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

accounting ratios (ROA) or market indicators (Tobin’s Q) as proxies for firm performance. Using a series of indicators allows for capturing the potential differences in performance of different types of ownership in a more logical manner. The remainder of the paper is organized as follows. Section 2 provides a brief background to China’s enterprise reform, in particular the SASAC reform, and also discusses ownership types among China’s listed firms. Section 3 provides the literature review and introduces the hypotheses. Section 4 describes the data and research method used. Section 5 presents the empirical results and Section 6 provides the conclusion and policy implications. II. C hina’s E nterprise R eforms and O wnership S tructure The Chinese government announced the “Grasping the large, letting go the small” policy in 1997. The aim was to distinguish different types of traditional SOEs, then assign disparate economic objectives to them (Leung & Cheng, 2013). The “Grasping the large” scheme refers to the actions taken by the state as an owner to strengthen its control over central SOEs as well as over large, local, state firms, which are scattered among strategic industries, such as energy, telecommunications, civil aviation, defense, transportation, publication, metallurgy, and heavy machinery (Leung & Cheng, 2013). In contrast, the “Letting go the small” scheme emphasizes the complete privatization of small to medium-sized SOEs. Despite preliminary positive results achieved by partial privatization, attempts to improve corporate governance in SOEs were faced with challenges (Leng, 2009). The major drawback was that ownership was distributed over various state agencies, reflecting inconsistent responsibilities among different government departments and conflicting supervision systems (Hassard et al., 2010). Although the central government was the sole owner of all state assets prior to 2003, it exercised direct control and supervision only of the largest SOEs (central SOEs). On the other hand, the local governments were able to actively control local SOEs within their jurisdictions, they did not have the formal status of “owner” and all-important decisions on major transactions by local SOEs were made by the central government (Hassard et al., 2010). As a result, the central government enjoyed the sales revenue from the privatized local state firms and was considered to be the major cause of the conflict of interest (Leng, 2009) in state - owned assets in China. The separation of ownership and control existed not only at different levels of government but also among multiple government agencies (Chen et al., 2009). Various government agencies with different, sometimes conflicting, objectives were responsible for some part of SOEs’ business operations. None of these agencies, however, assumed ultimate responsibility for firms’ performance (Leng, 2009). To strengthen SOE corporate governance practices, the State Council established the State- owned Assets Supervision and Administration Commission (SASAC) in 2003 which redefined the relationship between SOEs and governments (Mattlin, 2009). First, the central government separated the central, provincial, and municipal SOEs and granted control rights to SASAC offices at the respective administrative levels (Mattlin, 2009). Second, the SASAC centralized functions that formerly were distributed among different institutions and Party organizations (Leng, 2009). Third, local governments were granted de facto ownership rights for local SOEs (Leng, 2009), and local SASACs at provincial and city levels handled SOEs within their respective jurisdictions and reported directly to local governments. Between 1992 and 2004, Chinese listed firms operated under a unique ownership classification system, which divided equity into tradable and non- tradable shares. As a result, China’s listed enterprises held up to 60% (on an average basis) of non-tradable shares, and most of these were owned by the government (Jiang, Laurenceson, & Tang, 2008). The artificial splitting of shares led to significant agency problems between holders of non-tradable and tradable shares. For example, the controlling shareholders of listed SOEs were not interested in stock price movements and consequently, minority individual investors suffered from irregular fluctuation in the share price (Leng, 2009). Furthermore, managers of SOEs tended to pursue objectives that were not related to profit maximization. As a result, the expropriation of minority shareholders’ interests was widespread and the principal-agent problem was further exacerbated by the existence of multiple principal-agent problems (Yu, 2013). To deal with the corporate governance failures arising from non-tradable shares, the Chinese authorities enacted the Split Share Structure Reform in 2005 (Jiang et al., 2008). As a result, the ownership structure of Chinese SOEs has changed dramatically since 2004. By the end of 2012, there were 113 large SOEs, commonly known as the central SOEs (SOECG), owned and directly controlled by the central government. SOECGs are supervised by SASAC and since SOECG chairmen are selected on the basis of their ability, many of them got promoted to positions at the ministerial level (Chen et al., 2009). Since the central government is the ultimate shareholder of these listed enterprises, incentives serve to impose policies and laws that enhance government objectives rather than misappropriate profits or assets (Cheung, Rau, & Stouraitis, 2010). Local SOEs constitute the largest group of controlling shareholders of listed state-invested The Relationship between Ownership Identity, Ownership Concentration, and Firm Performance: Evidence from China 10 Global Journal of Management and Business Research Volume XXII Issue VIII Version I Year 2022 ( ) A © 2022 Global Journals