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

b) Effect of Ownership Concentration on Firm Value We are interested in finding out whether the proportion of shares held by the largest shareholder has a positive effect on the various financial performance measures. According to Shleifer and Vishny (1986), larger ownership may better align the incentives of the dominant owner with the preference of the minority investors but it also increases the possibility that the controlling party may undertake tunneling activities. Table VI reports the results of the linear relationship between the five performance measures and the proportion of the largest shareholder ownership. According to columns 11 and 14 of Table VI, the percentage of shares held by the central government in SOEs is statistically significantly related to SPROD and Tobin’s Q. However, the coefficient of SOECG in column 11 is negative, thus suggesting that the largest shareholder contributes negatively to firm performance measured by SPROD. This result indicates that the central government is interested in achieving social objectives. Consequently, it hires more people to boost employment, and this in turn leads to a decline in sales per employee (as measured by SPROD). On the other hand, the coefficient of SOECG in column 14 is positive and statistically significant at a 1% level. Results reported for the non-linear model in Figure 1, Graph A in the Appendix also show that central government ownership above 40% leads to higher Tobin’s Q. Our results reported in Table II confirm that central government ownership in strategic industries is between 45% and 60%. Our results are similar to that reported by Wang and Xiao (2009), which suggest that the central government has kept a substantial amount of state shares in the partially privatized enterprises to retain control even after the Split Share Reform. This result supports our hypothesis H5. According to columns 3, 6, 12, and 15 of Table VI, the percentage of shares held by the local government in SOEs is statistically significantly related to the firm performance measures ROA, CFOA, SPROD, and Tobin’s Q. The coefficient of SOELG in columns 3, 6, and 12 is positive, thus suggesting that the largest shareholder contributes to firm performance measured by ROA, CFOA, and SPROD. Our findings support the view posited by Li, You, Wang, and Yuan (2013), that managers are interested in accounting based performance measures because their personal performance appraisals are determined by them. On the other hand, the coefficient of SOELG in column 15 is negative and statistically significant at a 5% level. This result supports the view posited by Zou et al . (2008), that local government-owned SOEs receive a negative market reaction from investors and consequently experience lower market valuation (similar to the results reported in Table V). Results reported for the non-linear model in Figure 1, Graph B in the Appendix show that local government ownership between 25% and 72% leads to higher Tobin’s Q. Our results reported in Table II show that local government ownership in strategic industries is between 28% and 49%. However, Chen et al. (2009) and Leng (2009), argue that the proper legal infrastructures and weak law enforcement may have led to the expropriation of the minority shareholder rights by the local government. According to columns 4, 10, 13 and 16 of Table VI, the percentage of shares held by private investors is statistically significantly related to firm performance measures ROA, OCS, SPROD, and Tobin’s Q. The coefficient of PRIVATE in columns 4, 10, and 16 is positive, thus suggesting that the largest private shareholder contributes to a firm’s performance, as measured by ROA, OCS, and Tobin’s Q. This result indicates that the largest shareholder (PRIVATE) is interested in creating value for the firm. Results reported for the non-linear model in Figure 1, Graph C in the Appendix also show that the local government ownership above 30% leads to higher Tobin’s Q. According to Wang et al. (2010), family businesses account for a large proportion of private firms where concentrated ownership of up to 45% is common. Since private firms are not close to government ties, expropriation seems to be lower. On the other hand, the coefficient of PRIVATE in column 13 is negative and statistically significant at a 5% level. This result suggests that firms with predominantly private investors tend to contribute negatively to sales per employee, which could be the result of misappropriation. The results in Table VI show that the percentage of ownership by non-controlling blockholders (BLOCK) is positively related to the firm value measured by Tobin’s Q, a result that is statistically significant at a 1% level. This result provides support for hypothesis H6 and is consistent with the results reported by Song et al . (2004), Kang and Kim (2012), and Leung and Cheng (2013). The evidence suggests that non-controlling, large shareholders play an active role in corporate governance in China irrespective of who the controlling investor is. The coefficient of foreign ownership (PFOR) for Tobin’s Q reported in Table VI is positive and is statistically significant at a 1% level for all three types of controlling investor groups. This result supports our hypothesis H7 and is consistent with the results reported by Bai et al . (2004), Wei et al. (2005), and Jiang et al . (2008), who in different contexts conclude that the presence of foreign shareholders in China’s public firms leads to higher market value. A plausible reason for this may be greater transparency in these companies’ financial performance, enhanced monitoring effects, and the technical support brought by foreign investors. Since foreign investors seek better economic returns, they force management to act more consistently in regard to the goal of profit maximization. Consequently, an increase in foreign investors in China’s listed companies The Relationship between Ownership Identity, Ownership Concentration, and Firm Performance: Evidence from China 23 Global Journal of Management and Business Research Volume XXII Issue VIII Version I Year 2022 ( ) A © 2022 Global Journals