dfcState Ownership and Value of Firm: Evidence from China
Lifan Wu*
Senior Visiting Rearch Fellow
Shanghai Stock Exchange
Department of Finance and Law
California State University Los Angeles
leader什么意思艾美奖获奖5151 State University Dr.
Loa Angeles, CA 90032
Email: lwu7@calstatela.edu
December 2002
* I am grateful to the Shanghai Stock Exchange for the data and financial support of this rearch. This
paper has benefited from minar prentations at the Shanghai Stock Exchange and Shanghai JaoTong University. The views stated here are tho of the author and do not necessarily reflect the views of the Shanghai Stock Exchange. The author is responsible for all errors.
ABSTRACT
be happyWe study the relationship between the state ownership structure and Tobin’s q in China. The effect of the state ownership on q ratio is found nonmonotonic; q ratios first increa, then decline and finally ri again as the state ownership increas. However, the legal person-controlled firms are better performed than the state-controlled firms. Firm value increas monotonically with increas in managerial ownership. The evidence also shows a significant positive relationship between firm value and the concentration of a few largest shareholders.
I. Introduction
The fundamental issue of the corporate governance is potential conflicts of interests between ownership and control in modern corporations. The conflict of interests is first addresd by Berle and Means (1932), and developed by Jenn and Meckling (1976) and Grossman and Hart (1980). Later, a number of papers document theoretic models and empirical evidence on non-linear relations
汇文教育resistinghip between managerial ownership structure and corporation value.1 For a long time, the agency problem is formalized in the context of lf-interested managers (the controllers) and outside shareholders (the owners). Recently, La Porta, Lopez-de-Silanes, Shleifer, and Vishny (hereafter LLSV) (1998) show that the ownership structure described from Berle and Means (1932) exists in the US and other well-developed economies, but for countries with less legal protection and other external governance mechanism, the family-controlled or the state-controlled ownership structures are popular. Shleifer and Vishny (1997) argue that the central agency problem in the countries is not the failure of the professional managers to rve minority shareholders, but rather the expropriation of minority shareholders by controlling shareholders.联系人英文
plate是什么意思La Porta, Lopez-de-Silanes, and Shleifer (1999) prent evidence that the state or families as controlling shareholders are prent in most large companies in developing economies. La Porta, Lopez-de-Silanes, and Shleifer (2002) study government ownership of banks around world. Claesns, Djankov, and Lang (2000) and Claesns, Djankov, Fan and Lang (2002) show pyramidal ownership structure and cross-holdings in most of large firms in East Asia. Along this line of study, our
1 Among them include Fama (1980), Demtz (1983), Fama and Jeann (1983), Demtz and Leh
n (1985), Stulz (1988), Mrock, Shleifer and Vishny (1988), McConnell and Servaes (1990), Hermalin and Weisbach (1991), Cho (1998), Holderness, Kroszner and Sheehan (1999), and Himmelberg, Hubbard, and Pjalia (1999).
paper examines another type of ownership structure - the state ownership of corporations. Specifically in this paper, we document the relationship between the state-owned companies and their valuation using China data. Our analysis focus on three issues of the state ownership: (1) what is valuation effect of the state ownership structure? (2) What is relationship between managerial ownership and value of firm?
(3) How does ownership concentration affect on firm value?
catherine是什么意思We choo China becau of its uniqueness of the state ownership structure. In contrast to the managerial control and holding structure in US, and to the pyramidal ownership structure in the East Asia, the state ownership is the most important part of corporate ownership structure in China. The state is simply the single largest shareholder in majority of corporations owning both controlling rights and cash flow rights becau of its significant large stack in the firms’ equity. The government plays a key role in corporate governance, appointing and monitoring own employees to the board of
directors, and executives. In such environment with less investor protection and external corporate control, the conflict of interests exists between controlling shareholders (the state) and minority shareholders (outsiders). Our paper explores the functioning of the government ownership under the circumstances and provides new evidence of the agency problem.
Our study of the government ownership relates to the issue of the state versus private ownership in the economics literature. The debate about pros and cons of the government function in the economy has traced back many years, from Lewis (1949), who is in favor of government ownership of firms when facing market inequities or imperfections, to Friedman (1962) who strong oppos the state ownership and advocates the laisz-faire economy even taking into account of social goals. Recently, failures of the state ownership caud by bureaucratic system, bribes and scandals
push many governments to adopt economic reform and privatize the state controlled-firms. Shleifer (2002) argues that private ownership should generally be preferred to the state ownership when the incentives to innovate and to contain costs strong.
For currently over 1,100 listed companies on the Shanghai Stock Exchange and the Shenzhen Stock Exchange, the government controls more than two-third of them, individuals and legal person
control the rest one-third. Therefore, we obrve co-existence of a growing private ownership along with the overwhelming state ownership, which are not en in the US and other countries. While the Chine government recently tried to reduce its controlling power by lling its shares to private companies, and even to foreign investors in the market, we will not e any dramatic change in the ownership structure in the near future. The co-existence of the both state and private ownerships of firms in China provides us with opportunities to empirically examine the agency problem between the controlling state ownership and outside individual shareholders as well as comparison between the state and other ownership structures.
Our study also shed light on veral issues on the effects of corporate ownership structure on firm valuation. First issue is the managerial ownership structure and performance. Since Chine corporation rests primarily with the state ownership, plus managerial holding in corporations is insignificant, an entrenchment effect of the managerial holding virtually does not exist. Therefore, the relationship between managerial ownership and firm value is likely different from that obrved in the US. Similar to Morck, Nakamura and Shivdasani (2000) who find positive relationship between managerial shareholding and firm value at high level of the bank holdings, we also find a monotonically positive relationship between managerial holding and
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