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

companies in China (Leung & Cheng, 2013). The SASAC reform in 2004 enabled local governments to implement aggressive policies or bylaws to boost the development and performance of local SOEs (SOELGs). Some researchers have reported that SOELGs improved performance after 2004 (Leng, 2009; Cheung et al., 2010), while others argue that local governments have a strong financial incentive to undermine minority shareholders’ interests, especially when faced with difficult budgetary constraints or revenue inducements (Hassard et al., 2010). Since it is difficult to enforce laws and regulations at the provincial and municipal levels, the SOELGs are subject to weaker supervision and management (Chen et al., 2009). As the ultimate shareholders of the SOELGs, local governments tend to vary widely in their behavior. On the one hand, SOELGs are the local governments’ instrument for generating revenue (Mattlin, 2009) but on the other, local governments may expropriate revenue due to the fact they are both owners and regulators (Leng, 2009). By allowing the “natural person” to be the dominant shareholder of listed firms in China since 2001 (Wei, Xie, & Zhang, 2005), the total number of listed companies controlled by private investors increased from less than 10 to 1431 by the end of July 2013, accounting for 57.94% of all listed firms in capital markets. 1 The majority of these firms are listed on China’s two main boards and by the end of 2012, 325 listed firms conducted their IPOs in the newly established growth enterprise market (ChiNext). 2 III. L iterature R eview, T heory and H ypotheses Chen et al. (2009) argued that controlling private shareholders tend to have a better understanding of the industry in which firms operate and therefore are better able to monitor managers’ decisions. According to Wang, Chen, and Ye (2010), approximately half of the private listed firms in China are under family control. Since private investors are not monitored by the state, the existence of weak governance structures makes it possible for the dominant shareholders to misappropriate profits or assets (Wang et al., 2010). As a result, the principal-agent and principal-principal agency problems are widespread (Shen, 2008). The proponents of the helping hand hypothesis argue that firms that have close ties with the government can benefit from political connections (Fisman, 2001; Faccio, 2006). The specific benefits of government 1 Naughty, Naughty: China’s Corruption Crackdown Skims the Richest. (2013, 15 October). Forbes. Retrieved from http://www.forbes.com/ sites/hengshao/2013/10/15/naughty-naughty-chinas-corruption- crackdown-skims-the-richest/ 2 Based on the data adopted in this study, 325 private listed firms had conducted their IPOs in China’s growth enterprise market (ChiNext) by the end of 2012. ownership include access to favorable terms for loans from state-owned banks, a higher IPO offering price, government-sponsored bailouts, favorable government contracts, lower taxation, and receiving special licensing powers (Sapienza, 2004; Goldman, Rocholl, & So, 2009; Leng, 2009). SOEs in the strategic industries 3 sector receive preferential treatment from the government (Cheung et al., 2010). Since this sector has a strict ban on private and foreign investors, SOEs with monopolistic features enjoy windfall profits in these industries (Mattlin, 2009; Jiang & Lin, 2012). In addition to enjoying a strong influence on the market as a result of the government’s protectionist policies, these SOEs also receive a disproportionately large share of the loans provided by the large state banks (Liu, Uchida, & Yang, 2012). 4 Researchers investigating the ownership- performance nexus have reported a negative relationship between residual state shares and firm Given their soft budgetary constraints, SOEs have tended to expand the scale of their state assets, in some cases by overinvesting or by instigating a series of mergers and acquisitions. Consequently, the revenue and size of SOEs have increased dramatically (Mattlin, 2009). In contrast, local government-owned SOEs and privately controlled firms do not operate on the same playing field and often face capital starvation and regulatory impediments in their routine business activities (Leng, 2009; Chen et al., 2010). Based on the helping hand hypothesis, we propose our first hypothesis as follows: H1. Listed SOECGs have a higher level of liquidity compared to SOELGs and PRIVATEs. The debate regarding state ownership inefficiencies is highlighted by the property rights theory and the political interference hypothesis (Martin & Parker, 1997; Villalonga, 2000; Shleifer & Vishny, 1994). The proponents of the property rights theory posit that property rights are clearly defined in the private sector but not in the public sector and in consequence, private owners have a stronger incentive to effectively reduce their production costs and actively monitor the performance of management (McCormick & Meiners, 1988). Shleifer and Vishny (1997) argued that state ownership leads to principal-principal and principal- agent agency problems because government tends to pursue many different objectives and not solely value maximization (Shleifer & Vishny, 1997). As a result, state-owned enterprises tend to suffer from problems such as higher costs and lower efficiency (Stiglitz, 1999). 3 Strategic industries include energy, heavy machinery, metal, telecommunications, and transportation. 4 Large sums of money (4 trillion yuan) were pumped into large SOEs in the form of financial subsi- dies or direct loans from state banks during the period 2009 – 2011 (Liu et al., 2012). The Relationship between Ownership Identity, Ownership Concentration, and Firm Performance: Evidence from China 11 Global Journal of Management and Business Research Volume XXII Issue VIII Version I Year 2022 ( ) A © 2022 Global Journals