Research On The Effects Of Group Affiliated Listed Companies’ Governance Mechanism

Under the dual influence of government orientation and market mechanism,there have emerged many business groups in China characterized of emerging andtransition.These business groups have functions for institutional reform, economicimprovement, industrial structure adjustment, and so on. But after30years of reform,the Chinese economic, social and institutional environments have been greatlychanged. Business groups’ original function orientation borrowed from Japan andSouth Korean needs to be revised accordingly. Business groups have serious dualagency problems, and become vested interest groups impeding the further reform.Therefore, is the business group still an effective organizational and structuralarrangement? For its affiliations, is it a paragon or a parasite? How do affiliations’governance mechanisms function effectively, so as to reduce the dual agency cost andimprove their performance? These have become urgent topics to study in theory andpractice.Combined the corporate governance mechanism, dual agency costs andcorporate performance is unified under an analysis framework, based on empiricalstudy on business group controlling listed companies in Shanghai and Shenzhencovering the period of2007—2011as a data sample, this paper, used panel datamodels, and methods to reveal some of the main relationships, including relationshipbetween the affiliations governance mechanism and dual agency costs, relationshipbetween the affiliations, governance mechanism and their performance, relationshipbetween the affiliations dual agency costs and their performance. Through positiveanalysis we have arrived at the following conclusions.(1)Affiliations’ dual agency cost is higher and performance is insignificantlylower than the independent ones. The private affiliations’ dual agency cost issignificantly higher, and performance is insignificantly lower than the privateindependence ones. Local SOE affiliations’ dual agency cost is lower, performance issignificantly higher than the local independent ones. Therefore, the affiliation is an efficient institutional improvement for local SOE, but not for the private sector.(2)The SOE affiliations’ controlling agency cost is insignificantly higher,shareholder agency cost and performance is insignificantly lower than the privateaffiliations. Considering the nature of property difference, the local SOE affiliations’dual agency cost is insignificantly higher, performance is significantly higher than thecentral SOE affiliations. Therefore, in terms of whole affiliations, privatization canpromote efficiency. Furthermore, in terms of the SOE affiliations, localization cansignificantly improve the efficiency.(3)The affiliation is suffering dual agency problems, but the controlling agencycost has more negative impact on corporate performance than the shareholder agencycost. Considering the whole affiliations, the controlling agency costs havesignificantly negative effects on corporate performance, and the shareholder agencycost only has insignificantly negative effects. Furthermore, considering theheterogeneity of property rights, in local SOE affiliations and private affiliations, thecontrolling agency cost has significantly negative effects on corporate performance,and the shareholder agency cost only has insignificantly negative effects. In thecentral SOE affiliations, both the manager agency cost and the shareholder agencycost have significantly negative effects on corporate performance, yet the controllingagency cost is more prominent.(4)As far as the affiliation governance mechanism’s effects of inhibiting thecontrolling agency cost is concerned, they are weak. Specifically, executivecompensation and shareholding, separate of CEO and chairman, cleanness of theaudit’s opinion, debt maturity structure and product market competition mechanismscan effectively restrain the manager agency costs. Larger board size will lead to theinefficiency supervision. Asset-liability ratio increase will aggravate the controllingagency costs. It is uncertain of independent directors proportion and equity balancedegree to inhibit the manager agency costs. Other governance mechanisms canconstrain the controlling agency costs, but the effect is not obvious.(5)As far as the affiliation governance mechanisms effects of inhibiting thecontrolling shareholder agency cost is concerned, they are weak and complex with the structural differences. With the ownership concentration increasing, the non-operatingnet cash taken up by the affiliations’ controlling shareholder will increase, and theoperating net cash taken up will decrease. Conversely, the effect of equity balancedegree is just opposite to the degree of equity concentration. Institutional investorshareholding’ increase effectively restricts affiliations’ cost of controllingshareholders agency. Trading share increasing will minimize the effect of theaffiliations’ controlling shareholders agency costs. With the widening of separationbetween cash flow rights and controlling rights, the operating cash taken up byaffiliations’ controlling shareholders will increase. It is invalid of board andindependent directors to curb affiliations’ controlling shareholders. The separate ofCEO and chairman can only restrain affiliations’ controlling shareholders agencyproblem in the low degree. With the non-paid directors’ proportion increasing, thenon-operating net cash taken up by the affiliations’ controlling shareholder willdecrease, and the operating net cash taken up will increase. At present, affiliationsexecutives’ shareholding proportion is low and the increasing of the proportion aremore likely to aggravate tunneling. In the protected industry, affiliations’ controllingshareholder agency cost is significantly lower. The debt, information disclosure, andinvestors’ legal protection mechanisms can effectively inhibit affiliations’ controllingshareholder agency problem.(6)As far as performance improvement effects of the affiliation governancemechanisms are concerned, they are weak. Ownership concentration degree,institutional investors’ proportion is significantly positive to corporate performance.Equity balance degree, the proportion of tradable shares, and the separation degreebetween cash flow rights and the controlling rights are insignificantly positive tocorporate performance. Larger board size and independent directors’ proportion isinefficient to promote company performance. Non-paid directors’ proportion issignificantly positive to corporate performance. The non-dual CEO affiliation hashigher ROA. To promote executive incentives can effectively improvementaffiliations performance. The asset-liability ratio is significantly negative toaffiliations performance, but shortening the debt maturity structure helps to improve affiliations performance. Audit opinion cleanliness is significantly positive toaffiliations performance. In the protected industries affiliations have higher ROE butlower ROA. Affiliations located in the higher investors’ legal protection areas havebetter performance.