Global Journal of Management and Business Research, A: Administration and Management, Volume 22 Issue 8

The Relationship between Ownership Identity, Ownership Concentration, and Firm Performance: Evidence from China Krishna Reddy Keywords: privatized SOEs, ownership concentration, ownership identity, tobin’s Q, efficiency. I. I ntroduction he success of China’s transition to a market economy depended on whether state ownership reform can achieve efficiency gains as expected. According to Shleifer and Vishny (1994), the efficiency gains from privatization can only be realized if control rights are passed from the state to private investors. In this regard, China’s policymakers have tried to reconcile continuing state ownership with market-orientated economic reforms to make state control more effective (Hassard, Morris, Sheehan & Xiao, 2010). The Chinese authorities established the State- owned Assets Supervision and Administration Commission (SASAC) in 2003 to restructure its state assets management system. According to Stiglitz (1999), commercialized state ownership might bring advantages in countries with weak institutional environments but these benefits tend to be associated with political connections or a “helping hand” from governments. In consequence, the transition to a free competitive market economy is likely to be impeded (Stiglitz, 1999; Bortolotti, Fantini & Siniscalco, 2001). Leng (2009) argued that governments have the financial incentives to promote SOEs’ development by imposing policy barriers against potential competitors because Author: Postgraduate Business, Toi Ohomai Institute of Technology, Rotorua, New Zealand. e-mail: krishna.reddy@xtra.co.nz governments act as owners and regulators, especially in the Chinese context. If SOE expansion is undertaken by means of preferential treatment by the state, ownership reforms may fail to realize efficiency gains, as intended (Hassard et al., 2010). However, whether state sector ownership reform in China has been successful in improving performance is not well understood since no studies (to our knowledge) have focused on the effects of state ownership on firms’ performance over the last decade. Accordingly, this study is motivated by the SASAC reform in China and we aim to address four important research questions. First, did SASAC reform in China improve the efficiency of government and local government-owned firms? If it did, does the type of ownership matter? That is, do different types (identities) of the large shareholders contribute to a higher level of economic efficiency in publicly listed firms? Does the controlling shareholder influence the profit-maximizing strategy of SOE-listed firms? Do listed central government-owned SOEs perform better than the local government-owned SOEs and privately-owned firms? This study contributes to the literature in several ways. First, this is the first study undertaken after China’s SASAC reform in 2003 that focuses on central versus local government ownership. Since the government has the fiscal incentives to boost SOEs’ performance through policy protection or preferential treatment, we are interested in finding out whether the state’s helping hand has affected SOE performance. Second, the study supplements the literature on the relationship between ownership structure and firms’ value by focusing on more recent institutional changes undertaken in China. Prior researchers have focused either on the legal share type or artificial ownership classifications as proxies for real owner type. The drawback of the legal share type is that it fails to determine who the real controlling shareholder is. On the other hand, artificial ownership classification leads to unrealistic inferences concerning firms categorized as belonging to one ownership type when they have different interests and motivations (Chen et al., 2009; Leng, 2009). Third, this study extends the limited research on the ownership-performance nexus in China by using a wider set of measures as proxies for a firm’s operating efficiency. Prior studies have used either T 9 Global Journal of Management and Business Research Volume XXII Issue VIII Version I Year 2022 ( ) A © 2022 Global Journals Abstract- This study compares the performance of state- owned firms, local government SOEs, and privately-owned firms in China. Using panel data comprising 13,273 firm-year observations for the period 2005-2012 and OLS, 2SLS, and difference-in-difference regression, we report that the identity of the largest shareholder does matter. Our results show that the listed, central government-owned SOEs’ operating costs are similar to those of local government owned SOEs and privately-owned firms. Our results suggest that ownership concentration matters in China, that is, central government shareholding is an important determinant of state owned firms’ performance. The policy implication of this study is that helping-hand and protectionist policies have helped state- owned firms to prosper in by creating an uncompetitive market and ineffective legal infrastructure.