Ownership structure and firm performance: Evidence from the Chinese corporate reform

We employ a new classification of ownership identity to analyze the impact of ownership structure on enterprise performance in China. Using both fixed effects model and Generalized Methods of Moments (GMM), this study finds that marketized state-owned enterprises outperform firms controlled by the government, indicating that partial privatization of state-owned Chinese firms improves corporate governance. Non-controlling large shareholders of marketized state-owned enterprises and private enterprises are found to play active roles in corporate governance. Lastly, there is evidence that ownership concentration of a controlling shareholder decreases the incentives to expropriate minority shareholders.

► This study investigates the impact of ownership structure on firm performance using an alternative classification scheme of ownership based on the identification of the controlling shareholder instead of the official classification scheme adopted in most previous empirical studies. ► In more detail, it uses data on listed firms from 1994 to 2002 to explore the different effects of three types of ownership structure, namely, government shareholding, marketized corporate shareholding, and private shareholding. ► In addition, this study looks at whether a change in controlling shareholder from the government to marketized state-owned enterprises (MSOEs) leads to improvement in firm performance. ► Using both fixed-effect and dynamic system-GMM estimations, this study finds that firms controlled by MSOEs outperformed ones controlled by the government. ► Furthermore, changes in control rights from the government to MSOEs enhanced firm performance. ► There is some evidence that non-controlling large shareholders are found to play active roles in corporate governance in China, perhaps by blocking political intervention or monitoring the management. ► Our findings suggest that gradual privatization with government retention of a large equity share through profit-motivated state-owned enterprises is a feasible and effective path to privatization, especially in a country in which market supporting institutions are under-developed and thus markets do not work properly.