Abstract
Our study analyses the relations among agency costs, ownership structure, and governance mechanisms in Chinese listed firms. We find that firms with foreign shareholders incur higher agency costs. Legal person shareholders, our proxy for institutional investors, and government ownership have no impact on the level of agency costs. We also find that boards with a majority of outside directors are not associated with lower agency costs. There is some evidence that concentrated ownership is associated with lower agency costs. Although Chinese listed firms have engaged in ownership and governance reform, this has not manifested itself in a reduction in agency costs.
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Notes
There were, however, no formal corporate governance guidelines until 2001.
Note, however, that the recent corporate scandals in Europe and the US often involve firms that, on paper at least, have good governance mechanisms and are actively monitored by debt and capital markets. Thus, the industrialised nations are not immune to governance structures that prove ineffective in real-world settings.
The Code of Corporate Governance for Listed Companies in China was issued in 2001. The Code is published by The China Securities Regulatory Commission (CSRC), which is the official regulator of listed firms in China.
Additional analyses, however, that include managerial shareholdings show them to be non-significant.
Since 2001, the Chinese Securities and Regulatory Commission has requested that listed firms appoint at least two independent directors, and this became a requirement in 2003.
Other forms of compensation, such as share options, are not common in China; if they do occur, they are not disclosed. Because of non-linearity issues and the presence of outliers, we transform compensation by using its natural logarithm.
Here, the industry medians are deducted from the agency costs and so we have relative agency costs (ie relative to the industry median).
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Acknowledgements
We acknowledge financial support from the Hong Kong Polytechnic University and the University Grants Committee of the Hong Kong SAR (research grants G-V910, G-T074 and PolyU5208/01H).
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Firth, M., Fung, P. & Rui, O. Ownership, governance mechanisms, and agency costs in China’s listed firms. J Asset Manag 9, 90–101 (2008). https://doi.org/10.1057/jam.2008.13
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DOI: https://doi.org/10.1057/jam.2008.13