In fact, in such scenarios, individual investors are characterized by a total lack of ‘shareholder activism’ and do not have the power, skills, or interest in monitoring management.
China is an emerging economy where the majority of companies were historically controlled by the state and a significant proportion of their shares could not be traded on the financial market. The Chinese government considered non-tradable shares as being the major hurdle for domestic financial development (Yeh et al., 2009) thus, in January 2004, the China Securities Regulatory Commission (CSRC) launched a program that converted a significant proportion of restricted shares into tradable shares, with the aim to increase ownership dispersion and to improve market efficiency.
Domenico Campa’s research uses data from 2011 to 2014 and its results show an increase in the number of shares traded on the financial market, in comparison with statistics from studies that focus on the pre-reform period (e.g. Ma et al., 2010). At the same time, the relationships between ownership structure and firm performance are not significantly different from the findings of research that uses pre-reform data: the evidence still indicates that there is a positive effect of ownership concentration on entity performance, that there is a negative effect of the level of state shareholdings on firm profitability, value creation, and efficiency, that the presence of legal persons provides benefits to companies and, finally, that domestic investor shareholdings does not positively affect company performance.
Overall, the 2005 reform of the Chinese stock market has reduced the ownership concentration but has not significantly changed the dynamics that link block-holder identity and corporate performance. Thus, why a reform that should have improved market efficiency, thus reinforcing the idea of the market for corporate control did not work in that direction? Well, Yu (2013, p. 82) states that China, after the 2005 share reform, is still characterized by poor investor protection and weak regulatory enforcement. Therefore, the evidence highlighted above indicates that reforms aimed at increasing ownership dispersion in countries with weak investor protection do not mitigate agency problems. It suggests to policy makers that reforms imported from other economic contexts do not necessarily produce the same effects in a different institutional setting and pints out that financial reforms do not always cause significant changes on economic dynamics if the institutional setting of a country does not change as well.
The full paper is available at: http://www.inderscience.com/info/ingeneral/forthcoming.php?jcode=ijcg
For more information:
- Ma, S., Naughton, T., and Tian, G. (2010). ‘Ownership and ownership concentration: which is important in determining the performance of China’s listed firms’, Accounting and Finance, 50(4), 871-897.
- Pursey, P. M., Heugens, A. R., van Essen, M., and van Oossterhout, J. (2009). ‘Meta-analyzing ownership concentration and firm performance in Asia: Towards a more fine-grained understanding’, Asia Pacific Journal of Management, 26(3), 481-512.
- Shleifer, A., and Vishny, R. W. (1986). ‘Large shareholders and corporate control’, The Journal of Political Economy, 94(3), 461-488.
- Yeh,Y., Shu, P., Lee, T., and Su, Y. (2009). ‘Non-Tradable share reform and corporate governance in the Chinese stock market’, Corporate Governance: An International Review, 17(4), 457-475.
- Yu, M. (2013). ‘State ownership and firm performance: empirical evidence from Chinese listed companies’, China Journal of Accounting Research, 6(2), 75-87.