Using a sample of China's partially privatized state-owned enterprises (SOEs) that have emerged in the global equity markets, this paper examines the decision to list overseas and its consequences. We find that overseas listing of Chinese SOEs is primarily determined by political needs, not by firms' desire to fund growth and expand foreign sales. In addition, we find that overseas listed SOEs have more professional boards of directors, use greater accounting conservatism, exhibit higher investment efficiency, and have better one-year and two-year post-listing stock performance than their domestically listed counterparts. Additional analysis exploring the impact of political relations on overseas listing effects finds that strong political connections weaken the overseas listing effect on investment efficiency and post-listing stock performance, consistent with the positive overseas listing effect on investment efficiency being attenuated by government influence to satisfy state objectives such as excess employment. Taken together, our study suggests that overseas listing provides a mechanism for constraining politicians' pursuit of private benefits and improving efficiency for partially privatized Chinese SOEs. However, the effectiveness of this mechanism is limited for SOEs with strong ties to the government.
The 2005 policy decision to change the status of non-tradable state and non-state shares into tradable A shares ushers in a new era in the stock markets of China. Over time all of these shares will be tradable and potentially transferred to foreign and domestic private sector investors. These changes have the potential to significantly alter the monitoring and control of the majority of listed firms that until now have been controlled by tightly held blockholders of non-tradable shares. It is therefore timely to reassess the corporate governance of Chinese listed firms. This paper reviews the theoretical and empirical corporate governance literature in China.
We examine the diversification patterns of almost all publicly listed non-financial companies in China during the 2001 to 2005 period. More than 70 percent of the firms in our sample are diversified. We document that patterns of diversification strongly depend on firms' political connections. Former local bureaucrats are more likely than other CEOs to enter multiple industries. This effect is particularly pronounced in state-owned enterprises (SOEs) that operate in weak institutional environments. These companies are particularly prone to entering low-growth, low-profitability, and unrelated industries. Consequently, the performance effects of diversification differ sharply across SOEs and private firms. While the latter earn a premium from diversifying their operations, SOEs do not. Our results are consistent with the view that provincial and local governments push Chinese SOEs into unattractive sectors of the economy and that politically connected CEOs use their relationships to build corporate empires.
We study the relationship between firm value and related party transactions (RPTs) in China. We find that firm value (as measured by Tobin's Q) is negatively related to RPTs but the relation becomes insignificant after controlling for corporate governance characteristics. Following Cheung, Rau and Stouraitis (2006), we use abnormal returns in response to announcements of RPTs as a direct measure of the impact of RPTs on firm value. We observe significantly negative abnormal returns before the Share Structure Reform. After the reform, the abnormal returns become insignificant. The evidence suggests that RPTs are not as detrimental to firm value after the reform as they were before the reform. This is consistent with our hypothesis that the reform increases the takeover pressure from external market and thus moderates controlling shareholders' propensity to tunnel wealth via RPTs.
We examine changes in market values and accounting returns for a sample of publicly traded Chinese firms around announcements of block-share transfers among government agencies ("State Bureaucrats"), market-oriented State-owned enterprises ("MOSOEs") and private investors ("Private Entities"). We provide evidence that transfers from State Bureaucrats to Private Entities result in larger increases in market value and accounting returns than transfers to MOSOEs. We also find that CEO turnover occurs more quickly when shares are transferred to Private Entities. Moreover, we find that the changes in firm value and accounting returns as well as the likelihood of CEO turnover are all functions of the incentives and managerial expertise of the new block holder. We conclude that corporate governance can be improved at State-controlled firms by improving the incentives and managerial expertise of controlling block holders, and that this is better accomplished by transferring ownership to private investors rather than by shuffling ownership among State controlled entities.