Corporate governance and performance: An analysis of listed companies in China

This study investigates the corporate governance system in China. I examine how the governance mechanisms operate in China using data from Chinese listed firms. First I study agency cost control, I find that firms with foreign shareholding incur higher agency costs. There is limited but weak evidence that concentrated ownership is associated with lower agency costs. Contrary to previous studies, I find no evidence that legal person shareholding is more effective in reducing agency costs. I also find that there is no difference between government and non-government controlled firms. The composition of the board of directors, as reflected in the proportion of non-executive directors, has no association with agency costs.; Second, I examine the top management compensation and I find that, similar to the developed economies, there is a positive pay-performance relation in China; I also find evidence to support the argument that concentrated ownership and government ownership act to both reduce compensation levels and induce performance related pay for CEOs. The presence of a foreign shareholder is associated with higher pay and I attribute this to foreign investors demanding better qualified management and the willingness to pay for them.; Third, I examine the turnover behavior in China. I find that there is a significant relationship between turnover and performance and this relationship is more significant in a forced turnover situation. I argue as government influence is paramount, the ownership structure would not impose any difference in removal mechanism. The removal of the key management figure in response of performance deterioration is a natural response of a bureaucratic shareholder and I argue this is the ‘scapegoat’ behavior.; Finally, I study the substitution and complimentarity effect of the different corporate control components. There is evidence of interdependence in the use of different control mechanisms. The empirical results show that there are significant relationships between corporate governance control mechanisms and firm performance, but the significance of those control mechanisms disappears in the simultaneous equation estimation. This result is consistent with the hypothesis that there is an optimal use of corporate governance mechanisms for an individual firm.