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.

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.

This paper empirically investigates the determinants of financing decisions in Chinese listed firms, using 3,196 firm-year observations from the Shanghai Stock Exchange during the period 2001–2005. Thereby, we investigate the effects of differences in institutions across Chinese provinces and municipalities, and compare the financing choices of state-owned and private-controlled enterprises. We find that a better legal environment negatively affects the debt ratio and the proportion of debt that consists of bank loans in SOEs as well as private-controlled enterprises. Conversely, regional banking development positively influences these two variables. If anything, these effects of the rule of law and regional banking development on leverage are stronger for private-controlled firms. SOEs have lower debt ratios in regions with better stock market access, while private-controlled firms rely less on bank loans in regions with more government intervention in business. Finally, we document that SOEs’ overall debt ratio and composition of debt are comparable to those of private-controlled firms.

The independent directors of a board can impact CEO pay-performance more effectively if a compensation committee provides information and assist them in designing relevant executive pay schemes. On the basis of this idea, we developed and tested the hypotheses that Chinese firms with a compensation committee have a closer CEO pay link with performance when a larger proportion of independent directors serves on the board. We focused primarily on the effect of a compensation committee on CEO pay-performance relation as a consequence of its help for the board and found that board independence produces a stronger relationship between executive compensation and firm performance in Chinese listed firms. This association is more evident in those firms which have a compensation committee. Our findings suggest that the interaction between independent directors on the board and a compensation committee has important consequences for CEO incentive systems as well as corporate governance structures in China.

Using data from a large sample of the listed firms in China from 1999 to 2002, we find that firm profitability and state ownership are negatively related to top management turnover only when firm profitability is below target (measured by industry median). We also find that top management turnover has a positive impact on subsequent firm profitability when it occurs under performance below target, but has a negative impact when it occurs under performance above target. Lastly, we find that top management turnover under low performance has a positive impact on subsequent firm profitability when the state is not the largest shareholder, but has no impact when the state is the largest shareholder.

This paper investigates CEO pay and pay-performance relationship in China’s listed firms. We distinguish four firm types based on their controlling owners: state owned enterprises affiliated with state asset management bureaus (SAMBs), state owned enterprises affiliated with the central government (SOECGs), state owned enterprises affiliated with a local government (SOELGs), and private firms controlled by private investors. We also distinguish between firms with foreign investors and those without. Because the different types of controlling owners have different objectives, motivations, and political interests, they affect managers’ compensation in the firms in which they invest. Our results indicate that CEO pay is lowest in SAMB controlled firms and highest in SOECG controlled firms. Not only is CEO pay positively associated with firm performance, the positive pay-performance relationship is stronger in both types of SOE firms but weaker in privately controlled firms. In addition, firms with foreign investors compensate their CEOs more highly than those without foreign investors, an effect that is significant in both SOEs and privately controlled firms. Overall, the evidence suggests that CEO compensation in China is jointly determined by firm performance, market-oriented reform and the unique ownership structure, meaning that standard theories of efficient compensation contracts may not apply in such emerging markets.

Business groups organized by pyramids enable the ultimate shareholders to control a portfolio of firms with less cash requirement. Further, corporate pyramid induces an internal capital market and makes capital transfer more convenient within the pyramid. In China, the state and business groups control a large number of listed firms through pyramidal ownership structure. What role does the corporate pyramid play in firms’ investment decisions? What is its influence on firm performance? This paper investigates the capital investment and firm performance from the perspective of pyramidal ownership structure. We find that as the layers of corporate pyramid increases, the capital overinvestment declines. The negative relations between pyramid and overinvestment exist for both state-owned enterprises (SOEs) and non-state-owned enterprises (NSOEs), which indicate that increasing the layers within corporate pyramid reduces the likelihood of overinvestment of the listing firm and improving investment efficiency. Moreover, we show that the effects of increasing the layers of corporate pyramid on accounting performance are different for SOEs and NSOES. For SOEs, increasing the layers of pyramid results in less government interference on the listed firm and more flexibility in operate. Therefore, increasing pyramidal layers is positively related to accounting performance. While for NSOEs, pyramiding is to build an internal capital market for the ultimate shareholder’s capital investment. Although pyramid may reduce overinvestment of the listing firm, agency costs may offset the positive effect and induce a lower accounting performance.

Like other major countries in the world, Chinese listed firms have recently experienced a dramatic rise in executive compensation. However, the arguments that could explain the same phenomena in developed countries can not be extended to the case in China. First, most Chinese listed firms are controlled by the state, thus management cannot set their own compensations through captured boards as suggested by Bebchuk and Fried (2004). Second, very few listed firms in China granted stock options and/or common stocks as part of executive compensations prior to 2005. There is little possibility that executives increased their own compensations by offering stock-option plans implied by Bolton et al. (2006). Based on the facts that the legal investor protection has been improved in China, we argue theoretically and empirically in this paper that the rise in executive compensation of Chinese listed firms can be attributed to the enhancement of legal investor protection. Since the management has to give up part of their private benefit with the improvement of legal investor protection, some private benefits extracted by management before have to be paid in an explicit way in order to make management incentive compatible. This finding partially leads to the increasing trend in executive compensations. It therefore provides a new perspective to explain why executive compensations keep rising in this emerging market where legal investor protection has been improving.

This paper empirically investigates the determinants of financing decisions in Chinese listed firms, using 3,196 firm-year observations from the Shanghai Stock Exchange during the period 2001–2005. Thereby, we investigate the effects of differences in institutions across Chinese provinces and municipalities, and compare the financing choices of state-controlled and private-controlled enterprises. We find that a better legal environment negatively affects the debt ratio and the proportion of debt that consists of bank loans in SOEs as well as private enterprises. Conversely, regional banking development positively influences these two variables. If anything, these effects of the rule of law and regional banking development on leverage are stronger for private-controlled firms. SOEs have lower debt ratios in regions with better stock market access, while private firms rely less on bank loans in regions with more government intervention in business. Finally, we document that SOE bank loans have a longer maturity, while their overall debt ratio and debt mix are comparable to those of private firms.

The issues concerning the governance mechanism of board independence and its determinants remain controversial in the field of corporate finance. Particularly, the association between the properties of family power and board independence is yet comprehensively discussed and is crucial important for the financial market in Europe and Asia. We set out in our study to identify the determinants of board independence with the sample of listed firms in Taiwan from 2002 to 2006 based on the notions that independent boards play an important role to enhance corporate governance mechanism. The argument that the higher involvement of family power in the board room is harmful to the board independence is expected. The evidence shows that firms with larger size and greater opportunities of managers to consume private benefits tend to hire more independent directors. Besides, higher growth opportunities, as well as greater outsider influence provide the same positive effect on appointing independent directors. Regarding to the most important evidence, firms with greater proportion of family members on the directorship reduce the tendency to appoint more independent directors; moreover, the higher percentage of shares owned by family members provides the positive effect on board independence. However, firm age is found to have a contradictory effect to that reported in the prior studies and firms which are more seasoned do not necessarily tend to hire more independent directors. Furthermore, we also compare board structures across different firm sizes and find that board composition in small and large firms is extremely divergent. We tend to contribute to the literatures with the evidence that firms with greater influence of power of family directorship on the board meeting are burdened with severe problem of less independence of the board.