Non‐controlling Large Shareholders and Firm Performance in China

• Author: Hongqu He,Caiyu Yan
• Published date: 01 June 2018
• DOI: http://doi.org/10.1111/ajfs.12216
• Date: 01 June 2018

Non-controlling Large Shareholders and

Firm Performance in China

Caiyu Yan*

Business School, Central South University, China

Hongqu He

Business School, Central South University, China

Received 12 May 2017; Accepted 19 December 2017

Abstract

This paper examines the determination of non-controlling large shareholders (NCLSs) on

firm performance and investigates the impacts of NCLSs on tunneling and investment effi-

ciency. We use three attributes of NCLSs (ownership, identity, and relational board/manage-

ment representation) to fully capture the governance effects of NCLSs. We find robust

evidence that NCLSs are associated with higher firm performance. Furthermore, we also doc-

ument that NCLSs promote investment efficiency. However, except for individual investors,

the other items in NCLSs deteriorate tunneling. Additionally, except for mutual funds, we

find that the other governance effects of NCLSs are stable under different circumstances.

Keywords China; Firm performance; Investment efficiency; Non–controlling large sharehold-

ers; Tunneling

JEL Classification: G32, G34

1. Introduction

Following La Porta et al. (1999), research shows that owner ship in listed firms in

emerging economies is typically controlled by large shareholders. A great deal of

research has sought to study the economic effects of the separation of ownership

and the voting rights of controlling shareholders in order to comprehend the key

issue of whether controlling shareholders can solve agency problems or exacerbate

them (Shleifer and Vishny, 1997; Becht et al., 2002). To further understand the gov-

ernance mechanism of controlling shareholders, a scant but growing number of

studies have directed their attention to the governance roles of multiple large share-

holders, especially the role of other non-controlling large shareholders (NCLSs)

instead of ignoring their economic effects. In fact, the multiple large shareholders

*Corresponding author: Business School of Central South University, No. 932, South Lushan

Road, Changsha, 410083, Hunan, China. Tel: +86-181-6379-6225, Fax: +86-0731-8871-0006,

email: yancaiyu@126.com.

Asia-Pacific Journal of Financial Studies (2018) 47, 401–425 doi:10.1111/ajfs.12216

©2018 Korean Securities Association 401

structure is common around the world (Faccio and Lang, 2002; Maury and Pajuste,

2005; Laeven and Levine, 2008; Holderness, 2009). In this paper, we investig ate the

governance role of NCLSs by examining their effects on firm performance in China.

A review of recent theoretical developments on the firm’s agency problems

addresses the potential economic effects of NCLSs. We find that the results are

mixed. On one hand, NCLSs have incentives to monitor and restrict controlling

shareholders’ expropriation of private benefits and it is often the link to valuation

premium in the economy (Volpin, 2002; Laeven and Levine, 2008; Attig et al.,

2009). However, NCLSs could collude with the controlling shareholder to extract

minority shareholders and share the private benefits (Konijn et al., 2011). These sit-

uations motivate us to study the potential governance roles of NCLSs.

Based on the conflicting theoretical developments, we investigate these two

competing governance effects in Chinese listed firms (since China is the most popu-

lous country and largest economy among emerging economies) to determine which

one dominates in which situations. This will extend the scant existing related litera-

ture on emerging economies. It is ambiguous whether the relationship between

NCLSs and firm performance documented in emerged economics can be general-

ized to China due to the characteristics of Chinese listed firms. The most important

characteristic is “that the majority of Chinese-listed firms are former state-own ed

enterprises and the government is still the largest shareholder in many of those

companies” (Liu et al., 2015, p. 224). Moreover, similar to companies in other

emerging economies, Chinese companies typically have a concentrated corporate

ownership structure, and China’s institutional environment is weak due to poor

investor protection and rampant insider self-dealing (Jiang et al., 2010).

Using a unique sample of Chinese listed firms that incorporate detailed NCLSs

information, we investigate NCLSs that are independent from the controlling share-

holder to better understand the governance mechanism of NCLSs on firm perfor-

mance. Specifically, NCLSs are defined as the top two to three largest shareholders

who are independent from the controlling shareholder. Additionally, we use three

attributes of NCLSs to fully capture their governance effects on firm performance,

including ownership, identity, and relational board/management representation.

Consistent with prior findings that suggest that NCLSs are associated with higher

firm performance (Volpin, 2002; Laeven and Levine, 2008; Attig et al., 2009), our

findings show a positive relationship between NCLSs and firm performance.

In addition to examining the relationship between NCLSs and firm perfor-

mance, we advance the literature by investigating the potential channels through

which NCLSs exert their influence on a firm’s operations. To comprehend these

potential channels, we extend prior literature that documents that government

intervention and insider self-dealing are major impediments to efficient operations

and optimal investments in Chinese listed firms ( Chen et al., 2011b; Wang and

Xu, 2011). Furthermore, we examine the effects of NCLSs on the tunneling of firm

resources and investment efficiency. Empirical results show that NCLSs improve

C. Yan and H. He

402 ©2018 Korean Securities Association