A Study On Shareholding Reform, Corporate Governance And Performance

Share issue privatization (SIP) is a way of restructuring state-owned enterprises (SOEs) widely practiced by many other countries as well as by China. Most literature focuses more on the effect of post-IPO governance structure on the operation and performance of SOEs, and pays less attention to the influence of government's adoption of different pre-IPO restructuring modes over the post-IPO operation and performance of SOEs. Most listed companies in China evolved from SOEs after restructuring. Under special institution situations, such as China's gradual reform, the competition among local governments, the arrangement of stock issuing regulation and the strict regulation, the governments, especially the local ones, adopt different restructuring modes to reorganize SOEs when taking the cost and the difficulties of the reform into consideration. Different restructuring modes indicate governments' different ways of dealing with such issues as policy burden, non-profit making assets and surplus staff, and thus lead to different pre-IPO "endowments" of SOEs, which affects later the post-IPO arrangements of governance structures, and accordingly the operation behaviors and performances of the listed companies.Using a sample of 285 Chinese SOEs that went public between 1997 and 2000, the empirical study of this research finds that the restructuring mode is closely related to the formation of the governance structure, and the incomplete restructuring is the primary reason that causes many serious problems in Chinese stock market and a leading factor that results in the poor performance of Chinese SOEs. Followings are the main research findings.Firstly, most of Chinese SOEs went through incomplete restructuring.Secondly, the restructuring mode has a profound impact on the company's governance structure, and of course, has a dramatic effect on the formation of the characteristics of the board of directors. In an incompletely restructured SOE, the degree of the centralization of the company shares is high, and the controlling shareholders have a higher control over the company. The degree of control and the characteristics of the board of directors correlate with the performance of the listed company, and the extent of the correlation mainly depends on which of the different restructuring modes is adopted.Thirdly, controlling shareholders' fund embezzlement is common among SOEs that went through incomplete restructuring while it is not the case in completely restructured SOEs. There is a higher probability and degree of related-party transaction and M&A happening among incompletely restructured SOEs. Though the ownership structure strongly affects fund embezzlement, related-party transaction and M&A, this effect, in fact, has its roots in the restructuring mode.Fourthly, the difference in restructuring modes exerts great influence over the distribution of benefits. Controlling shareholders in SOEs that underwent an incomplete restructuring have a higher degree of fund embezzlement, and thus they tend to pay fewer dividends. The opposite is true with SOEs with a complete restructuring. The correlation between the controlling shareholders' shareholds and the dividend payout level is much more apparent in SOEs with a complete restructuring than that of the SOEs underwent an incomplete restructuring.Fifthly, the inefficiency of public offering is common among China's SOEs, which is in sharp contrast with the cases of other contries. After IPOs, most SOEs noticeably have an output increase and leverage decrease, but at the same time, have an increase in cost, expenditure, staff number and a decrease in profit making, thus make no obvious improvement in operation profit per-employee. The empirical results show that SOEs with a complete restructuring achieve a greater post-IPO output increase, a better performance and cost control, than SOEs with an incomplete restructuring. The empirical study also finds that serious related-party transaction, fund embezzlement and unreasonable arrangement of govermance structure are three determinant factors in worsening the post-IPO performance of SOEs with an incomplete restructuring. Furthermore, fund embezzlement is the most important factor of all.To summarize, this study has its practical significance in regulating the government behaviours and the SOEs' assets reorganization during IPO.