Dynamic allocation of control rights between managers and investors affects policy of the dividend and value of enterprise. The paper studied the relevant factors that affect optimal debt ratio and allocation of control right. We suggest that the enterprise decrease the debt ratio with the increase of moral hazard, liquidity risk and investors’ absolute risk aversion. With the increase of shareholder’s control right, the relationship between shareholder’s control right and managers’ moral hazard is reversed from positive to negative. The implication of the paper is moderate debt ratio may achieve the tough constraint on the managers’ decision.

Using a sample of listed subsidiaries and their parent companies in China, I study top executive compensation and turnover and their relationship to firm performance in business groups in China. The empirical results support the hypothesis that the pay-performance sensitivity of managerial compensation (CEO turnover) in a listed firm is positively (negatively) related to the accounting performance of its parent company. Using related party transactions to proxy for the correlation between the two firms, I find that management compensation in a listed firm is related to the performance of its parent company if related party transactions exist between them. In addition, I find a stronger relationship between the compensation (turnover) in a listed subsidiary and the performance of its parent company when the percentage of common directors and managers are less than median level. This result indicates that the incentive system can be used to align the interests of managers in the listed firm with that of its parent company when the information asymmetry is high and the parent company can not effectively monitor. Using brand name as a proxy for reputation, I find that management compensation and CEO turnover in group firms are more likely to be sensitive to the performance measures in their parent companies if both use the same brand name.

This study proposes an incentive alignment hypothesis of corporate spin-off activities, in which executive compensation contracts tie the interests of CEOs with those of shareholders and the reduction of agency problems enhances firm value through corporate spin-offs. Consistent with this hypothesis, CEOs with a high level of equitybased compensation are more likely to initiate a spin-off. The announcements of such corporate restructurings are reacted positively by the market. Firms engaging in spin-offs provide greater operating growth in the years following the restructurings compared with their size- and industry-matched control firms. Also consistent with this hypothesis, high incentive CEOs yield more personal gains by selling shares and exercising options following spin-offs.

Lin, Cai, and Li (1998) argue that under information asymmetry, SOE managers can use state-imposed policy burdens as excuses of poor performance and make the State accountable for it. The argument implies that turnover-performance sensitivity of SOEs decreases as policy burdens increase and that such impact depends on the extent of information asymmetry. Accordingly, this paper empirically explores how policy burdens affect top management turnover of Chinese listed firms between 2000 and 2005. We find that high surplus labor significantly reduces the sensitivity of chairman turnover to performance for state-controlled firms, while private firms do not exhibit such a pattern. Furthermore, our results show that high surplus labor reduces the turnover-performance sensitivity more for firms with greater information asymmetry. Overall, we find strong evidence supporting the implications of Lin, Cai, and Li (1998). In addition, we find that chairman turnover of Chinese firms is sensitive to different performance measures for state-controlled firms and private firms.

We study financial market contracts and signals in a transitional economy where state-controlled banks may lend to weak firms to avert unemployment and social instability. Our sample of Chinese corporate borrowers reveals that that poorer financial performance and higher managerial expenses increase the likelihood of obtaining a bank loan, and bank loan approval predicts poor subsequent borrower performance. Furthermore, negative event-study responses are observed at bank loan announcements, particularly if the borrower measures poorly on quality and creditworthiness. Our results document the dilemmas that arise in a state-led financial system and the local stock market’s sophistication in interpreting news.

Dynamic allocation of control rights between managers and investors affects policy of the dividend and value of enterprise. The paper studied the relevant factors that affect optimal debt ratio and allocation of control right. We suggest that the enterprise decrease the debt ratio with the increase of moral hazard, liquidity risk and investors' absolute risk aversion. With the increase of shareholder's control right, the relationship between shareholder's control right and managers' moral hazard is reversed from positive to negative. The implication of the paper is moderate debt ratio may achieve the tough constraint on the managers' decision.

Existing literatures indicate that, in Nontradable Shares Reform, institutional investors collude with nontradable shareholders (controlling shareholders) to help them settle a lower compensation ratio. Classifying institutional investors into mutual funds and non-mutual funds, this paper presents a further research upon whether fund governance helps mitigate collusion. Due to the rigorous entry qualifications, and the worldwide reputation as hostage, a foreign background fund is expected to have better governance quality than a domestic fund. Our empirical evidence shows that, relative to those dominated by domestic funds, mutual funds dominated by foreign background funds are less inclined to collude with nontradable shareholders. Introducing foreign institutional investors into domestic markets is Chinese government’s consistent policy. Our evidence indicates that this policy may be beneficial to the sound development of Chinese stock markets. Meanwhile, we find no sufficient evidence that mutual funds dominated by open-end funds are less inclined to collude with nontradable shareholders, although an open-end fund is expected to have better governance quality than a closed-end fund due to the redemption mechanism. As for the effect of ownership structure, it is found that mutual funds with a lower institutional ownership are less inclined to collude with nontradable shareholders. Fund governance seems to deteriorate as institutional ownership increases. Providing an implication for policy making, our evidence suggests that restricting the proportion of fund shares held by institutions may help improve fund governance in China.

This letter applies the endogenous structural break Minimum Lagrange Multiplier unit root test to re-examine the stationarity of Chinese stock market indices. The main result is consistent with Yan and Felminghan (Applied Economics Letters, 13, 605-608, 2006) who use the ADF-type structural break unit test, and the break we found is more in line with the reality.

he paper assesses the vulnerability of China to external shocks via the indirect negative effect of a slow-down in exports on domestic demand for investment. In the last decade China has increased its dependence on external demand, particularly from the advanced countries; at the same time it has become a primary destination market for goods produced in the rest of emerging Asia. Since 2001 investment expenditures have represented a key driver of Chinese GDP growth; as a very large share of activity in the manufacturing sector is export oriented, we expect fixed capital investment in this sector to be highly related to exports. Overcoming serious shortcomings in available data, we estimate an investment equation for the period 1993-2006 and find an elasticity of investment to exports in the manufacturing sector in the range between 0.9 and 1. Taking into account the dominant contribution of capital accumulation to Chinese GDP growth, we conclude that the growth effects of an external demand shock could become significant when taking into account the domestic investment channel.

The Chinese state owned enterprises (SOEs) have become quite profitable recently. As the largest shareholder, the state has not asked SOEs to pay dividends in the past. Therefore, some have suggested that the state should ask SOEs to pay dividends. Indeed, the Chinese government has adopted this policy advice and started to demand dividend payment starting from 2008. While we do not question the soundness of the dividend policy, the point we raise is whether those profits are real if all costs owned by SOEs are properly accounted for. Among other things, we are interested in investigating whether the profits of SOEs would still be as large as they claim if they were to pay a market interest rate. Using a representative sample of corporate China, we find that the costs of financing for SOEs are significantly lower than for other companies after controlling for some fundamental factors for profitability and individual firm characteristics. In addition, our estimates show that if SOEs were to pay a market interest rate, their existing profits would be entirely wiped out. Our findings suggest that SOEs are still benefiting from credit subsidies and they are not yet subject to the market interest rates. In an environment where credit rights are not fully respected, dividend policy, though important, should come second and not first. Keywords: