DBJ Discussion Paper Series, No. 1702

Corporate Governance and Corporate Performance
under Market Socialism:
Empirical Analysis of Listed Companies in China

Le Wang(Graduate School of Commerce and management,
Hitotsubashi University)
Qun Liu（Hitotsubashi University Research Center for East Asia Policy）
Masaharu Hanazaki(Graduate School of Commerce and management,
Hitotsubashi University)

September 2017

Discussion Papers are a series of preliminary materials in their draft form. No quotations,reproductions or circulations should be made without the written consent of the authors in orderto protect the tentative characters of these papers. Any opinions, findings, conclusions or
recommendations expressed in these papers are those of the authors and do not reflect the viewsof the Institute.

Corporate Governance and Corporate Performance under Market Socialism: Empirical
Analysis of Listed Companies in China

Le Wang※

Qun Liu✝

Masaharu Hanazaki※

This research quantitatively analyzes the relationship between the presence of government inownership structure and the corporate board, and corporate performance and corporate behavior,using financial data for all listed non-financial firms in China from 2000 to 2014. We findgovernment ownership and corporate performance has a non-linear U-shaped correlation. We
then classify the sample firms into two groups based on whether their chief executive officers(CEOs) and independent directors are government officials, and empirically examine thedifference in corporate behavior between the two groups. We find that government-affiliatedCEOs aggravate corporate profitability, growth potential, and financial strength, but
independent directors have no considerable influence on these factors. This shows that the
government enforces its policy effectively via human resource management (HRM).

Key words: Corporate Governance, Market Socialism, Board of Directors.
JEL codes: G34, H70, P34.

※

Wang and Hanazaki: Graduate School of Commerce and management, Hitotsubashi University.

✝

Liu: Hitotsubashi University Research Center for East Asia Policy.

 This paper is an output of the Hitotsubashi-DBJ Joint Research Project. We would like to thankProf. Hideaki Miyajima and the other participants of the DBJ seminar held on August 7, 2017 forthe constructive comments.
11. Introduction

In 2014, the Chinese economy, which had sustained high growth for 20 years, began to slow down.
It is critically important to examine the function and role of corporate governance, on which thegovernment has strong influence, to determine whether to investigate the reasons for the socalled miracle economic growth, or to measure the policy responses to the new difficult phase.

As the biggest market socialist country in the world, China’s economy is most distinguished by
the initiatives taken by the government. Many researchers have shown the effects that the
Chinese government as a shareholder has on firms. This research suggests various correlations
between government ownership and performance of firms, such as positive, negative and Ushaped. However, the mechanism by which the government as a large shareholder affects
performance remains largely unknown.

This research quantitatively analyzes the relationship between the presence of government inownership structure and the corporate board, and corporate performance and corporate behavior,using financial data for all listed non-financial firms in China from 2000 to 2014. We findgovernment ownership and corporate performance has a non-linear U-shaped correlation. We
then classify the sample firms into two groups based on whether their chief executive officers(CEOs) and independent directors are government officials, and empirically examine thedifference in corporate behavior between the two groups. We find that government-affiliatedCEOs aggravate corporate profitability, growth potential, and financial strength, but
independent directors have no significant influence on these factors. This shows that the
government enforces its policy effectively via human resource management (HRM).

The rest of this paper is organized as follows. Section 2 surveys previous studies. Section 3
2

describes the formal changes in the corporate governance system of China’s listed firms, andpresents our hypotheses. Section 4 describes the data and variables used in this research. Section
5 presents the regression results. Section 6 offers concluding remarks.

2. Survey

2.1 Role of Government

Shleifer and Vishny (1998) discuss the “grabbing hand” of government under various economic
systems. They demonstrate that politicians tend to take advantage of the system to pursue theirown interests, and recommend the privatization of state-owned enterprises. Estrin and Perotin(1991) argue that as the shareholder of firms, government gives preference to its political andeconomic interests over maximization of the firms’ value. The authors particularize “prevalenceof public service,” “redistribution of wealth,” and “employment maintenance” as the political andeconomic interest. However, these interests might be inconsistent with each other, and might bemodified frequently. Again, these factors decrease the effectiveness of state-owned enterprises.
On the other hand, Qian (2003) analyzes economic reform in China, and concludes that local
governments contribute significantly to promoting the growth of the private economy as a resultof protecting township–village enterprises to secure their fiscal revenue and increasing public
investment.

The results of the empirical analysis with respect to listed firms in China are not uniform.
Huyghebaert and Wang (2012) state that firms with high government ownership have moretransactions between interested parties and more labor surpluses, which is consistent with thetheory of the “grabbing hand.” Bai et al. (2004) demonstrate that a firm whose largest
shareholder is government present lower corporate value. Chen and Al-Najjar (2012) argue that3the higher is the ownership that the government holds, the more inefficient is corporate
management and the more severe are agency problems. In addition, the authors point out thatthe efficiency of the monitoring mechanism worsens and the compensation of board members
increases in the case of high government ownership.

On the other hand, a large number of researchers study the “helping hand” of government. Liuet al. (2012) study 970 listed firms before and after the world financial crisis of 2008, and findthat state-owned firms (whose controlling shareholder is government) did not perform worse
during the crisis period compared to usual business periods, although their performance isusually bad. The authors show a U-shaped relationship between large shareholder1 ownershipand firm performance, that is, expropriation tends to occur when the large shareholders’ownership is low, but improved resistance to crisis can be expected when the large shareholders’ownership is high. Similarly, Tian and Estrin (2008) point out a U-shaped relationship between
government ownership and corporate performance. The authors show that when government
ownership increases, voting rights and cash flow rights become higher simultaneously2, which
alleviates the agency problem. In particular, under such circumstances as in China, where thequality of law enforcement is low, governance of large shareholders is expected to be high.
Blanchard and Shleifer (2001) demonstrate that compared with Russia, China’s private economy
has developed rapidly, and help from local government plays an important role.

2.2 Influence of CEO Characteristics on Corporate Management

In China, a series of reforms has been accomplished regarding central government-owned
enterprises (nearly 100% controlled by central government) and partly state-owned enterprises,

1 Large shareholders are defined as those whose shareholding ratio is more than 5%.
2 Divergence between voting rights and cash flow rights is rare in China.

4although improvement of management efficiency remains a major problem. Qian (2003)
attributes the failure of these reforms to the appointment of government bureaucrats as firmmanagers. First, the government bureaucrats or ex-bureaucrats who are appointed as firmmanagers do not have excellent management skills. Second, the appointments are political andopaque, and do not comply with general assessment criteria of the market. Third, government
bureaucrats usually give preference to political objectives over improvements of management
and corporate performance. In other words, if CEOs are government affiliated, they work strictly
as government’s grabbing hand.

Because most CEOs of listed firms are bureaucrats appointed by government in China, if thecontrolling shareholder is government, the relationship of CEOs and government becomes evencloser. Fan et al. (2007) analyze 790 firms that went public and were partly privatized between
1993 and 2001. The authors define a CEO who used to belong to the central government, local
government, or military force as a government-affiliated CEO, and find that corporate
performance in terms of both share prices and financial indexes are worse in the governmentaffiliated CEO’s firm. In addition, the authors show that in the government-affiliated CEO’s firm,
the corporate board has more government officials, less experts, and higher average age of board
members.

With respect to CEOs’ shareholding ratio, Liu et al. (2012) indicate that the higher is theshareholding ratio of the CEO or director, the better is the performance during the financial
crisis. On the other hand, Chen et al. (2010) show that in firms whose CEOs hold shares,
compensation of directors is increased, adhesion with government bureaucrats is facilitated andvalue of corporate assets is compromised. However, generally in China, it is rare for insiders to
own treasury stock, and stock options are not prevalent.

5Non-government-affiliated CEOs can be divided into insider and outsider CEOs. Shapiro et al.
(2015) analyze the data of 390 enterprises in Zhejiang province, most of which are small andmedium sized, to indicate that outsider CEOs tend to oversee greater innovation. On the other
hand, there remains little research on the effects of insider CEOs on corporate performance for
Chinese enterprises.

There is a large amount of research relating to corporate performance when CEOs concurrently
serve as presidents or vice-presidents. When a firm’s CEO also works as the president of the firm,
the recurring cost and agency cost are both high (Yu & Ashton, 2015). When a firm’s CEO also
works as the president or vice-president of the firm, the corporate value becomes low (Bai et al.
(2004)).

2.3 Corporate Board of Directors and Independent Directors

Chen and Al-Najjar (2012) examine the size of the corporate board and the independence of
directors, and find positive correlation between the number of directors and the scale of thesupervisory board, the size of the firm, and corporate value, and negative correlation between
the number of directors and concentration of ownership. Independence measured by the rate ofindependent directors is correlated negatively with the scale of the supervisory board and theshareholding ratio of government. The authors interpret the results in two ways. First, the scaleof the supervisory board, the shareholding ratio of government, and the role of independent
directors are alternative to each other in terms of monitoring function for managers. If thegovernment as a large shareholder were to carry out the monitoring function for managers, theagency problem would be alleviated and it would be possible to reduce the number of independent
directors in the meantime. Second, from the perspective of the “grabbing hand” theory, thegovernment is the controlling shareholder. If the government expropriated minority shareholders
6

or impaired corporate value, it would intentionally lower the independence of directors to avoid
monitoring. As stated earlier in this section, independent directors can alleviate the agency
problem, and increase corporate value.

On the other hand, Stewardship theory indicates that independent directors who are outsiders
find it relatively difficult to cooperate with managers who are insiders or other directors, andindependent directors have a negative impact on corporate performance. However, Tian and Lau(2001) demonstrate that independent directors do not affect corporate performance at all withregard to listed firms in China. In addition, Cheung et al. (2008) analyze listed firms in China bycreating governance indexes based on the OECD Principles of Corporate Governance, and showthat governance indexes, such as composition of the board of directors, have no effect on corporate
value at all.

In China, it is quite common for the government to appoint management and directors for listed
firms. Many independent directors are bureaucracy retirees. They are cozy with the controllingshareholders of government and consider remaining loyal to the government as their allegiance(Huyghebaert & Wang, 2012). However, there is no research yet on the position of these
independent directors.

3. Transition of Corporate Governance in China and Hypotheses

China’s market transition has extended over 30 years since it launched economic reforms at theend of 1978. China’s economy has been transformed by successive waves of economic reform.
Extensive institutional reforms, such as transfer of authority from central government to local
government, tax and fiscal reform, partial liberalization of commodity prices, development of
capital markets, and privatization of state-owned enterprises, have been carried out. However,7

in the following subsection, we focus on the adoption of a modern enterprise system.

3.1 Adoption of Modern Enterprise System

The adoption of the Company Law 3 in 1994 signaled the start of China’s modern enterprisesystem. The organizational structure is the same as that in developed countries in terms ofshareholders’ meetings, boards of directors and supervisory boards, management, obligations,and authorities. However, the dissimilarity in the case of wholly state-owned enterprises is thatthey are 100% held by the government. As a single shareholder cannot hold a shareholder’smeeting, a board of directors exercises part of the authority of a shareholders’ meeting, and thegovernment sector or agency appointed by the government to oversee the company carries voting
rights on important issues.

However, adoption of the modern enterprise system has not been successful in China. In
particular, replacement of management and delegation of authority has led to problems. Under
the old enterprise regime, a communist party committee, employee representation committee,
and labor union committee, referred to as the “three old committees,” held voting rights regarding
the corporate’s operations. The members of the “three old committees” could mutually beappointed to the board of directors, supervisory board, or management, referred to as the “three
new committees” under the new enterprise regime. For instance, the board of directors andsupervisory board must include employee representatives, and cadres of the communist party
committee could serve as directors and auditors. In addition, if a member of the “three newcommittees” were a communist party member, he/she could join the communist party committee,
as per the Decision of the Central Committee of the Communist Party of China on Major Issues
Concerning the Reform and Development of State-Owned Enterprises (hereafter, the Decision).

3 Company Law of People’s Republic of China.

8As a result of mutual entering, power became too concentrated to supervise. There are an
increasing number of firms whose chairpersons concurrently serve as president, and in somecases, concurrently as party secretary. To break up the concentration of power, the Decisionenables the party secretary and president to serve concurrently, but the chairperson and CEO
cannot serve concurrently in principle. Although the Company Law allows an additional post, inthe case of listed firms, as long as a reasonable excuse is disclosed, the president can also serveas the chairperson, as is presently the case.

As stated in this subsection, CEOs of listed firms, and in particular, of state-owned-enterprises,
have significant power and collaborate closely with the government. Consequently, the CEO issignificantly affected by the government. When the government prioritizes political motivation,
firm performance is inhibited and corporate value is sacrificed. Consequently, we propose thefollowing hypothesis.

Hypothesis 1. A government-affiliated CEO operates the firm in compliance with the politicalmotivation of the government, not for the purpose of maximizing corporate value, and thereby
decreasing corporate value.

3.2 Introduction of Independent Directors

Independent directors were introduced as an option for listed firms in 1997. There were only 27
firms that introduced independent directors in 1999, but this had increased to 70 in 2000, andmore than 200 by June 2001. The Guidelines for Introducing Independent Directors to the Boardof Directors of Listed Companies were issued in August 2001, according to which, listed firms
had to introduce at least two independent directors by June 30, 2002, and one-third of the total
9

board by June 30, 2003.

A higher degree of independence of outside directors is required in China compared to Japan. In
addition, the Guidelines for Introducing Independent Directors to the Board of Directors of Listed
Companies established strict limitations on qualification; for instance, independent directors

must have expertise in law, accounting, or economics, and related work experience, as well as
being independent. First, in order to ensure independence from the firm, employees or relativesof employees of listed firms cannot become independent directors. Second, in order to ensure
independence from the shareholder, people who hold more than 1% of shares, the largest 10
shareholders, and their relatives cannot become independent directors. Third, the people who do
not satisfy the above two conditions but provide consulting services in law and accounting to thefirm are not eligible. The appointment process of independent directors is decided by voting at
the general shareholders’ meeting, but candidates are recommended by the board of directors,
the supervisory board, or the shareholders. Therefore, recommendations of candidates’ and theirselection are strongly influenced by major shareholders.

Under the regulations, it is stipulated that shareholders and their stakeholders cannot become
independent directors, but the definition of stakeholders of shareholders is ambiguous if theshareholder is government. According to a provisional regulation concerning the supervisory
control of state-owned enterprise assets issued on May 27, 2003, the State Council (central
government) and the people’s government (local government) established their own state-owned
assets supervision and management organizations to exercise their functions and responsibilities
as shareholders. According to this provision, the State Asset Supervision and Administration
Commission (SASAC) is the shareholder of state-owned enterprises rather than the government.
In other words, an individual who is not a staff member of the SASAC and its stakeholders is
10

eligible to be an independent director. As can be observed from previous studies, there are manycases in China in which bureaucrats are appointed after retirement. Consequently, the following
hypothesis is proposed.

Hypothesis 2. Government independent directors are susceptible to the influence of thegovernment, leading to declines in the monitoring of corporate management and corporate
performance.

3.3 Reform of Stock Ownership Structure

Prior to 2005, the shares of Chinese listed firms were divided into two types: tradable shares thatcan be traded on the capital market and non-tradable shares that cannot. In the early 1990s
when stock exchanges were established in Shanghai and Shenzhen, regulations concerning theinitial listing had not yet been developed, and thus, entrepreneurs could buy their own sharesand keep them, making it impossible for shares in the firm to trade in the open market. Such
non-traded shares owned by individuals were only a part of this picture; most were state-owned
stocks held by the government or state-owned enterprises. When state-owned enterprises werelisted, in order to prevent the government from losing control of the company, the government
deliberately created non-tradable stocks. Since then, because there is no clear definition of theshareholders of state-owned enterprises, the status of non-tradable shares has been maintained.

In China, tradable stocks are classified as follows depending on whether the investor is a nationalor foreigner, and on which stock exchange market the stocks are issued. A shares are stocks thatcan be openly transacted in mainland China. B shares are stocks originally listed on domestic
stock exchanges for foreign investors, but in which it is now also possible for domestic investors
to invest. In addition, H shares, N shares, and S shares are the shares of companies listed in
11

Hong Kong, New York, and Singapore respectively. Non-tradable shares cannot be traded in the
open market, but can be traded between corporations only with the permission of the China
Securities Regulatory Commission4.

On September 4, 2005, the certification board announced the “Circular of China Securities
Regulatory Commission on Distributing the Measures for the Administration of the Share-trading
Reform of Listed Companies” (hereafter, Administration Measures), as a result of which, non-tradable shares were reformed to allow trading alongside tradable stocks. A specific concretereform plan was created for each company, and it could be implemented if approval was received
from the general shareholders’ meeting. By the end of 2007, these plans had been implemented
in 97% of companies (Lit et al., 2011). However, transactions cannot be made immediately uponcompletion of approval of procedures for non-tradable stock transactions. The Administration
Measures stipulated that within 12 months of implementing the reform plan, sale of non-tradable
shares within a range not exceeding 5% of the total number of shares is possible, and within 24
months, sale of non-tradable shares within a range not exceeding 10% of the total number ofshares is possible. State-owned enterprises are more strictly restricted. On June 30, 2007, the“Interim Measures for the Administration of State-owned Shareholders' Transfer of Their Shares of
Listed Companies” (hereafter, the Interim Measures) were announced, which stipulate that whenselling non-tradable shares of state-owned shareholders, the following two conditions must be
satisfied:
1) for companies with less than 1 billion shares, less than 5% of shares can be sold in 3
consecutive fiscal years and for companies with more than 1 billion shares, 50 million sharesor less than 3% can be sold in this timeframe; and2) it is impossible to transfer control rights of listed companies.

4 There are few transactions between individuals but they do exist.

12

As mentioned above, the ownership structure for state-owned enterprises has been mainlyreformed, but there is little research on its effects. Most data used in previous research on thegovernment shareholding ratio and corporate performance are from before 2005, and thus,
cannot include the impact of the reform of the ownership structure. Therefore, in this study, weinvestigate this issue using data from 1999 to 2014. Based on previous studies, we propose thefollowing two hypotheses on the “grabbing hand” and “helping hand.”

Hypothesis 3. The higher is the government shareholding ratio, the easier it is for corporate
value, and thereby corporate performance, to decline.

Hypothesis 4. The higher is the government shareholding ratio, the easier it is for companies toobtain production resources by utilizing close relationships with the government, thereby
improving corporate performance.

Related to Hypothesis 1 on government CEOs and Hypothesis 2 on government independent
directors, the government’s alternative roles as the “grabbing hand” or “helping hand” arepossible. We attempt to find some evidence for these roles in the following sections.

4. Data and Variables

4.1 Data Description

We collect financial data from China Listed Firms’ Corporate Governance Research Databaseprovided by GTA (CSMAR Solution) from 2000 until 2014. This comprehensive database includes
all companies listed on the Shanghai and Shenzhen stock exchanges.

13

Information on corporate governance, such as that on shareholders and executives, is used 1 year
ahead of the financial data. Therefore, corporate governance data are required from 1999 to 2013,
although we use data on only three time points, for 1999, 2006, and 2013, because it takes time
to manually collect and classify the attributes of CEOs and independent directors.

With respect to target companies, we include 347 chemical companies, 321 electromechanicalmanufacturing companies, 209 general machine manufacturing companies, 175 information andcommunication industries, 164 construction and real estate companies, 131 commercial
companies, 100 service companies, 96 transportation equipment manufacturers, 45 mining
companies, and 22 transportation companies from 10 industries. In total, for 2014, 1610
companies out of 2586 companies listed on both exchanges are included in the dataset 5 . In
addition, considering survival bias, we target new entry companies and companies that havedelisted during the period of study.

4.2 Definition of Variables

Explained variables are two corporate performance measures, namely, return on assets (ROA)
and return on equity (ROE), one growth measure, that is, Sales Growth, and one financial
structure measure, that is, DEBT (debt ratio).

Much previous research on listed companies in China focuses on evaluating corporate value andcorporate performance using stock price data; however, in this study, we use only corporate
financial data. The main reason is that China’s capital market is still incomplete, the stock pricefluctuates drastically, the stock turnover rate is high, and the average holding period is short,

5 This number is based on 2014, and when tracing back to the past, the number of companies

decreases. There are only governance data for only 949 companies in 1999.
14and thus, the stock price cannot reflect corporate performance correctly. In fact, some studies(Bai et al., 2004; Yu & Ashton, 2015) point out that financial information accurately represents
corporate performance rather than market information, such as stock prices.

The key explanatory variables that represent the structure of corporate governance are divided
into three groups: ownership structure variables, CEO attribute variables, and independent
director attribute variables.

We classify the top 10 shareholders into five types, and define the ownership ratio of each groupas the ownership structure variables. They are the State Ratio (ownership ratio of state andgovernment-affiliated corporations), Private Ratio (ownership ratio of private enterprises),Foreign Ratio (ownership ratio of foreign capital), Person Ratio (domestic individual ownership
ratio), and Director Ratio (ownership ratio of management and directors).

Previous research classifies the ownership ratio into four groups: national holding, domestic
corporation holding, foreign ownership, and individual holding. National holding is the same asState Ratio. However, domestic corporation holding is problematic, as it contains the ownershipof both government-affiliated corporations and private enterprises whose corporate attributes
are completely different. This is because the government might influence listed companies
through state-owned corporations. In this study, we analyze domestic corporations separately forgovernment-based corporations and private corporations. We examine the corporates’ annual
reports, and if the largest shareholder is the government or another state-owned enterprise, we
define the corporation as government affiliated, otherwise private.

In addition to the government’s shareholding ratio, we use the following two dummy variables toinvestigate the state-owned enterprise and the private enterprise: over50_dummy = 1 when more
15

than 50% of the company’s shares are owned by the government, and control dummy = 1 when
the largest shareholder is the government.

The variables regarding the CEO’s attributes are roughly divided into two types: “governmentbased” and “non-government-based.” The latter type is further divided into “insider” and“outsider.” A government CEO (state_CEO) is a CEO with some connection to the government.
An internal CEO (insider) is not related to the government, but has become the CEO after
performing various duties for the same company for a long time. An external CEO (outsider) is
CEO hired from the outside without a connection to the government or company.

Regarding government-based CEOs, the central government and local governments might havedifferent attitudes toward the company, different motivations for economic development, anddifferent degrees of influence from the government depending on the CEO’s last job. Therefore,
government-based CEOs are delineated further by their last jobs, indicated by the following fivedummy variables: Central_gov_CEO indicates a CEO from central government, local_gov_CEO
indicates a CEO from local government, state_rea_CEO indicates a CEO from a government
research institute, SOE_CEO indicates a CEO from a state-owned enterprise andCommu_com_CEO indicates a CEO from the Communist Party Committee.

In China, there are various research institutes belonging to central and local governments.
Among them, the Chinese Academy of Sciences and the Chinese Academy of Engineering, the socalled “the two academies,” are famous. Such research institutes provide consulting services to
the government and their relationship is very close. Therefore, CEOs from research institutes
are vulnerable to the influence of the government.

Moreover, in China, Communist Party organizations are spreading even to social organizations,16

such as schools and hospitals, and foreign capitalized companies are obliged to establish a
Communist Party branch organization. It is necessary to establish a branch committee when
there are seven or more members of the organization. Thus, listed companies always have a
Communist Party branch committee. If a Communist Party committee executive becomes CEO,he/she would certainly be vulnerable to the influence of the government.

There are cases in which there are duplications in the five categories of government CEOs. For
example, there are CEOs who belonged to the central government and who served as executivesof the Communist Party Committee. In such a case, considering the susceptibility of these CEOs
to influence from government, the central government and local governments should beprioritized. In other words, the central government and local government system should beselected first and if neither is applicable, then the CEO is classified in the remaining three
categories. The remaining three categories may have overlap.

The variables of the attributes of independent directors can be roughly divided into two types,“government based” and “non-government based.” The variables of the attributes of agovernment independent director are indicated as stateID, and the variables of an independent
director who is not government type as outsiderID. The attributes of government independent
directors are subdivided into five types, which are similar to the CEO attribute classification.
The five subdivided attributes represent the number of government independent directors withthe following variables: cenID is a variable representing the number of central government
independent directors; locID is that for local government; SOEID for state-owned enterprises;
reashID for government research institutes; and comID for the Communist Party committee.

Regarding control variables, there are possibilities of “economies of scale” and “diminishing effectof profit and growth,” and thus, we use the total assets (TASS) to control the company size. The
17

larger is the size of the board of directors, the more experts and the greater diversity of thedirectors are considered. On the other hand, as the number of people increases, latent problems
arise, such as free lighters, and many previous analyses have pointed out that monitoring
efficiency is poor. Thus, the size of the board of directors is controlled by the number of directors(board_number).

Many discussions have been held about the independence of the board of directors. One opinionemphasizes that in the case of high independence, as monitoring capability is superior, corporate
performance improves. On the contrary, the other viewpoint highlights negative effects, that themonitoring function and the advisory function of the independent director are restricted owing
to less accessibility to internal information, and the influence on corporate performance islimited. The number of independent directors, ID_number, is taken as a proxy variable of the
independence of the board of directors. We use the debt ratio DEBT to control the financial
strength of the company when analyzing the profitability and growth potential of a company. In
addition, based on previous research, we use the total shareholding ratio of the top 10
shareholders (top10) to control the concentration of a firm’s ownership structure. Generally, forcompanies with large shareholders, such as family companies, conflicts of interests between
major shareholders and minority shareholders are serious and corporate value is considered
impaired. However, in the case of developing countries, where the legal system is not complete
and the governance mechanism from the capital market cannot be demonstrated, highconcentration is evaluated as an effective alternative governance mechanism.

The intersection term of the governance variable and cash flow is a product of standardized cash
flow (or logarithmic cash flow) and the corporate governance variable. For example, theintersection term between the standardized cash flow (CASH/K or InCASH) and the government
holding ratio is cash_State, the intersection term with the government independent director is18

cash_StateID, and the intersection term with the government CEO is Cash_StateCEO, and soon. These intersection terms are set up to investigate whether the relationship with thegovernment can ease the financial constraint, as the degree of abundance of funds is considered
an important constraint for capital investment.

In accordance with prior research, the sign of the control variable is predicted as follows. The
higher the debt ratio, the more difficult it is to procure additional funds, making capital
investment difficult. According to the law of diminishing profit margin, capital investment
becomes passive as ROA and ROE decline when corporate size increases. If procurement of
external funds is difficult both qualitatively and quantitatively, capital investment is restrictedby the level of cash flow, and thus, the coefficient is expected to be positive. Regarding theinfluence on profitability and capital investment of the size of the board of directors and thenumber of independent directors, it is difficult to judge theoretically or empirically, because there
are two possibilities that could be both bad and good. Table 1 shows the definition of all variables
used in this study.

19

Table 1 Definition of Variables
Variable
Sales_growth

Sales growth rate

DEBT

Debt ratio

ROA

Operating income/total assets

ROE

Net income/capital

Variables of Ownership Structure
over50_dummy

Dummy variable, government holding ratio> 50% = 1

control_dummy

Dummy variable, government is the largest shareholder = 1

State_ratio

Government ownership ratio

Private_ratio

Private corporate ownership ratio

Person_ratio

Domestic individual ownership ratio

Foreign_ratio

Foreign capital ownership ratio

Director_ratio

Official shareholding ratio of company

20

Table 1 Definition of Variables (continued)
Attribute Variables of Independent Director
stateID

Number of people who are government independent directors (totalof the following five types)

cenID

Number of people who belonged to central government before

locID

Number of people who belonged to local government before

SOEID

Number of people who belonged to state-owned-enterprise before

reashID

Number of people who belonged to government research institutes(the Chinese Academy of Sciences, Chinese Academy ofEngineering, etc.) before

comID

Number of people, previous or present, who belonged to theCommunist Party Committee

outsiderID

Number of people who are non-government-based independent
directors

Attribute Variables of CEO
state_CEO

Dummy variable for government CEOs (the following five types)

central_gov_CEO

Dummy variable if belonged to central government before

local_gov_CEO

Dummy variable if belonged to local government before

state_rea_CEO

Dummy variable if belonged to government research institutes (theChinese Academy of Sciences, Chinese Academy of Engineering,etc.)

SOE_CEO

Dummy variable if belonged to state-owned-enterprise before

Commu_com_CEO

Dummy variable if, previously or presently, belonged to theCommunist Party Committee

insider

Dummy variable if an internal company person

outsider_CEO

Dummy variable if CEO hired from outside the company

Control Variables
TASS

Total assetsboard_number

Number of directors

Top10

Total shareholding ratio of top 10 shareholders

ID_number

Number of independent directors

21

4.3 Statistical Description

Table 2 presents the descriptive statistics. ROA, ROE, and sales growth rate are 7.32%, 13.06%,
and 20.54% on average, respectively, indicating rapid growth of the Chinese economy in recent
years. The debt ratio of 47% or more shows the high dependence of listed firms on bank loans in
China.

The majority of shares of approximately 27% of the companies in the sample are held by thegovernment. In more than half of the companies, the government is the largest shareholder.
Privatization is progressing but government control is still strong. As can be observed from theshareholding ratio, there is a limit to the degree of openness of China and the entry of foreign
capital remains low. As in previous research, there are few institutional arrangements, such as
executive holdings and stock options, and thus, the ratio of executive ownership is only 2.39%.
The total shareholding ratio of the top 10 shareholders is 56.24%, indicating that theconcentration of the corporate ownership structure is high. The government ownership ratio ofstate-owned enterprises is high, and in the case of private enterprises, the holding ratio of private
corporations or officials up to the second in charge is also high. With respect to independent
directors, some companies had not yet introduced them in 1999, and thus, the minimum value is0, but on average, there are three in each company, accounting for one-third of the average sizeof the board of directors. Half of the average three independent directors are government
affiliated. Most commonly, government CEOs are from state-owned enterprises, followed by local
government. More than half of the CEOs are government affiliated and 41% of the remainder
are non-government-based from inside the company. Only 15% are hired from the outside.

The correlation coefficients between variables are shown in Appendix 1. The correlation between
Over 50 _ dummy and control _ dummy, and that between Over 50 _ dummy or control _ dummy
22and the shareholder’s ownership ratio are high. Since the correlation between the government’s
ownership ratio (State_ ratio), the executive ownership ratio (Director_ratio), and theshareholder variable other than the foreign ownership ratio (Foreign_ratio) appears to be
somewhat high, individual regression analysis is undertaken.

23

Table 2 Descriptive Statistics
variable

mean

p50

min

max

sd

N

sales_growth

20.54

15.41

-61.95274.4636.39

17,448

DEBT

47.59

47.78

-19.47

199.6822.64

19,444

ROA

7.32

5.1

-99.86

99.65

13.5

19,624

ROE

13.06

8.87

-298.76

287.1728.63

19,578over50_dummy

0.27

0

0

1

0.45

15,428control_dummy

0.54

1

0

1

0.5

15,428

State_ratio

29.09

27

0

99.37

25.35

15,428

Private_ratio

17.03

5.17

0

91.64

21.3

15,428Person_ratio

5.91

0.5

0

76.52

13.93

15,428Foreign_ratio

1.82

0

0

71.56

5.85

15,428

Director_ratio

2.39

0

0

79.77

9.3

15,428

Table2 Descriptive Statistics (continued)
variable

mean

p50

min

max

sd

N

stateID

1.38

1

0

9

1.2

11,953

cenID

0.24

0

0

6

0.54

11,953

locID

0.45

0

0

4

0.71

11,953

SOEID

0.43

0

0

5

0.73

11,953

reashID

0.12

0

0

3

0.36

11,953

comID

0.22

0

0

3

0.47

11,953outsiderID

2.25

2

0

8

1.25

11,953state_CEO

0.52

1

0

1

0.5

13,474

central_gov_CEO

0.02

0

0

1

0.15

13,474

local_gov_CEO

0.1

0

0

1

0.3

13,474state_rea_CEO

0.02

0

0

1

0.13

13,474

SOE_CEO

0.23

0

0

1

0.42

13,474

Commu_com_CEO

0.17

0

0

1

0.38

13,474insider

0.41

0

0

1

0.49

13,474outsider_CEO

0.15

0

0

1

0.35

13,474

top10

56.24

57.57

0.6

100

15.82

15,4286,732.36 1,435.45

0.132390000

48,955.61

19,686TASS

24

board_number

9.1

9

4

19

2.05

15,407

ID_number

2.63

3

0

7

1.4

15,352

5. Regression Results and Discussion

5.1 Corporate Governance and Corporate Profitability

5.1.1 Estimated Model

We use the ordinary least squares (OLS) model, fixed-effects model, and random-effects model inour regression analysis. However, according to the results of Hausman test and F-test, fixed effectanalysis is the most desirable, and thus, we present only the results of the fixed-effects analysis
in this paper.

The basic equation to be estimated isProfitability = α + 𝛽1 Corporate Governance variable + 𝛽2 Control variables + 𝛽3 year（1）

+ 𝛽4 𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑦 + 𝜀

where:
Profitability: ROA, ROE
Corporate Governance variables: attribute variables of CEO, attribute variables of independent
director, shareholder ownership ratio variables, etc.
Control variables: top10 (ownership concentration). TASS (company size), DEBT (debt ratio),board_number (number of directors), and ID_number (number of independent directors),
Year: year dummy,
Industry: industrial dummy25Ɛ: an error term

5.1.2 Effect of CEO Attributes

Panels A and B in Table 3 show the analysis results of the influence of CEO attributes on the
profitability of the company. Focusing on the number of directors as the control variable, we
observe that corporate performance decreases as the number increases. This is the same result
as that of many previous studies, which find that the efficiency of deliberation and other actions
deteriorate as the number of directors increases. If both the size of the board of directors and thenumber of independent directors were included, since the signs and significance of the variablesof the size of the board would change, we avoid combining the two variables for future analyses.
If the number of independent directors were used as the control variable instead of the numberof directors, the significant effect on profitability would be lost (the results are omitted). This
result suggests that independent directors of Chinese listed companies do not perform theirmonitoring function properly and simply serve to bloat the organization.

Panel A of Table 3 presents the effects on profitability of government-born CEOs and CEOs fromoutside the company, compared to internal company CEOs. The result indicates that government
CEOs as a whole do not have a statistically different influence to internal company CEOs.
However, by subdividing government-affiliated CEOs into five categories, we observe asignificantly negative influence of CEOs who have worked at a state-owned enterprise, who have
served as executives in party committees, and who are from national research institutes, andtherefore, Hypothesis 1 is supported. Because the state-owned enterprise to which CEOs wereaffiliated were protected by the government and not exposed to market competition, themanagers of these enterprises were inefficient compared with the managers of private
enterprises in the same industry. With regard to CEOs of the party committee, as executives of26

the Communist Party, they have an obligation of loyalty to the government and Communist
Party, and have to prioritize their political and economic objectives over those of the company.
Furthermore, as observed from the transition of the system introduced in Section 3, executivesof the Communist Party committee have close relationships with workers’ representatives, andthus, it is possible that they sacrifice the profitability of the company by considering employees’
welfare benefits first. In addition, CEOs from research institutes might be experts in specificfields, but their management skills might not necessarily be excellent.

On the other hand, if the CEO is from the central government, the effect of significantly
improving ROE is observed. Among the five types of government-affiliated CEOs, government
influence is biggest for CEOs from central government. In China, the personnel management
system known as human resource management (HRM) controls the promotion route of people
who undertake important duties for the Communist Party of China (CCP). HRM is a means ofdominating companies and financial institutions through the personnel management of theCommunist Party. Although the government and Communist Party are separate from theorganization, the two hierarchies are related to each other while the central government andcentral committee are closely connected as the highest organizational tiers of the Communist
Party (Pistor, 2013). To that end, CEOs from central government strive to raise corporate
performance and achieve results with the aim of securing their own promotion.

Next, there is no significant difference between internal and external CEOs. With respect tointernal and external CEOs, many studies focus on developed countries, but less research has
been undertaken in China. The reason is that the ratio of external CEOs in listed companies in
China is only 12%, which is lower than the one-third of the U.S. (Murphy and Zabojnik, 2007).
Theoretical views on the relationship between external CEO and performance are divergent.
Some scholars indicate that external CEOs improve corporate performance, because they are27

more likely to introduce new ideas and strategic changes. However, some scholars argue thatexternal CEOs are more conservative than internal CEOs, because they cannot grasp company
information in the short term and lead to decreasing corporate performance (Balsmeier &Bushwald, 2015). Meanwhile, there is also a view (John, 1993) that emphasizes differences in
the initial purpose of appointment between external and internal CEOs. The external CEO isgenerally appointed when the company is facing management problems and is expected to carryout reforms, such as cost reduction, restructuring, and debt reduction. In the case of Chinesecompanies, further analysis about why external CEOs have no significant influence on
profitability is necessary to assess if the effects of both sides cancel each other out. Panel B
presents the results of the analysis with the target group of non-government CEOs. The results
are in line with the findings that CEOs from central government improve corporate profitability,
but CEOs from national research institutes, state-owned enterprises, and the Communist Party
committee have a negative influence on profitability.

Another control variable, that larger total assets are associated with lower profitability of thecompany, demonstrates that the effect of diminishing revenue is more effective than the effect of
economies of scale. The coefficient of the debt ratio is significantly negative, as expected fromtheory.

5.1.3 Effect of Independent Director Attributes

Panel C of Table 3 presents the analysis results of the attributes of independent directors on
profitability. As the number of independent government directors increases, ROE significantly
worsens, and therefore, Hypothesis 2 cannot be rejected. However, there are only a few cases inwhich the coefficients are statistically significant when categorizing the independent directors
further. Thus, independent directors in China do not necessarily play an important role in terms
28

of corporate governance.

5.1.4 Effect of Shareholder Attributes

Finally, Panel D of Table 3 shows the analysis results of the impact of shareholders’ attributeson the profitability of the company. The explained variable of Model 1-5 is ROA, and that of Model
6-10 is ROE. Comparing Models 1 and 2, or Models 6 and 7, when the government is the largest
shareholder, but its holding ratio is relatively low, the profitability of the company appears to below. However, if the government owns more than 50% of the company’s shares, the impact on the
profitability of the company becomes insignificant. This result is similar to a previous study
introduced in Section 3 showing a U-shaped relationship between the government’s shareholding
ratio and corporate performance. Therefore, in Models 5 and 10, we include the government’s
shareholding ratio and its squared term in the analysis. The result indicates that although theprofitability of the company worsens as the shareholding ratio of the government increases, thenegatively influence declines.

Models 3 and 8 compare the impact of various shareholders on companies’ profitability. In thesemodels, compared to individual investors, the higher are the shareholding ratios of private
corporate shareholders, executive shareholders, foreign investors, and government-affiliatedshareholders, the worse the companies’ profitability becomes. In general, individual investors in
China are found to be strongly speculative and do not hold shares over the long term; thus,
individual investors are considered not to have a positive impact on corporate performance owing
to their lack of enthusiasm for monitoring the enterprises. Appendix 1 shows that the possibilityof multiple collinearity exists because the government’s shareholding ratio is highly correlated
among other shareholders’ shareholding ratios. The coefficient of the government ownership ratio
becomes significantly negative in Models 4 and 9 when individually considering the effect of the29

government’s shareholding ratio. This result rejects Hypothesis 4 on the “helping hand” andsupports Hypothesis 3 on the “grabbing hand.”Regarding another explanatory variable, the top 10, the concentration degree of stockholding
structure shows significantly positive results in all analyses. Different from developed countries,
in China, where the legal system is not complete, the existence of major shareholders is evaluatedas a kind of effective governance means.

30

Table 3 Internal Governance and Corporate Profitability
Panel A Analysis Compared with Internal CEOs
Variable

ROA

state_CEO−0.247

outsider_CEO

0.048

ROA

ROE

ROE

0.55
−0.026

0.675

0.385

central_gov_CEO

1.064

6.225***

local_gov_CEO

0.491

1.478

state_rea_CEO−1.517*−5.913**

SOE_CEO−0.594**

0.794

Commu_com_CEO−0.526**−1.873**

top10

0.101***

0.101***

0.222***

0.224***

lnTASS−0.653***−0.643***−1.597***−1.564***DEBT−0.146***−0.146***−0.146***−0.144***

board_number−0.122**−0.122**−0.412**−0.424**_cons

10.710***10.627***13.454***13.116***

r2_w

0.136

0.138

0.038

0.039

N

12877

12877

12807

12807

Panel B Analysis Compared with Non-government CEOs
Variable

ROA

state_CEO−0.255

ROA

ROE

ROE

0.444

central_gov_CEO

1.069

6.154***

local_gov_CEO

0.495

1.413

state_rea_CEO−1.512*−5.992**

SOE_CEO−0.591**

0.747

Commu_com_CEO−0.522**−1.940**top10

0.101***

0.101***

0.222***

0.225***

lnTASS−0.653***−0.643***−1.601***−1.567***

DEBT−0.146***−0.146***−0.146***−0.144***

board_number−0.122**−0.122**−0.410**−0.423**_cons

10.719***10.621***

13.569***13.188***

r2_w

0.136

0.138

0.038

0.039

N

12877

12877

12807

12807

31

Note: * p<.1; ** p<.05; *** p<.0132

Panel C Attributes of Independent Directors and Corporate Profitability
Variable

ROA

ROA

stateID−0.167

ROE

ROE−.712**

cenID−0.0909−0.094locID−0.159−.977*

SOEID−0.0345−0.532

reashID−0.101−0.422

comID−.386*−0.729top10.129***.129***.254***.254***

lnTASS−1.43***−1.43***−3.19***−3.19***

DEBT−.144***−.144***−.126***−.125***

ID_number

0.02680.0245−0.412−0.427_cons

13.6***

13.6***

14*

13.8*

r2_w

0.141

0.142

0.04350.0436

N

11546

11546

11487

11487

Panel D Attributes of Shareholders and Corporate
Profitability
ROA

Variable
Model 1

over50_dummy
control_dummy

Model 2Model 3

ROE
Model 4Model 50.0472Model 6

Model 7

Model 8Model 9 Model 10−0.292−.685***−2.17***

State_ratio−.106*** −.0108**

Private_ratio−.0984***−.128*

Foreign_ratio−.0817**−.298***

Director_ratio−.0838***−.314***−.0427***

State_ratio2.0005**

33−.169** −.0371**−.156***.00186***

top10.111***.111***.206***.115***.109***.26***.237***

lnTASS−.472*** −.471***−.42***−.47***−.461*** −1.25*** −1.25*** −1.18*** −1.24***−1.21***

DEBT−.149*** −.149***−.149*** −.149***−.149*** −.156*** −.155*** −.157*** −.156***−.154***_cons

7.06***

7.55***

6.64***

7.21***

7.65***

4.75

6.33**

4.99*

5.3*

6.96**

r2_w

0.142

0.143

0.144

0.142

0.143

0.04130.04190.04270.04160.0422

N

15127

15127

15127

15127

15127

15050

15050

15050

15050

15050

Note: * p<.1; ** p<.05; *** p<.0134.249***.244***.391***

Table 4 Internal Governance and Corporate Growth
Panel A Attributes of CEOs and Corporate Growth
Variablesales_growthstate_CEO

sales_growthsales_growth−0.101sales_growth

0.302

central_gov_CEO

1.781

2.154

local_gov_CEO−0.0040.324

state_rea_CEO−13.858***−13.434***

SOE_CEO−0.173

0.069

Commu_com_CEO−1.943−1.592

outsider_CEO

2.596

2.01

top10

0.162***

0.165***

0.161***

0.164***

lnTASS

1.411*

1.428*

1.435*

1.447*

DEBT

0.091***

0.092***

0.092***

0.093***

board_number

0.092

0.074

0.08

0.066

_cons

−4.211−4.035−4.748−4.482

r2_w

0.041

0.042

0.041

0.042

N

12137

12137

12137

12137

Panel B Attributes of Independent Directors and Corporate Growth
Variablesales_growthstateID−0.691sales_growthcenID−1.93*

locID−1.75**

SOEID

0.741

reashID

1.6

comID

0.0501

top10.14***.142***

lnTASS

2.93***

3***

DEBT

.0673**.0693**

ID_number−0.398−0.28135

_cons

−16.1

−16.7

r2_w

0.041

0.0417

N

11181

11181

36

Panel C Attributes of Shareholders and Corporate Growth
Variablesales_growthsales_growthsales_growthState_ratio−0.189−0.0255−.217***

Private_ratio−0.177

Foreign_ratio−0.069Director_ratio

0.0906over50_dummysales_growth sales_growth−0.755

control_dummy−2.64**

State_ratio2.00299***top10.179***.17***.334***.182***.145***

lnTASS

2.14***

2.17***

2.25***

2.16***

2.18***

DEBT.0762***.0779***.078***.0766***.0801***_cons−9.78*−7.94−10.9**−9.43*

−6.64

r2_w

0.038

0.03830.03850.038

0.0386

N

14045

14045

14045

14045

14045

Note: * p<.1; ** p<.05; *** p<.01
5.1.5 Effect on Sales Growth Rate

Table 4 presents the results of the influence of internal governance on the sales
growth rate. There is no significant difference between government-affiliated CEOs
and non-government CEOs, and between internal and external CEOs. However,CEOs from national research institutes seem be associated with a decrease in thegrowth of the company. As mentioned above, it is possible that experts in a specificfield lack management skills, and that these experts might place emphasis on, forexample, R&D, rather than advanced growth. However, owing to data limitations, it
is difficult to estimate this possibility. In addition, independent directors from local
government are associated with lower corporate growth. This result suggests thatthe appointment of independent directors from local government does not provide
37the management team with an advice function, or an efficient monitoring capability.
When the government is the largest shareholder, the relationship between theshareholding ratio and sales growth is U-shaped. However, there are no significant
differences observed between the attributes of the five types of shareholders.

38Table 5 Internal Governance and Debt Ratio
Panel A Attributes of CEOs and Debt Ratio
Variablestate_CEO

DEBT

DEBT

−0.274DEBT

DEBT−0.551

central_gov_CEO−0.993−1.337

local_gov_CEO−2.419***−2.732***state_rea_CEO

1.183

0.792

SOE_CEO−0.17−0.396

Commu_com_CEO

0.545

0.22

outsider_CEO−1.759*** −1.860***

top10−0.066***−0.065***−0.065*** −0.064***lnTASS

3.658***

3.624***

3.645***

3.610***

0.177

0.17

0.182*

0.174

_cons

16.677***17.091***

r2_w

0.044

0.046

0.045

0.046

N

12883

12883

12883

12883

board_number

16.972*** 17.437***

Panel B Attributes of Independent Directors and Debt Ratio
Variable

DEBT

stateID

DEBT

0.0947cenID−.864**

locID

1.04***

SOEID−0.334

reashID−1.44**

comID−0.264

top10−.0421**−.0405**lnTASS

3.41***

3.39***

ID_number−0.0564−0.059_cons

19.4***

19.5***

r2_w

0.02090.0233

39

N

11551

40

11551

Panel C Attributes of Shareholders and Debt Ratio
Variable

DEBT

over50_dummy−1.37***

control_dummy

DEBT

DEBT

DEBT

DEBT

0.0112.169***

1.74***

State_ratio

0.033

Private_ratio

0.0271

Foreign_ratio−0.015

Director_ratio−.132**−.00247***

State_ratio2
top10−.0784***−.0899***−.114***−.0957***−.0649***lnTASS

3.85***

3.86***

3.86***

3.86***

3.81***_cons

17.3***

16.1***

17.5***

17.2***

14.9***

r2_w

0.0606

0.061

0.061

0.06020.0627

N

15135

15135

15135

15135

15135

Note: * p<.1; ** p<.05; *** p<.01
5.1.6 Effect on Debt Ratio

Table 5 presents the influence of internal governance on debt ratio. Panel A
indicates that CEOs from local government are associated with lower corporate
debt ratio. Many previous studies argue that corporate debt ratio is consideredhigh, since local governments provide funds to companies by pressurizing stateowned financial institutions for political purposes, such as regional economic
development and securing employment rates. Our results seem contrary to thoseof previous studies. However, our analysis on independent directors is consistent
with previous studies. In other words, the debt ratio is higher as the number of
independent directors from local government increases. The differences between
CEOs and independent directors in terms of effect of local governments are41

considered to be due to the different roles and responsibilities of CEOs andindependent directors. That is, independent directors only advise and utilize
personal human resources to make it convenient to receive corporate loans orinvestment. However, in the case of CEOs, corporate performance is closely tied
to their careers and remuneration, and thus, it is necessary for CEOs to adopt arisk avoidance attitude and consider the cost aspect of a high liability ratio.
People from local government are considered to have different effects on the debt
ratio owing to different jobs and responsibilities. Independent directors from
central government and national research institutes have a negative impact on
the debt ratio. We consider it reasonable to lower debt from a high average valueof about 50% of the debt ratio at the end of the high economic growth period.
Furthermore, the shareholding ratio and debt ratio of the government have an
inverted U-shaped relationship. From the perspective of improving financial
structure, it can be said that it is desirable to expedite privatization, but at thesame time, it is also a good choice to nationalize important companies instrategic industries.

5.2 Revalidation of Impact of Corporate Attributes, Internal Governance, andPerformance

In the previous Subsection 5.1, we analyze the influence of internal governance on
corporate performance using all samples. However, different corporate attributes
might mean that there are differences in the appointment of government CEOs
versus government independent directors. For example, the government might
dispatch government officials as officers to strengthen control over state-owned

42enterprises, but in the case of private enterprises, companies might hire government
officials to develop access to production resources. For this reason, in this subsection,
we classify enterprises into central state-owned enterprises, local state-owned
enterprises, and private enterprises, and undertake an analysis of these subsamples.

As a shareholder or investor of a state-owned enterprise, the SASAC works for theinterests and obligations, but central state-owned enterprises are managed by theState Assets Supervision and Administration Committee of the State Council, andlocal state-owned enterprises by the State Assets Supervision and Administration
Committee of various local governments. As mentioned in Section 2 on preceding
research, the government might act to impair the enterprise value of state-owned
enterprises for political or personal interests, but the political purposes of the central
and local governments are not consistent in the first place. Moreover, since theeffectiveness of the law decreases as it moves away from the central government, it
is considered that pursuing the interests of bureaucrats as individuals is likely inrural areas. Therefore, state-owned enterprises are divided into two types: central
state-owned enterprises and local state-owned enterprises.

There were 112 central state-owned enterprises that are directly managed by theState Assets Supervision and Administration Committee of the State Council in
2014. They are large-scale companies of core industries, such as China National
Nuclear Corporation, Aviation Industry Corporation of China, and China National
Petroleum Corporation. There were more companies before 2014, but the list of 112
companies is what is available from the website of SASAC for 2014. Most central
government-owned enterprises are 100% owned by the government, and many of43

them are unlisted companies. Instead of central state-owned enterprises, companies
funded by central state-owned enterprises and companies in which the government
ownership ratio accounts for more than half the top 10 are defined as central stateowned-affiliated enterprises in this study. State-owned enterprises that are notfunded by central state-owned enterprises are defined as local state-owned
enterprises, and the others are defined as private enterprises.

5.2.1 Statistical Description by Attributes

Table 6 provides a statistical description of the data. According to Table 6, we observe
there are many local state-owned enterprises and private enterprises. The central
state-owned-affiliated enterprises account for about one-third of local state-owned
enterprises. The latter enterprises have the highest profitability and growthpotential. Private enterprises appear to have a slightly lower debt ratio. The
government ownership ratio of private enterprises is about 6% on average, and the
maximum value is smaller than the average value of central state-owned and stateaffiliated enterprises and local state-owned enterprises. However, the size andindependence of the directors are almost the same, and the average number ofgovernment independent directors of 1.3 and 1.4, respectively, does not differ greatly.
Few private enterprises have government-affiliated CEOs. Private enterprises andlocal state-owned enterprises have ownership concentration of 55%, while central
state-owned and state-affiliated enterprises have ownership concentration of nearly
60%.

44

Table 6 Statistical Description by Attributes
Panel A Central State-Owned and State-affiliated Enterprises
variable

mean

p50

min

max

sd

N

ROA

5.42

4.14

−43.28

81.04

8.93

2349

ROE

9.42

8.08

−244.97168.35

20.51

2345

sales_growth

19.32

15.56

−61.49268.03

34.08

2157

DEBT

48.53

48.56

4.24

1.15E+02

19.79

2348

over50_dummy

0.61

1

0

1

0.49

1956

control_dummy

0.99

1

0

1

0.08

1956

State_ratio

53.27

54.27

19.21

96.15

14.4

1956

Private_ratio

2.77

0.72

0

33.66

4.73

1956

Person_ratio

0.57

0

0

20.44

1.87

1956

Foreign_ratio

2.05

0

0

39.06

6

1956

Director_ratio

1.25

0

0

41.52

5.32

1956

stateID

1.45

1

0

6

1.25

1493

outsiderID

2.24

2

0

8

1.25

1493

state_CEO

0.69

1

0

1

0.46

1841

insider

0.33

0

0

1

0.47

1841

outsider_CEO

0.06

0

0

1

0.24

1841

26,809.16

2,624.26

53.88

2.39E+06 132602.55

2350

board_number

9.67

9

5

19

2.15

1960

ID_number

2.72

3

0

7

1.57

1955

top10

59.91

60.19

20.42

98.68

14.7

1956

TASS

45

Panel B Local State-owned Enterprises
variable

mean

p50

min

max

sd

N

ROA

9.63

5.9

−99.86

99.65

15.59

10036

ROE

17.44

10.14

−259.81277.24

31.3

10028

sales_growth

21.33

15.81

−61.89274.07

36.28

8496

DEBT

49.35

49.67

−19.47196.89

21.34

9947

over50_dummy

0.49

0

0

1

0.5

6246

control_dummy

0.98

1

0

1

0.14

6246

State_ratio

49.04

49.7

2.82

99.37

15.93

6246

Private_ratio

4.19

1.24

0

37.68

6.47

6246

Person_ratio

0.94

0

0

21.54

1.94

6246

Foreign_ratio

1.07

0

0

40.72

4.11

6246

Director_ratio

0.61

0

0

33.75

3.04

6246

stateID

1.46

1

0

9

1.2

4401

outsiderID

2.12

2

0

8

1.23

4401

state_CEO

0.6

1

0

1

0.49

5437

insider

0.36

0

0

1

0.48

5437

outsider_CEO

0.12

0

0

1

0.33

5437

4,202.26

1,233.99

0.51 861733.56

18,488.70

10073

board_number

9.36

9

4

18

2.14

6239

ID_number

2.35

3

0

8

1.59

6209

top10

55.86

57.18

3.38

100

15.81

6246

TASS

46

Panel C Private Enterprises
variable

mean

p50

min

max

sd

N

ROA

4.74

4.52

−95.17

92.14

10.77

7239

ROE

8.14

7.91

−298.76

287.17

25.94

7205

sales_growth

19.95

14.74

−61.95274.46

37.22

6795

DEBT

44.83

44.46

0.71

199.68

24.88

7149

over50_dummy

0

0

0

1

0.05

7338

control_dummy

0.06

0

0

1

0.23

7338

State_ratio

5.94

2.5

0

47.18

7.97

7338

Private_ratio

31.64

33.07

0

91.64

22.58

7338

Person_ratio

11.51

1.75

0

76.52

18.58

7338

Foreign_ratio

2.4

0

0

73.44

6.96

7338

Director_ratio

4.16

0

0

79.77

12.62

7338

stateID

1.32

1

0

7

1.18

6170

outsiderID

2.35

2

0

8

1.26

6170

state_CEO

0.41

0

0

1

0.49

6308

insider

0.47

0

0

1

0.5

6308

outsider_CEO

0.19

0

0

1

0.39

6308

3,745.34

1,448.99

0.13530825

13,660.427263

board_number

8.73

9

4

19

1.86

7318

ID_number

2.85

3

0

6

1.09

7298

top10

55.66

57

0.6

100

16

7338

TASS

5.2.2 Analysis Results of CEOs by Company Attributes

Tables 7, 8, and 9 summarize the analysis results of central state-owned and stateaffiliated enterprises, local state-owned enterprises, and private enterprises,
respectively. Panel A of each table shows the relationship between attributes ofCEOs, profitability, and growth potential, Panel B of each table shows therelationship between independent director attributes and corporate performance,47

Panel C of each table shows the relationship between shareholders’ shareholding
ratio and corporate profitability, while Panel D of each table shows growth potential.

Compared with non-government-based internal CEOs, central state-owned andstate-affiliated enterprises and local state-owned enterprises are not significantly
different in impact on profitability measured by the three variables and growthpotential of companies. Meanwhile, for private enterprises, government CEOs areassociated with worse ROA. In addition, in comparison with internal CEOs, externalCEOs are associated with better ROA for central state-owned and state-affiliatedenterprises whereas for private enterprises, the result is the opposite. Whendecomposing government CEOs, different results are obtained depending on theattributes of the company. In other words, in the case of central state-owned andstate-affiliated enterprises, CEOs from the central and local governments generally
improve profitability and the growth potential of companies. On the contrary, thesame result cannot be found for local state-owned enterprises. In addition, CEOs of
private enterprises have a positive impact if they are from the central government,
but a negative impact if they are from local governments. The difference between
these results suggests that when a company is close to the central government, thelaw is highly effective and the link between corporate performance and CEOs’
personal political paths becomes closer. Therefore, government CEOs of central
state-owned

and

other

state-affiliatedenterprises

canimprove

corporate

performance, and for private enterprises, CEOs from central government are
preferable to those from local governments.

5.2.3 Other Analysis Results by Company Attributes

48

Government independent directors are associated with lower ROA for the central
state-owned and state-affiliated enterprises. In particular, independent directors
from local government are associated with lower profitability in terms of both ROA
and ROE. However, if the independent directors are from central government, theprofitability of local state-owned enterprises and private enterprises partially
improves. Independent directors strongly related to the central government are
believed to demonstrate an effective monitoring function. Regarding ownership
structure, there is no significant result in the case of central state-owned enterprises.
Coinciding with all samples, for local state-owned enterprises with the largest
number of samples, the government’s shareholding ratio and growth potential are
U-shaped. Although there does not appear to be a U-shaped relationship between
profitability and government holding ratio, when the largest shareholder isgovernment, profitability declines; if the government owns more than 50% of theshares, the coefficient becomes positive although it is not significant. For private
enterprises, the higher the shareholding ratio of the government is, the worse is thecompany’s performance.

Table 10 presents the results of internal governance of a subsample and the debt
ratio. Although notation is omitted for the control variable, the result is almost thesame as that for the whole sample. First, Panel A shows that CEOs from local
governments have a significant and negative effect on the debt ratio for all
enterprises, except for central state-owned and state-affiliated enterprises. Panel B
shows that the coefficients of independent directors from central government losesignificance, while independent directors from local governments increase the debt

49

ratio of companies for local state-owned enterprises. Furthermore, the relationshipbetween the government’s ownership ratio and the debt ratio is a non-linear U-shapefor central state-owned and state-affiliated enterprises, which is different from thewhole sample. In the case of private enterprises, there is a linear relationshipbetween the debt ratio and government holding ratio; that is, the debt ratio rises as
the government holding ratio increases. For private enterprises, it turns out thatwhen the government becomes a shareholder, the degree of tolerance for riskincreases and it is easy to procure funds, such as bank loans.

50

Table 7 Central State-owned and State-affiliated Enterprises
Panel A Attributes of CEOs and Performance
Variable

ROA

state_CEO−0.208outsider_CEO

1.856**

ROA

ROE

ROE

sales_growth

0.795
1.802**

sales_growth

0.898

4.034

3.099

−1.206−1.361

central_gov_CEO

1.535

6.479**

7.965

local_gov_CEO

2.104**

9.556***

11.141**state_rea_CEO

0.275

1.412

−14.388*

SOE_CEO−0.152−0.8027.135*

Commu_com_CEO−0.538−1.762−3.946lnTASS0.734**

0.713**

6.070***

6.019***

0.721

0.446

DEBT

−0.167*** −0.166***−0.417***−0.417***0.401***

0.411***

board_number−0.269*** −0.263***−1.008***−0.992***

0.662

0.81

top10

0.109***

0.097***

0.165**

0.122*

0.294*

0.279*

_cons

1.727

2.411

-24.097***−20.649**−33.803*−35.063*

r2_w

0.161

0.168

0.105

0.12

0.091

0.099

N

1743

1743

1740

1740

1653

1653

Panel B Attributes of Independent Shareholders and Performance
Variable

ROA

stateID−.566**

ROA

ROE

ROE

−0.244

sales_growthsales_growth

−1.77

cenID

0.0494

1.59

−2.67

locID

−2.1***−3.53***

−2.76

SOEID

−0.0503−0.274−1.14

reashID−0.473−5.56**

2.49

comID

−0.0618

2.98*−0.211lnTASS−0.188

DEBT−.164***−0.2695.12***

5.32***

1.52

1.27

−.163*** −.456***−.46***.332***.331***

ID_number−0.441

−0.18

−1.25

0.0992

−1.88

−1.65

top10

.112***.112***.206**.225**

0.275

0.25

_cons

10.1**

10.6**−21.8−25.1*

−37.9

−34.3

r2_w

0.162

0.178

0.09130.107

0.0964

0.0975

N

1419

1419

1416

1416

1391

1391

51

Panel C Attributes of Shareholders and Performance
Variable

ROA

over50_dummy−0.647

ROA

ROA

ROA

ROE

ROE

ROE

1.18**-0.344−0.394−3.79

control_dummy

ROE

−8.06

State_ratio−0.178

Private_ratio−0.127

1.3**

Foreign_ratio−0.167

1.5**

Director_ratio−0.216

1.01*

State_ratio2−0.1080.000615

0.00284

lnTASS.935***.915***.982***.966***

6.99***

6.97***

6.96***

7.08***

DEBT−.176***−.176***−.177***−.177***−.459***−.46***−.45***−.463***

top10.121***.107***

0.277.141***.185**.181***−1.03**

.211*

_cons

−2.63

1.7

−2.19

−0.516−40***−31.8***−38.5***−32.6***

r2_w

0.159

0.159

0.159

0.159

0.113

0.114

0.117

0.114

N

1913

1913

1913

1913

1910

1910

1910

1910

Panel D Attributes of Shareholders and Growth Potential
Variablesales_growthsales_growthState_ratio−1.96*−0.221

Private_ratio−1.86*

Foreign_ratio−1.59

Director_ratio−2.25*

over50_dummysales_growthsales_growth−6.36*−2.12

control_dummylnTASS

1.54

1.44

2.09

1.58

DEBT

.366***.363***.347***.36***

top10.444**.283*

2.21**

.474*

_cons

−36.6**−28.1−33.5**−30.6*

r2_w

0.08550.08390.08650.0843

52

N

1796

1796

Note: * p<.1; ** p<.05; *** p<.01

53

1796

1796

Table 8 Local State-owned Enterprises
Panel A Attributes of CEOs and Performance
Variable

ROA

ROA

state_CEO−0.169outsider_CEO

0.512

ROE

ROE

sales_growth−0.802

1.061
0.436

sales_growth

0.686

−1.23

0.298

−1.299central_gov_CEO

1.107

4.065

1.695

local_gov_CEO

0.546

3.045*−0.159state_rea_CEO−1.348−9.602**−16.656**

SOE_CEO−0.04

2.430*

0.434

Commu_com_CEO−0.483

−0.44

0.804

lnTASS1.101***

1.114***

1.476*

1.491*

2.899**

2.836**

DEBT−0.202***−0.201*** −0.313*** −0.313***

0.036

0.037

board_number−0.276***−0.282***−0.585**−0.653**−1.476***−1.536***

top10

0.114***

0.115***

0.245***

0.255***

0.270***

0.286***

_cons

1.054

0.841

−0.504−1.002−5.457−5.931

r2_w

0.188

0.19

0.049

0.052

0.04

0.042

N

5032

5032

5006

5006

4700

4700

Panel B Attributes of Independent Shareholders and Performance
VariablestateID

ROA

ROA

0.237

ROE

ROE

sales_growthsales_growth−0.795

0.339

cenID

.767**

0.343−0.397

locID

0.239

0.56

−1.6

SOEID

0.135

−0.11

0.412

reashID

0.181

0.627

1.65

comID

−0.231

0.267

−1.05

lnTASS

0.36

0.349

-1.83**−1.84**

3.83**

3.93**

DEBT−.219***−.22***-.249***−.25***

0.02190.0275ID_number−1.19***−1.18***

-1.17

−1.22

−4.64**−4.56**

top10.148***.144***.342***.343***.255***.255***

_cons

2.63

2.88

8.55

8.73

−3.94

−7.31

r2_w

0.2

0.201

0.05350.05360.04090.0413

N

4140

4140

4118

4118

4018

4018

54

Panel C Attributes of Shareholders and Performance
Variable

ROA

over50_dummy

ROA

ROA

ROA

ROE

ROE

ROE

ROE

0.00632.439**−0.0174

0.585−2.05**

control_dummy

0.265State_ratio−.223**

Private_ratio−.253**−0.0504

Foreign_ratio−.251**−0.169Director_ratio−.29**−0.262

State_ratio2−0.00697−0.0020.000269

lnTASS

1.29***

1.25***

1.34***

1.28***

1.57**

1.57**

1.58**

1.65**

DEBT−.204***−.204***−.205***−.204***−.273***−.273***−.272***−.274***

top10.0922***.106***.333***.0881***.26***.259***

0.264

_cons

−2.36

−0.548−3.32**−2.13−10.4*−10.7*−10.5*−12.5**

r2_w

0.185

0.185

0.186

0.185

0.0431

0.0431

0.04340.0424

N

6069

6069

6069

6069

6039

6039

6039

6039

Panel D Attributes of Shareholders and Growth Potential
Variablesales_growthsales_growthState_ratio−0.558−.979***

Private_ratio−0.62

Foreign_ratio−0.225

Director_ratio−1.04

over50_dummysales_growthsales_growth

−1.56
−6.75

control_dummyState_ratio2.00965***lnTASS

3.35***

3.26***

3.59***

3.55***

DEBT

0.007480.00949

0.00708

0.00872

top10.265***.242***

0.809.272**_cons−20.7**−13.1−22.7**−0.971r2_w

0.03280.033

0.03320.0349

55

N

5527

5527

Note: * p<.1; ** p<.05; *** p<.01

56

5527

5527

Table 9 Private Enterprises
Panel A Attributes of CEOs and Performance
Variable

ROA

state_CEO−1.035*outsider_CEO−0.848central_gov_CEO

ROA

ROE

ROE

sales_growth

0.063−1.022*

sales_growth

0.581−0.394−1.2678.404***

7.727***

2.147

16.162**

1.312

local_gov_CEO−2.437***−6.118**−2.882state_rea_CEO−4.674*−13.735*−16.86−2.638***−0.6641.595

1.553**−1.215−0.202

SOE_CEO
Commu_com_CEO
lnTASS−2.402***−2.419***−4.607***−4.558***2.203*

2.253**

DEBT−0.105***−0.106***−0.029−0.03

0.120***

0.122***−0.014−0.041

0.436

0.384

0.39

0.401

top10

0.112***

0.109***

0.297***

0.288***

0.023

0.018

_cons

20.347***21.216***18.429**20.160***−1.992−0.938

r2_w

0.153

0.158

0.053

0.056

0.044

0.044

N

6102

6102

6061

6061

5784

5784

board_number

Panel B Attributes of Independent Shareholders and Performance
VariablestateID

ROA

ROA−0.178ROE

ROE

sales_growthsales_growth−0.384-0.473

cenID

0.225

3.17**

−2.32

locID

0.247

−0.108−0.492

SOEID−0.191−0.8320.586

reashID

0.166−0.344

0.72

comID

−1.43***−3.11**−1.22

lnTASS−3.08***−3.11***−6.05***−6.13***

2.97**

3***

DEBT−.0741***−.0735***0.00734

0.00882.137***.136***

ID_number−0.166−0.0718−2.56*−2.65*

1.16

1.53

top10

.125***.128***.329***.338***

0.007390.00581_cons

21.1***

20.7***

31.2***

31***

−11.5

−12.7

r2_w

0.154

0.156

0.06130.0631

0.04390.0442

N

5987

5987

5953

5953

5772

5772

57

Panel C Attributes of Shareholders and Performance
Variable

ROA

ROA

over50_dummy(omitted)

ROA

ROA

ROE

ROE

ROE

ROE

(omitted)−1.31

control_dummy−2.11

State_ratio−.119***−0.0492−.293***

Private_ratio−.0658**−0.103Foreign_ratio

0.0227−.276*

Director_ratio

0.0251−0.0242−0.000231

State_ratio2−0.166−0.00204

lnTASS−2.32***−2.31***−2.23***−2.3***−4.26***−4.25***−4.13***−4.19***

DEBT−.103***−.102***−.101***−.102***−.0579***−.0569**−.0541**−.0539**top10.128***.128***.183***.131***.324***.324***.43***.337***_cons

17.2***

17.4***

16.4***

17.5***

15.6***

15.9***

15.8***

16.5***

r2_w

0.158

0.159

0.161

0.159

0.05630.05640.05820.0575

N

7145

7145

7145

7145

7101

7101

7101

7101

Panel D Attributes of Shareholders and Growth Potential
Variableover50_dummysales_growthsales_growthsales_growthsales_growth−.3*−.217*(omitted)−10.2**

control_dummyState_ratio
Private_ratio−0.0805

Foreign_ratio

0.13

Director_ratio

0.0979lnTASS

2.53**

2.62**

2.72**

2.6**

DEBT

.148***.152***.156***.153***

top10

0.06450.06430.136

0.0773

_cons

−3.67

−2.42

−4.87

−2.8

r2_w

0.04780.04870.0486

0.0482

N

6722

6722

6722

6722

58

Note: * p<.1; ** p<.05; *** p<.0159

Table 10 Internal Governance of Subsample and Debt Ratio
Panel A Attributes of CEO and Debt Ratio
CentralVariable

DEBT

state_CEO

1.574*

outsider_CEO

1.234

Local

DEBT

DEBT

Private
DEBT

DEBT−0.522DEBT−2.185**0.886−4.764*** −5.500***−1.386−0.849central_gov_CEO−1.492−1.7963.062

local_gov_CEO

1.441−3.002***−4.531***state_rea_CEO

1.082

1.401

10.660**

SOE_CEO−0.1350.672−2.786**

r2_w

0.229

0.23

0.082

0.086

0.028

0.031

N

1743

1743

5034

5034

6106

6106

Panel B Attributes of Independent Shareholders and Debt Ratio
CentralVariablestateID

DEBT

Local

DEBT

DEBT

.784*

Private
DEBT

DEBT

0.238

DEBT

0.513

cenID

−0.8780.421−0.648locID

11.85***

0.0467SOEID

1.44**−1.05*

1.02*

reashID−2.03−1.96**−1.74*

comID

0.129

−0.269

1.33

r2_w

0.174

0.179

0.02850.03580.02340.0249

N

1419

1419

4142

4142

5990

5990

Panel C Attributes of Shareholders and Debt Ratio
CentralVariableover50_dummy
control_dummy

DEBT

DEBT

Local
DEBT

DEBT

DEBT

Private
DEBT−0.854

0.736
−6.4

DEBT

DEBT

(omitted)
4.31**

7.11***

State_ratio−.481***−0.0523

State_ratio2.00355**−0.000345

60

DEBT

.239***

r2_w

0.259

0.259

0.262

0.09970.1

0.1

0.03750.04080.0416

N

1913

1913

1913

6073

6073

6073

7149

7149

7149

Note: * p<.1; ** p<.05; *** p<.01
5.3 Interaction between Management and Shareholders and Impact on Corporate
Performance
In Subsection 5.2, we analyze three types of enterprise: central state-owned andstate-affiliated enterprises, local state-owned enterprises, and private enterprises.
The CEOs of state-owned enterprises often come from government, but it is possible
they do not. The CEOs of private enterprises too also come from both government
and non-government. According to previous studies, the government creates
concrete paths to realize the “grabbing hand” through control of the corporate
management personnel. Specifically, government CEOs are affected by governmentbased shareholders, and the interaction between the management team andshareholders might lower the profitability of the company and shareholders.
Therefore, in this subsection, in order to determine the interaction between the
manager, the shareholder, and its influence, we use the interaction terms of the CEO
and the shareholder attributes variable as independent variables for analysis.

We define the non-government CEO (unstate _ CEO) as the inverse of thegovernment CEO (state _ CEO), with a value of 0 if the CEO is government based,
and 1 otherwise. Similarly, uncontrol_dummy is symmetrical with control_dummy,which has a value of 1 if the government is not the largest shareholder. Furthermore,
under50 is a dummy variable that takes a value of 1 if the shareholding ratio of thegovernment is less than 50%. Table 11 summarizes the definitions of 11 interaction
terms.

61

Table 11 Definition of Interaction Terms of CEO and Shareholder
Csta

Government CEO * “the largest shareholder is government” =state_CEO*control_dummy

unCunsta

Non-Government CEO * “the largest shareholder is notgovernment” ＝unstate_CEO*uncontrol_dummy

unCstaNon-Government CEO * “the largest shareholder is government”＝unstate_CEO*control_dummy

CunstaGovernment CEO * “the largest shareholder is not government”＝state_CEO*uncontrol_dummy

C50

Government CEO * “the shareholding ratio of the government ismore than 50%”＝state_CEO*over50

unCun50

Non-Government CEO * “the shareholding ratio of thegovernment is less than 50%”＝unstate_CEO* under50

unC50

Non-Government CEO * “the shareholding ratio of thegovernment is more than 50%”＝unstate_CEO*over50

Cun50

Government CEO * “the shareholding ratio of the government isless than 50%”＝state_CEO* under50

Table 12 presents the regression results of dependent variables (ROA and ROE) andindependent variables (CEOs’ attributes, shareholders’ attributes, and theirinteraction terms).

62

Table 12 Interaction of CEO and Shareholder and Profitability
Panel A Use of Largest Shareholder Variable
Variable

ROA (1)

unCsta−0.927**

ROA (2)

ROA (3)

ROA (4)

ROE (3)

ROE (4)−0.529Csta−0.5290.927**

0.529

unCunsta

0.927**−0.1330.794**

state_CEO
control_dummyROE (2)−0.927**

Cunstaunstate_CEO

ROE (1)0.133

uncontrol_dummy−0.515−0.794**−1.0441.044−0.886**

0.041

0.529

−2.120**−0.0410.886**

0.515−2.649**2.649**

2.120**

lnTASS−0.648*** −0.648*** −0.648*** −0.648*** −1.574*** −1.574*** −1.574*** −1.574***

DEBT−0.148*** −0.148*** −0.148*** −0.148*** −0.154*** −0.154*** −0.154*** −0.154***

top10

0.103***

0.103***

0.103***

0.103***_cons

9.112***

9.019***

9.905***

9.153*** 11.679***

r2_w

0.137

0.137

0.137

0.137

0.039

0.039

0.039

0.039

N

12922

12922

12922

12922

12851

12851

12851

12851

0.225***

0.225***

0.225***

0.225***

8.515** 11.164***9.559***

Panel B Use of 50% Ownership Variable
Variable

ROA (1)

unC50−0.869*ROA (2)

ROA (3)0.869*ROE (4)1.283
0.869*−0.3940.475*

state_CEOlnTASSROE (3)−1.283

unCun50

under50

ROE (2)−1.283C50

over50_dummyROE (1)−0.869*Cun50

unstate_CEO

ROA (4)0.394−0.454−0.475*0.103
0.650*** 0.650*** 0.650***−1.6671.737−0.1030.766**

1.298−0.7570.526−0.766**-0.650***

63

0.454

0.757
−1.590*** 1.590*** 1.590***−2.940***−1.054**

DEBT

0.148*** 0.148*** 0.148***-0.148***−0.154*** 0.154*** 0.154***

top10

0.099*** 0.099*** 0.099***

0.099***

0.225*** 0.225*** 0.225***_cons

9.091*** 9.462*** 9.566***

9.856***

10.057***8.846** 9.603***−0.157***22.744***

r2_w

0.137

0.137

0.137

0.137

0.038

0.038

0.038

0.033

N

12922

12922

12922

12922

12851

12851

12851

12851

Note: * p<.1; ** p<.05; *** p<.01
Table 12 shows similar results to those in Subsection 5.2, that corporate profitability
deteriorates when CEOs are from government. In addition, when government is thelargest shareholder, profitability deteriorates, but if the shareholding ratio of thegovernment surpasses 50%, ROA increases. The coefficients of non-governmentaffiliated CEOs and non-government-affiliated shareholders show opposite signs.

Regarding the interaction terms, we focus on the cases in which the dependent
variables are ROA, because significant results cannot be obtained in the case of ROE
being a dependent variable. First, ROA (3) of panel A of Table 12 indicates thatprofitability declines significantly when the CEO and shareholders are government
affiliated, but the coefficient of their interaction term is positive and significant,which suggests that the negative influence of the single variable of CEO orshareholder is alleviated. In addition, ROA (4) of panel A indicates that if both CEOsand shareholders are non-governmental affiliated, profitability increases. ROA (1)and ROA (2) of panel A show that if one of either CEO or shareholder is government
affiliated and the other is non-government affiliated, a negative impact is observed,
and the positive effect of non-government affiliation is impaired. As described above,
the interaction between the CEO and shareholder is confirmed, and in general, theprofitability of the company improves when both the attributes coincide.

64

5.4 Government CEOs and Benefits

Subsections 5.1–5.3 show that the influence from government CEOs is bad as awhole but the results are mixed when examined by attributes. In particular,
government-affiliated CEOs, such as those from the central government and local
governments, often play the role of improving profitability and growth potential anddecreasing the debt ratio, whereas CEOs from national research institutes often
exercise bad influence. However, since there is the possibility that employee welfare
is emphasized over profitability, we examine these hypotheses in this subsection.

First, we consider the hypothesis that welfare is emphasized at the expense of
corporate earnings. The only item in the cash flow table, which can be used owing todata constraints, is “benefit payable to employees.” By normalizing this item withthe sales of the company, we create an explanatory variable called “welfare.” We use
OLS, the random-effects model, and the fixed-effects model in our regression
analyses, creating three dummy variables of the central state-owned and stateaffiliated enterprise (Dcen), the local state-owned enterprise (Dloc), and the private
enterprise (Dpri), controlling company attributes and including five types ofgovernment CEOs as explanatory variables. From the Hausman test, only the
results of the fixed-effects model determined to be most desirable are shown in Table
13.

65

Table 13 Government CEOs and Employee Benefits
Variablewelfarewelfarestate_CEO−.221*

outsider_CEO−.344**

welfarewelfare−0.167−.353**

central_gov_CEO−0.168−0.103

local_gov_CEO−0.0368

0.0233state_rea_CEO−0.00976

0.0654

SOE_CEO−.475***−.432***

Commu_com_CEO−0.0399

0.0216Dcen−0.228−0.269−0.251−0.292

Dloc.755***.767***.761***.773***

lnTASS−2.28***−2.28***−2.28***−2.28***

DEBT.00999***.01***.0101***.0102***

board_number.151***.152***.15***.152***

top10.0262***.026***.026***.0258***_cons

15.9***

15.9***

15.8***

15.8***

r2_w

0.157

0.157

0.156

0.157

N

12883

12883

12883

12883

Note: * p<.1; ** p<.05; *** p<.01
Table 13 shows that government CEOs do not provide abundant wages to employees
compared to internal CEOs. In particular, the level of welfare benefits in the case ofCEOs from state-owned enterprises is significantly lower. On the other hand, theother four types of government CEOs, such as those from central government andlocal government, do not have significant differences in welfare standards. In
addition, in the case of external CEOs, the welfare benefits of employees tend to belowest. Overall, the results show that internal CEOs place great importance on theinterests of employees.

Table 13 shows that all the coefficients of the local state-owned enterprises (Dloc)
66

are significantly positive compared to private enterprises, indicating that employees’
welfare benefits are abundant in the local state-owned enterprises. On the other
hand, the coefficient of the central state-owned and state-affiliated enterprises(Dcen) is negative and insignificant. In local state-owned enterprises, which areaffected by partial privatization reforms, employees’ welfare benefits are graduallyemphasized.

6. Conclusion

This study presents the influence on corporate performance of government as ashareholder and by means of personnel control, such as appointment of management
teams. We report firm-level regression results for 10 industries, including thechemicals, electromechanical manufacturing, general machinery manufacturing,
information communication, construction and real estate industries, using financial
data between 2000 and 2014, as well as corporate governance data for 3 years: 1999,
2006, and 2013.

The major difference between this study and previous research lies in the manner ofprocessing governance variables. We discuss the reclassification of shareholders in
our analysis, whereas previous studies ignore the difference between state-owned
corporate shareholders and private corporation shareholders. In addition, althoughprevious research has considered various attributes, such as CEOs’ terms of officeand concurrent posts, there is still little analysis of the existence of a relationshipbetween government and corporate performance. In addition, in this study, we
analyze the effect on corporate performance of independent directors, who are67categorized based on their relationship with the government. Accessibility to data
after the stock reform in 2005 enables us to conduct an analysis over a longer spanof 14 years.

The main analysis results are as follows. First, as presented in previous research,
we confirm a U-shaped relationship between the government’s shareholding ratio
and the profitability and growth potential of the company. In other words, a
relatively low government shareholding ratio is negatively associated with theprofitability and growth potential of an enterprise. However, when the government
owns more than 50% of the company’s shares, an increase in the government
shareholding ratio improves corporate performance. On the other hand, there is aninverted U-shaped relationship between the government’s ownership ratio and thedebt ratio, and it is found that if the government owns a share ratio exceeding acertain threshold, an increase in its shareholding ratio improves the soundness ofcorporate finance. This result suggests that if the government is not the largest
shareholder, the government tends to prioritize issues such as politics and social
stability rather than maximizing corporate value. Therefore, a government
shareholding ratio lower than 50% tends to exacerbate corporate performance at theexpense of the interests of minority shareholders. However, once the shareholding
ratio of the government exceeds a certain threshold, it is more likely that thecompany is able to balance interests and corporate performance improves.

Second, depending on the attributes of the company, the role of the government as ashareholder is different. In local state-owned enterprises, a U-shaped relationship isfound, but in the case of central government enterprises and companies invested in68

by central government enterprises, the ownership ratio of the government is foundto have no influence on performance. Moreover, the higher is the government
shareholding ratio in private enterprises, the worse is corporate performance. The
overall results suggest that privatization of general state-owned enterprises isdesirable. However, for strategically important companies involved in national
security, national regulations should be strengthened and they should remain
unlisted.

Third, the appointment of CEOs and directors of listed companies in China issignificantly affected by shareholders. If the government is a major shareholder, inorder to ensure the implementation of a policy, it is highly likely that the manager
with a close relationship with the government is appointed, and thereby, thegovernment influences the management. This result suggests that CEOs who haveworked at state-owned enterprises, CEOs who have served as executives ofCommunist Party committees, CEOs from national research institutes, and othergovernment-affiliated CEOs have worsened corporate performance. Moreover, if
private enterprises have CEOs from local governments, profitability declines. Whenthe effectiveness of the law is weak, a government-affiliated CEO as therepresentative of the government is likely to realize political objectives or collaborate
with the “grabbing hand.” On the contrary, a CEO with most relevance to the central
government is motivated to improve company performance when laws andregulations are highly effective and his/her career path is strongly related tocorporate performance. With respect to central-government enterprises andenterprises invested in by central-government enterprises, government CEOs haveno negative impact on performance, and CEOs from central government and local

69

government have a positive impact on performance.

Fourth, in limited research comparing inside and outside CEOs of Chinese
enterprises, our results show there is no significant difference on corporate
performance between the influence of inside and outside CEOs. Outside CEOs are
more likely to implement cost reductions, such as restructuring, and can promotereforms utilizing externally acquired knowledge, whereas they are moreconservative than internal CEOs are because they cannot grasp corporate
information in the short term. It is possible that the effects on both sides offset eachother. A better understanding of the difference between internal and outside CEOsof Chinese listed companies awaits further research.

Fifth, the effect of independent directors on corporate performance is limited. A
government independent director has bad influence on the profitability, growthpotential, and financial soundness of a company. The size and independence of theboard of directors are not regarded as important in Chinese listed companies and it
is found that these variables do not play an important role.

Sixth, using the total value of the shareholding ratio of the top 10 shareholders, wemeasure the concentration of the ownership structure of listed companies. Although
the concentration level is high at 56% on average, an effect of improving corporate
performance is confirmed. It can be observed that high concentrations are valued as
effective means of governance in developing countries, such as China, where thelegal system is not complete.

70References
Bai C.-E., Q. Liu, J. Lu, F. M. Song, and J. X. Zhang, 2004, “Corporate governanceand market valuation in China,” Journal of Comparative Economics, Vol. 32, pp.
599–616.
Balsmeier B. and A. Buchwald, 2015, “Who promotes more innovations? Insider
versus outside hired CEOs,” Industrial and Corporate Change, Vol. 24, No. 5,
pp. 1013–1045.
Blanchard O. and A. Shleifer, 2001, “Federalism with and without politicalcentralization: China versus Russia,” IMF Staff Working Papers, Special Issue.
Chen C. and B. Al-Najjar, 2012, “The determinants of board size and independence:
Evidence from China,” International Business Review, Vol. 21, pp. 831–846.
Chen J. J., X. G. Liu, and W. Li, 2010, “The effect of insider control and global
benchmarks on Chinese executive compensation,” Corporate Governance: An

International Review, Vol. 18, No. 2, pp. 107–123.
Cheung Y.-L., P. Jiang, P. Limpaphayom, and T. Lu, 2008, “Does corporate
governance matter in China?” China Economic Review, Vol. 19, pp. 460–479.
Estrin S. and V. Perotin, 1991, “Does ownership always matter?” International

Journal of Industrial Organization, Vol. 9, No. 1, pp. 55–73.
Fan J. P. H., T. J. Wong, and T. Y. Zhang, 2007, “Politically connected CEOs,
corporate governance, and post-IPO performance of China’s newly partiallyprivatized firms,” Journal of Financial Economics, Vol. 84, pp. 330–357.
Huyghebaert N. and L. H. Wang, 2012, “Expropriation of minority investors in
Chinese listed firms: The role of internal and external corporate governancemechanisms,” Corporate Governance: An International Review, Vol. 20, No. 3,
pp. 308–332.

71

John, K., 1993. “Managing financial distress and valuing distressed securities: A
survey and research agenda,” Financial Management, Vol. 22, No. 3, pp. 61–78.
Li K., T. Wang, Y.-L. Cheung, and P. Jiang, 2011, “Privatization and risk sharing:
Evidence from the split share structure reform in China,” Review of Financial

Studies.
Liu, Chunyan, Konari Uchida, and Yufeng Yang, 2012, “Corporate governance andfirm value during the global financial crisis: Evidence from China,” International

Review of Financial Analysis, Vol. 21, pp. 70–80.
Pistor, Katharina, 2013, “The governance of China’s finance” in J. P. H. Fan and R.
Morck, eds, Capitalizing China, Chicago: National Bureau of Economic
Research Conference Report, University of Chicago Press, Chapter 1.
Qian, Y., 2003, “How reform worked in China,” William Davidson Working Paper

Number 473 June 2002
Shapiro D., Y. Tang, M. J. Wang, and W. Y. Zhang, 2015, “The effects of corporate
governance and ownership on the innovation performance of Chinese SMEs,”

Journal of Chinese Economic and Business Studies.
Shleifer A. and R. Vishny, 1998, The Grabbing Hand: Government Pathologies andTheir Cures. Cambridge, MA: Harvard University Press.
Tian J. J. and C. H.-M. Lau, 2001, “Board composition, leadership structure andperformance in Chinese shareholding companies,” Asia Pacific Journal ofManagement, Vol. 18, pp. 245–263.
Tian Lihui and Saul Estrin, 2008, “Retained state shareholding in Chinese PLCs:
Does government ownership always reduce corporate value?” Journal ofComparative Economics, Vol. 36, pp. 74–89.
Yu M., J. K. Ashton, 2015, “Board leadership structure for Chinese public listed72

companies,” China Economic Review.

73Appendix
ROA

sales_growth

ROA

1.000

sales_growth

0.254

1.000

over50_dummy

over50_dummy

0.019−0.0011.000

control_dummy−0.076−0.0420.560

control_dummy

Correlation Matrix
State_ratio

Private_ratio

Person_ratio

Foreign_ratio

Director_ratio

stateID

1.000

State_ratio−0.027−0.014

0.801

0.857

1.000

Private_ratio−0.0100.018−0.423−0.635−0.604

1.000

Person_ratio

0.145

0.054

−0.234−0.391−0.364−0.1451.000

Foreign_ratio

0.051

0.003

−0.047−0.083−0.075−0.074

0.081

1.000

Director_ratio

0.095

0.025

−0.111−0.153−0.179−0.105−0.020−0.063

1.000

stateID

0.008

0.011

0.054

0.054

0.065

−0.0620.036−0.001−0.004

1.000

cenID

0.022

0.011

0.065

0.067

0.070

−0.0600.007−0.013−0.016

0.458

locID

−0.011−0.008

0.003

0.012

0.010

−0.014−0.003−0.016

0.007

0.532

SOEID

−0.017

0.009

0.014

0.008

0.025

−0.041

0.074

0.041

−0.0230.554

reashID

0.051

0.014

0.016

0.010

0.017

−0.012−0.004

0.034

0.035

0.200

comID

−0.004

0.006

0.055

0.054

0.048

−0.020−0.031−0.030

0.012

0.343

outsiderID

0.002−0.005−0.067−0.076−0.093

0.055

0.008

0.010

0.038

−0.576state_CEO−0.018−0.016

0.156

0.226

0.213

−0.122−0.166−0.053−0.0670.072

central_gov_CEO

0.012

0.008

0.015

−0.0070.008−0.008

0.007

0.046

−0.0190.044

local_gov_CEO

0.018

0.012

0.046

0.027

0.045

−0.015−0.0220.015−0.021

0.047

state_rea_CEO

0.030−0.003

0.006

0.005

−0.002−0.0570.079−0.027

0.025

0.055

SOE_CEO−0.038−0.004

0.103

0.165

0.168

−0.110−0.106−0.020−0.033−0.022

Commu_com_CEO−0.036−0.032

0.130

0.187

0.187

−0.118−0.111−0.018−0.041

0.054

insider

0.057

0.000

−0.128−0.135−0.149

0.024

0.126

0.051

0.042

−0.063outsider_CEO−0.0220.008−0.087−0.104−0.119

0.138

0.017

−0.0240.024−0.030

top10

0.145

0.066

0.428

0.057

0.341

0.160

0.116

0.186

0.115

0.046

DEBT

−0.269

0.018

0.039

0.136

0.111

0.051

−0.269−0.063−0.113−0.001

TASS−0.011−0.009

0.094

0.065

0.105

−0.042−0.0420.118−0.0150.100

board_number−0.015−0.007

0.144

0.192

0.194

−0.062−0.1710.000−0.035

0.195

ID_number

0.113−0.018−0.166−0.161−0.199

0.039

0.125

0.058

0.075

0.275

74

Appendix Correlation Matrix（continued）
stateID

cenID

locID

SOEID

reashID

comID

outsiderIDstate_CEO

Central_gov_CEO

local_gov_CEO

State_rea_CEO

SOE_CEO

0.148
0.323

1.000
0.084

1.000

−0.042−0.003

0.127
0.520

−0.021−0.084−0.036−0.1611.000−0.045

1.000

0.087
−0.010−0.0350.053

0.436−0.566−0.056−0.129−0.095−0.274−0.044−0.0920.122−0.2641.000−0.280

0.000
0.041

−0.0390.016

0.022−0.033−0.175−0.024−0.0640.014−0.1400.026−0.055−0.005−0.121
0.005−0.1560.015−0.0100.051−0.049-0.002

0.029
0.039

0.009
−0.033

0.106
0.036

−0.008
0.026

0.005
0.027

−0.076−0.014

0.077
0.008

0.080
0.039

0.066
0.109

0.085
0.092

0.048
0.111

0.177
0.234

0.065
−0.0120.028−0.010

0.021
0.004

−0.016−0.011

0.028
0.002

0.056
0.027

stateID
cenID

1.000
0.458

1.000

locID
SOEID

0.532
0.554

0.031
0.045

1.000
−0.0461.000

reashID
comID

0.200
0.343

−0.0170.011−0.049−0.019−0.0650.089

1.000−0.0131.000

outsiderIDstate_CEO−0.5760.072−0.2450.025−0.3320.026−0.3170.040−0.117−0.014−0.1820.066

1.000−0.062

1.000

central_gov_CEO
local_gov_CEO

0.044
0.047

0.115
−0.001−0.0120.074

0.027−0.018−0.040
0.031

0.010
0.003

0.019
−0.046state_rea_CEO
SOE_CEO

0.055−0.0220.040−0.029−0.003−0.056

0.082
0.029

0.014
−0.018−0.004
0.026

Commu_com_CEO
insider

0.054−0.0630.039−0.0350.018−0.0120.013−0.061−0.0230.009

outsider_CEO
top10−0.0300.046−0.0270.019

0.004−0.007−0.016
0.050

DEBT
TASS

−0.0010.100−0.016
0.084

0.023
0.054

board_number
ID_number

0.195
0.275

0.117
0.147

0.107
0.148

75

Commu_com_CEO

Appendix Correlation Matrix（continued）
insider
1.000

Outsider_CEO

outsider_CEO
top10-0.344-0.054

1.000
0.012

1.000

DEBT
TASS

-0.0700.006-0.012-0.030-0.082
0.109

1.000
0.060

1.000

board_number
ID_number-0.0550.121-0.0380.000

0.058-0.091

0.098
0.004

0.061
0.111

insider

top10

DEBT

76

TASS

board_number

ID_number

1.000
0.146

1.000