The Study On The Effect Of The Product Market Competition On The Corporate Governance Performance

One of the main features of the modern enterprises is the separation of the ownership and the management of the enterprises, and resulted in that the agency problem becomes one of the most important problems of the modern enterprises. The economic people assumption is that avoiding the loss and preferring to the profit are the nature of the human being, and pursuiting the maximum of themselves interests is the fundamental motivation and the basic starting point of their personal behaviors. Therefore, the owners and the managers of the enterprises would have the completely different enterprise objective functions, and sometimes the managers will take the actions in accordance with their own interests resulted in the sacrifice of the owners profits.In theory, it is not necessary that the separation of the ownership and the management of the enterprises will bring out the agency problem. If the shareholders could have the information so much that the information between shareholders and management became symmetrical, the shareholders would know the managers as well as the managers themselvies, and the shareholders could let the managers take the actions according to the shareholders objectives by a powerful contract, in which the Pareto Optimality could be achieved. By this way, the managers' negligence, sloth and other behaviors which could damage the shareholders' interests would not be able to succeed, and the moral hazard problem would not exist.However, in the practice, it is not possible that the information between shareholders and management is completely symmetrical. In fact, the managers always have a great number of information (such as costs, market supply and demand condition, competitive position, etc.), therefore, the agency problem is inevitable. The higher the degree of the information asymmetry, the more serious the agency problem. How to eliminate or reduce the agency problem, to protect the investors' interests has become a worldwide problem, which is the final objective of the corporate governance.In fact, the performance of corporate governance is influenced not only by the internal governance mechanisms, but also by the external governance mechanisms. As an important external governance mechanisms, the product market competition can provide the information in the most economical way, and reduce the extent of the information asymmetry between the owners and managers, and reduce the agency costs of the enterprise; In addition, the product market competition will bring out some pressure for survival to the enterprises, which will inhibit the managers' opportunistic behavior and reduce agency costs. Although there are a lot of studies on the relationship between the product market competition and the corporate governance have been done abroad, but there are a few of studies in this field in our country. Whether the product market competition could improve the performance of the corporate governance in our country? If so, to what kind of enterprise does the improvement is significant? In order to make the biggest profit by the smallest cost, how to design the corporate governance of the enterprise? We hope to supply some useful empirical proofs for the reform of the state-owned enterprises of our country by looking for the answers of the above questions.In this study, the effect of the product market competition on the corporate governance performance has been studied based on the analyses of the corporate financial data, in which the analyses have been mainly focused on the stock owners, the distribution of the stocks and the salary of the managers, and some interesting results have been obtained. The corporate financial data used here have been obtained from the "Chinese stock market studying database—listed company database (2007 version)" supplied by the China accounting and finance research center of Hong Kong Polytechnic University and Shenzhen GTA Information Technology Limited Company. The data from 2000-2006 have been used in the analyses and the sample includes the following nine kinds of companies which have been listed as the A-stock listed companies in Shanghai stock market and Shenzhen stock market: manufacturing industries, industries of gas, power and water producing and supplying, building industries, transportation and warehousing industries, information technology industries, wholesale and retail trade, real estate trade, mining and quarrying industries, and farming, forestry, animal husbandry and fishery business. The result of this study confirms that the product market competition can influence the corporate governance performance.Firstly, we have analysized the effect of the product market competition on the corporate governance performance based on the shareholders of the enterprises. In this study, we have found that: (1) the product market competition can improve the corporate governance performance of the state-owned enterprises better than that of the private enterprises;(2) The product market competition can improve the corporate governance performance of the state-owned enterprises which are directly controlled by the central government-owned enterprises better than that by the local government-owned enterprises; (3) The product market competition can improve the corporate governance of the state-owned enterprises which are directly controlled by the local government better than which are controlled by the local state-owned enterprises.Furthermore, in the empirical analyses of the effect of the product market competition on the performance of the distribution of the shareholders of the enterprises, we have found that the effect is different in the different conditions, i.e. (1) the enterprises with more shareholders have a better corporate performance in the industries with the stronger product market competition; (2) The enterprises with a few shareholders have a better corporate performance in the industries with the weaker product market competition.Finally, we have analysized the effect of the product market competition on the performance of the incentive effect of the managers' reward. In this study, we have found that: (1) There is a positive relationship between the manager salary and the corporate performance; (2) The product market competition can effectively prevent the managers from taking the opportunistic behavior; (3) The product market competition can effectively increase the incentive effect of mannager reward, i.e. the stronger the product market competition is, the better the incentive effect of the manager reward is, and the better the corporate performance is; (4) The incentive effect of the manager reward in the industries with the stronger product market competition is better than that with the weaker product market competition; (5) The incentive effect of the manager reward is improved greater by the product market competition in the private enterprises than that in the state-owned enterprises.In addition, by careful analysis, we have also found that when the enterprises are smaller, the private enterprises are more efficient and have the better performance than the state-owned enterprises, and the performance of state-owned enterprises can not be significantly improved by the product market competition either. When the assets of the enterprises are increased to a certain extent, the difference in the corporate performance between the private enterprises and the state-owned enterprises is reduced, and the corporate performance of the state-owned enterprises can be significantly improved by the product market competition, and the improvement of the corporate performance is greater for the state-owned enterprises contolled by the central government than that controlled by the local government. When the enterprise assets are large up to a certain extent, the difference in the corporate performance between the state-owned enterprises and the private enterprises disappear, furthermore, the corporate performance of the state-owned enterprises controlled by the central government is even better than that of the private enterprises.These results suggest that the degree of the product market competition affect the performance of the internal corporate governance, that is, the effects of the corporate governance mechanisms are diferent in the different degrees of product market competition. We believe that the reform and improvement of the corporate governance should be combined with the external product market competition in our present market, and by the constant system innovation to improve the corporate governance structure of our state-owned enterprises.Innovation of this thesis:1. In the study, the accounting profits of the enterprises were used to measure the performance of the enterprises, which would be better indicators in reflecting the performance of the enterprises. At present, most researchers have used the production efficiency as the measurement of the corporate performance during the investigation of the relationship of the product market competition, the corporate governance and the corporate performance.2. In most of the literatures, the study on the performance of the corporate governance are focused on the internal corporate governance mechanisms, such as the directors, the managers' remuneration, the shareholder structure, less attentions have been paid for the effect of the product market competition on the corporate governance performance. In this study, the effect of the product market competition on the performance of the internal corporate governance has been studied. By this way the study of the corporate governance has been expanded, and the understanding for the corporate governance has been deepened.3. In the study, some analyses have been carried out in more details. Firstly, in the study of the effect of the product market competition on the performance of the shareholder of the enterprises, the classification of the shareholder was almost based on the state-owned shares, legal person shares and the circulation shares in the literatures. Using this classification, there are some serious shortcomings in the legal person shares, which will affect the validity of the researching conclusion. Therefore, In this thesis the classification based on the ultimate controllers of the enterprises has been used, and the state-owned enterprises have been classified in according to the direct and indirect controlling shareholder, and more details of the effect of the product competition on the performance of the corporate governance have been analysized based on this classification.Secondly, during the study on the effect of the product market competition on the performance of the ownership, the difference of the product market competition in different industies has been considered. The effect of the product market competition on the performance of the ownership of the enterprises in the market with stronger competition and weaker competition has been analysized respectively.Finally, during the analysis of the effect of the product market competition on the incentive effect of the manager, the difference of the ownership and the competition intensity of the industries have been considered.In addition, the study on the comparison of the corporate performance between the state-owned enterprises and the private enterprises has been carried out carefully based on the consideration of the corporate assets. The results indicated that when the enterprises were smaller, the performances of the private enterprises were better than that of the state-owned enterprises, and the product market competition could not affect this difference; When the enterprises were a little big, the difference of the corporate performance between the private corporate and the state-owned corporate became smaller, and the product market competition could significantly improve the state-owned corporate performance; When the assets of the enterprises became more large, the difference of the corporate performance between the private corporate and the state-owned corporate disappeared, and the performance of the state-owned enterprises was even better than that of the private enterprises.In short, we have studied the relationship between the product market competition and the corporate governance performance and tried to reveal the principle of the relationship in this study. This study has enlarged the researching field of the corporate governance, and supplied some empirical proofs for the improvement of the corporate governance of our state-owned enterprises, and enriched the socialist market economic theory.