To understand the interaction between internal control mechanism and the mar- ket for control, using a di¤erences-in-di¤erences methodology, we examine CEO turnover following an exogenous decline of takeover threats? second generation of antitakeover legislation in the U.S. Di¤erent from previous research using only time series variation in CEO turnover, we ?nd that, compared to a control group, the sensitivity of CEO turnover to performance increased for the ?rms a¤ected by the laws. The increases are both statistically and economically signi?cant. We also ?nd that the increases in the sensitivity of CEO turnover to performance are concentrated in the ?rms with bad internal governance. Our results suggest that internal control mechanism and the market for control may be substitutes instead of complements.

This study aims to examine empirically whether ownership structure and corporate governance mechanisms affect income-smoothing behavior in China. The sample comprises 1353 companies listed in the Shanghai Stock Exchange and the Shenzhen Stock Market during the period 1999 to 2006. By comparing the variability of income to the variability of sales an income smoother can be identified if income is less variable. Our empirical results show that the proportion of Chinese firms practicing income-smoothing is greater than those of Singaporean, Japanese and U.S. firms. Income smoothing in China is more severe when the state is the controlling shareholder of the listed firm. Firms with more independent directors are more likely to engage in income smoothing. This article presents the current development of China’s corporate governance system and indicates that agency conflicts between controlling shareholders and minor investors account for a significant portion of earnings management in China.

This paper investigates the relationship between firm productivity and corporate governance, including ownership structure, incentive compensation and board characteristics. Using TFP approach, I find ownership concentration and total compensation both are positively related to TFP, and the state ownership and the power of the first largest holder have negative effects on TFP. Using demand labour function approach, I find some contrary results, which need to be studied further.

Manuscript Type: Empirical Research Question/Issue: This study intends to solve the disputes between the free cash flow hypothesis and the tunneling hypothesis in explaining the role of cash dividends on asset expropriation of the controlling shareholders in Chinese listed firms, by investigating the values of cash holdings and cash dividends between firms with high and low ownership control. Research Findings/Insights: The results show that investors value more the cash dividends of firms with high ownership control than those of firms with low ownership control, and value more the cash holdings of firms with low ownership control than those of firms with high ownership control, more consistent with the free cash flow hypothesis rather than the tunneling hypothesis. Theoretical/Academic Implications: This study contributes to the literature of agency theory and international corporate governance by solving the disputes regarding the role of cash dividends in asset expropriation of controlling shareholders in Chinese listed firms. This study also contributes to the literature of cash holdings by showing that the most essential condition for these firms to hold high level of cash holdings is the quality of investor protection. This provides an example of the applicability of the Anglo-Saxon theory to emerging markets. Practitioner/Policy Implications: Even though the evidence does not support the tunneling hypothesis of cash dividends, it still suggests that investors are concerned with high cash payouts, which could thus lower firm value. Thus, changing corporate ownership structure and improving investor protection are necessary to deepen the development of financial markets.

We investigate the role of natural culture in corporate risk-taking using measures of income variability, R&D spending, and use of long-term debt. We identify three dimensions of national culture that should influence corporate risk-taking, and we isolate the effects of country-level and firm-level variables by using a hierarchical linear modeling approach. The three specific cultural values that we study – harmony, individualism, and uncertainty avoidance-- have both direct and indirect effects on our various measures of risk-taking. These results survive when we control for firm-level and country-level characteristics.

This paper provides a parallel investigation on the impact of board composition, board activity and ownership concentration on the performance of listed Chinese firms. We find that independent directors enhance firm performance effectively than other board factors. The frequency of shareholder meetings, rather than board meetings, is positively associated with firm value. Tradable share ownership concentration has a positive and linear relationship with firm value, while state and total share ownership concentration represent U(V) shapes. Importantly, companies with the highest levels of both total share and tradable share ownership concentration have a greater firm values than companies with the highest levels of only a single concentration.

Recent researches suggest that private benefits of control of managers are a key predictor of acquisition performance and that there exists a negative correlation between measures of private benefits and acquirer announcement returns. However, empirical evidence has not confirmed such a negative relationship. The study in this paper shows that this relationship between private benefits of control of managers and acquisition performance may depend on the level of government shareholding. The study is based on an analysis of a sample of 246 M&A events from the listed companies of Chinese state-controlled enterprises, during the period 2001-2006 and it reveals that, under a low level of government shareholding, private benefits of control are positively correlated with the performance of acquiring firm; but private benefits of control are negatively correlated with the performance of acquiring firm under high government shareholding. Results also indicate that the private benefits of control of managers are important determinants of the acquiring firm performance. These findings sharpen the current understanding of the relationship between private benefits of control of managers and acquiring firm performance.

This paper investigates whether Chinese equity investors price major earnings components correctly. Total earnings are decomposed into core and non-core earnings according to a classification framework of Chinese accounting principles. The results show that, as expected, core earnings are more persistent than non-core earnings. Most importantly, the market underestimates (overestimates) the value implications of changes in current core (non-core) earnings for future earnings changes. Therefore, future stock returns can be predicted based on the information that is contained in the components of current earnings. Both portfolio tests and regression analysis generate economically significant abnormal returns that are robust to sensitivity checks.

Using a 2004 Chinese securities regulation that required equity offering proposals and other major corporate decisions to seek the separate approval of minority shareholders, we empirically test the effect of a regulatory increase in minority shareholders’ control over corporate decisions on shareholder value. While the overall stock market reaction to the announcement of the regulation is insignificant, the stock market reaction is more positive for firms with higher institutional (especially mutual fund) block ownership and more negative for firms with higher individual block ownership. The regulation helps deter management from submitting value decreasing equity offering proposals, especially for firms with higher mutual fund block ownership. In addition, value reducing equity offering proposals submitted in the post-regulation period are more likely to be vetoed in firms with higher block ownership of institutional and individual minority shareholders. Overall, our results suggest that the 2004 regulation increases shareholder value, especially in firms with higher mutual fund block ownership.

This paper investigates the value effect of large investors through their impact on corporate investment policy using a sample of listed firms in the Chinese stock market where large shareholdings and concentrated ownership are a norm. We find that the impact of capital expenditures on firm value is closely related to the level of large shareholdings (non-tradable or state shareholdings). Capital expenditures are negatively associated with firm value if firms are controlled by entrenched large shareholders. Although there is a general tendency of over-investment, the negative impact of over-investment is cancelled out if firms are controlled by incentive-aligned large shareholders. We also find that, the incentive-alignment effect of large investors is stronger in scenarios where agency conflicts are more intensified. Our findings suggest that capital investment is an important channel through which the value effect of large investors is achieved.