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

performance (Xu & Wang, 1999; Qi, Wu & Zhang, 2000; Sun, Tong & Tong, 2002; Sun & Tong, 2003). However, Tian and Estirn (2008) and Ng, Yuce, and Chen (2009) argued that state ownership has a nonlinear relationship with firm profitability. Researchers who have used the shareholder’s real identity have reported that listed firms in which the state is a shareholder and SOEs affiliated with the central government have performed better than private-sector firms (Wang, 2003; Chen et al., 2009; Kang & Kim, 2012). However, Chen et al. (2008) argued that former SOEs now owned by private investors show an increase in profitability because of cost savings and/or a reduction in the number of employees. Since Chen et al. (2009) used data from the period 1996-2000, it is not clear whether similar performance phenomena still existed after the SASAC reform of 2003. We argue that partially privatized SOEs perform better than their private-sector counterparts because of protectionist policies and improved monitoring by the state. Based on the property rights and political interference hypotheses, we propose our second and third hypotheses as follows: H2. Listed SOEs (SOECGs) have higher profitability than SOELGs and privately owned firms. H3. Listed SOEs (SOECGs) have higher operating costs than SOELGs and privately owned firms. Prior research has reported that the largest shareholder has both a positive and negative effect on firm performance. Corporate governance literature has identified block shareholding as an influential mechanism to mitigate principal-agent problems and reduce the “free-rider” phenomenon of small investors (Shleifer & Vishny, 1997; Claessens & Djankov, 1999). However, if the largest shareholder is also the controlling shareholder, a collision of control rights with cash flow rights is likely to occur. Consequently, the conflict of interest between the largest shareholder and minority shareholders will be exacerbated (Fama & Jensen, 1983; Morck, Shleifer & Vishny, 1989). Frye and Shleifer (1997) and Shleifer and Vishny (1998) argued that when the government acts as the dominant shareholder in public firms, the wealth of minority shareholders is misappropriated by authorities swayed by political considerations and the corrupt behavior of politicians. This view is known as the interest entrenchment hypothesis. Xu (2004) reported that on average, the largest shareholder-owned 46% of SOEs prior to the 2005 Split Share Structure Reform. Having a large stake in SOEs, the largest shareholder (government) reserves the right to appoint firm directors and top managers and in this way, can exert considerable influence on the firm’s operational activities (Chen et al., 2008). Given China’s inadequate legal infrastructure and its poor shareholder protection regime, prior researchers have reported that the wealth of minority investors is misappropriated when the state’s shareholding goes beyond a certain level (Wei & Varela, 2003; Wei et al., 2005; Ng et al., 2009; Yu, 2013). Furthermore, researchers point out that different types (identities) of the largest shareholder are also associated with tunneling behaviors. Leng (2009) argued that public companies connected to local governments always subvert minority shareholders’ interests by asset stripping or self-serving activities in most MBO transactions. Cheung et al. (2010) provided empirical evidence of local government’s “grabbing hand,” a ploy by which local authorities influence the SOEs they control in order to steal or transfer minority shareholders’ wealth through related party transactions. In contrast, SOEs supervised by the central government provide a “helping hand” to protect minority partners’ interests during the same process. This is referred to as the interest alignment hypothesis. According to Leng (2009), Chinese stock investors view central government-controlled SOEs (also known as blue-chip companies in the market) as a safer investment as they have the ability to secure the value of their portfolios. Arguably, local government-controlled SOEs experience a more negative reaction from the market and have lower market value compared to central SOEs and private firms (Zou, Wong, Shum, Xiong, & Yuan, 2008; Chen et al., 2009). Based on the above, we argue that SOEs connected to the central government have a higher market value compared to privately listed firms and SOEs connected to local governments. Therefore, we propose our fourth and fifth hypotheses as follows: H4. Listed SOECGs have a higher market value than privately controlled firms. H5. Listed SOECGs have a higher market value than SOELGs. Shleifer and Vishny (1986) argued that dispersed small shareholders are reluctant to monitor management because the cost of monitoring is greater than the benefits. As a result, monitoring is only undertaken by the company’s controlling shareholder or other non-controlling block shareholders (Shleifer & Vishny, 1986; Pound, 1988). Smith (1996) and Woidtke (2002) pointed out that non-controlling institutional shareholders such as mutual funds and pension funds usually act as an effective mechanism for monitoring managerial inertia and so mitigate the typical principal- agent problems in countries such as the US and the UK. This is referred to as the interest alignment hypothesis. However, research on this issue in China has received little attention. A plausible reason may be that the majority of previous researchers have used legal type shares as a proxy for companies’ ownership structure, not distinguishing between the controlling shareholder and other important blockholders. Consequently, the effect of non-controlling shareholders on performance is not well understood in the Chinese The Relationship between Ownership Identity, Ownership Concentration, and Firm Performance: Evidence from China 12 Global Journal of Management and Business Research Volume XXII Issue VIII Version I Year 2022 ( ) A © 2022 Global Journals