1794. Ownership Structure, Corporate Governance, and Corporate Performance: The Case of Chinese Stock Companies

Xiaonian Xu and Yan Wang
(June 1997)

Does the ownership structure of publicly listed firms in China affect their performance? Yes. Institutional shareholders seem to have a positive impact on corporate governance and performance; state ownership seems to lead to inefficiency; and an overly dispersed ownership structure can create problems in the Chinese setting.

Xu and Wang investigate whether ownership structure significantly affects the performance of publicly listed firms in China and if so, in what way.

With public listed stocks, one can quantify the ownership mix and concentration, which makes it possible to study this issue. The authors use the recent literature on the role of large institutional shareholders in corporate governance as a theoretical base.

A typical listed stock company in China has a mixed ownership structure, with three predominant groups of shareholders—the state, legal persons (institutions), and individuals—each holding about 30 percent of the stock. (Employees and foreign investors together hold less than 10 percent.)

Ownership is heavily concentrated: the five largest shareholders accounted for 58 percent of outstanding shares in 1995, compared with 57.8 percent in the Czech Republic, 42 percent in Germany, and 33 percent in Japan.

Their empirical analysis shows that the mix and concentration of stock ownership do indeed significantly affect a company's performance:

• There is a positive, significant correlation between concentration of ownership and profitability.
• The effect of concentrated ownership is greater with companies dominated by institutions than with those dominated by the state.
• The firms' profitability is positively correlated with the fraction of legal person (institutional) shares; it is either negatively correlated or uncorrelated with the fraction of state shares and with tradable A-shares held mostly by individuals.
• Labor productivity tends to decline as the proportion of state shares increases.

This paper—a product of the Office of the Director, Economic Development Institute—is part of a larger effort in the Bank to understand and disseminate various models of corporate governance. The study was funded by the Bank's Research Support Budget under the research project "Ownership Structure, Corporate Governance, and Firm's Performance" (RPO 681-08). Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Joyce Chinsen, room G5-031, telephone 202-473-4022, fax 202-522-1714, Internet address jchinsen@worldbank.org. (54 pages)

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