Ownership Structure and Corporate Governance among Chinese Securities Firms

This study examines the impact of corporate ownership structure on the board of directors of securities firms in China. Using a sample of 369 Chinese securities firms from 2003 to 2005, we find that securities firms that are owned by local governments and state-owned enterprises experience more managerial expropriation due to insider control, whereas such firms that are privately owned are more likely to suffer from block holder expropriation. We also find that privately held firms are more likely to hold board meetings frequently and form specialized committees than local government and stateowned enterprises, providing shareholders with more protection against managerial expropriation. Introduction This paper investigates whether the characteristics of ownership structure of securities firms in China affect their corporate governance through agency costs. We study whether two types of agency costs, managerial expropriation and block holder expropriation are a function of the ownership structure of Chinese securities firms. We divide Chinese securities firms into four groups based on their ownership structure, which we have denominated as an Origin group, a Separation group, a Control group, and a Private group. Firms in the Origin group and Separation group are state-owned, while those in the Control group and Private group are privately owned by a block holder. We hypothesize that managerial expropriation is more prevalent in the Origin and Separation groups and block holder expropriation is more prevalent in the Control and Private groups. Our analyses focus on firms listed on the Shanghai Stock Exchange (SHSE) from 2003 to 2005. The results are consistent with our hypotheses. Firms in the Control group and the Private group experience more block holder expropriation due to domination of controlling shareholders, than do firms in the Origin group and the Separation. Firms in the Origin group and the Separation group experience more managerial expropriation due to insider control. Additionally, firms in the Control group and Private group are more likely to hold the "Three Meetings" (shareholders' meetings, directors' meetings, and supervisors' meetings) frequently and form specialized committees than firms in the Origin group and Separation group, providing shareholders with more protection against managerial expropriation. Firms in the Separation group are more likely to have specialized committees than are firms in the Origin group. The paper makes several contributions to the corporate governance literature. Previous studies have focused on the consequences of corporate governance and investigated how ownership structure affected firms' performance (Agrawal and Knoeber, 1996; Mak and Li, 200 1 ; Balatbat et al., 2004; Yeh and Woidtke, 2005 ; Hui and Zhao, 2008; Ragothaman and Gollakota, 2009; Chalhoub, 2009), executive turnover (Dahya et al., 1998), and the informativeness of earnings (Yeo et al., 2002). While these studies have provided insights into the importance of ownership structure, they have not considered possible mediators, such as governance mechanisms or agency costs. This paper explores possible relationships between ownership structure and corporate governance, providing evidence that ownership structures may affect firms' performance by inflicting agency costs. Also, this study was performed in a unique experimental setting. China's securities firms have unique variations in their ownership structures which are not found in more developed market-driven economies. Performing an archival-based analysis in such a stark setting is analogous to conducting laboratory experiments and analytical studies that minimize the set of experimental variables in order to focus on a minute set of factors (DeFond et al. 1 999). Our findings suggest that ownership structure has an innate ability to affect the efficiency and effectiveness of corporate governance. When the primary incentive for securities firms to better their corporate governance mechanisms is heavy regulation and the threat of government penalties, firms with certain ownership structures are less likely to be well-governed and therefore are more prone to scandals. …