研究领域：金融学
Corporate governance and asset appropriation in China
Lei Gao
Assistant Professor of Finance, Business School of Shantou University.
Daxue Road 243, Shantou, Guandong, . China 515063.
E-mail: drgaolei@
Huiyu Ren
Henan Institute of Economics and Finance
Zhengzhou, Henan 450002, PRChina
E-mail: xiaoyustar_happy@
Shuxi Ying
Assistant Professor of Finance, Business School of St. Gallen Univeristy.
Dufourstrasse 40a, CH-9000 , Switzerland.
E-mail: shuxi_yin@,
Abstract
It is one type of corporate governance failures in China for holding shareholders to appropriate the assets of publicly listed companies. Which corporate governance mechanisms fail in China? Which mechanisms can prevent holding shareholders from asset appropriation? Which mechanisms facilitate holding shareholders’ asset appropriation? This research paper discusses these issues. We reach the following conclusions: (1) the size of the board of directors, the frequency that the board of directors holds meetings, the stocks hold by senior managers, the size and reputation of independent audit firms, and market foundation have no impact on asset appropriation; (2) the more share that outside directors occupy in the board of directors, the higher ratio at which institutional investors hold the shares, independent audit report is Clean Opinion, and the existence of multiple big stockholders prevent asset appropriation; (3) governance structure with clear division between ownership and management, stock structure with one dominant shareholder, the existence of holding shareholders in the form of corporation group, holding shareholders are state-owned-enterprise (SOE), the firm’s operation in the protected industries, and the issuance of B share or H share exacerbate the asset appropriation by large shareholders.
Keywords: Corporate governance asset appropriation holding shareholder
1 Introduction
In recent years, the exploitation of small shareholders by large shareholders has attracted scholars' widespread attention and stimulated a great amount of research. Shleifer and Vishny (1997) found out that when big stockholders control firms, the main problem is no longer the conflict of interests between management and shareholders, but the prevention of the large shareholders’ exploitation of other shareholders. Johnson, La Porta, Lopez-de-Silanes and Shleifer (2000) coined the concept "tunnel digging" to describe the asset appropriation by large shareholders, that is, large shareholders legally and/or illegally transfer assets and profits to themselves. Tunnel digging not only hurts the interests of middle and small shareholders, but also seriously hinders the stock market’s development (Johnson, Boone, Breach and Friedman, 2000; Morck, Yeung and Yu, 2000; Wuegler, 2000; Bertrand, Mehta and Mullainathan, 2002). Johnson, Boone, Breach and Friedman (2000) proved that, unrestrained tunnel digging was the main reason behind the Asian financial crisis from 1997 to 1999. During the financial crisis, many facts proved that in emerging markets, this kind of agent problems were more severe than in mature markets. In China, it often happens that publicly listed firms fall into crisis because major stockholders appropriate assets. The “Houwanggufen”, “Xingfushiye”, “Sanjiuyaoye”, “Jinanqingqi” are all evidently examples. Obviously, assets appropriation, as a form of tunnel digging, constitutes a very serious corporate governance problem in China (Li Zengquan, Wang Zhiwei, Sun Zheng, 2004). Chinese scholars have already conducted some valuable research (Li Zengquan, Wang Zhiwei, Sun Zheng, 2004; Tang Qingquan, Luo Danglun, Wang Li, 2004). But how corporate governance mechanism affects asset appropriation has not been thoroughly studied. Therefore, this paper intends to address this issue in detail.
The rest of the paper is organized as follows. The second part theoretically analyzes the relationship between corporate governance and asset appropriation. The third part is research design, which includes variable description, model specification, and data selection. The fourth part presents the results of empirical investigation. The fifth part is conclusion and implication.
2 Theoretical hypotheses
The research focus of corporate governance has shifted from the problem between shareholders and management to that between major shareholders and small shareholders (Berle and Means, 1932; Shleifer and Vishny, 1997; Johnson, La Porta, Lopez-de-Silanes and Shleifer, 2000; Denis and McConnell, 2003 and so on). In recent years, the meaning of corporate governance becomes very comprehensive. For instance, Denis and McConnell (2003) argued that corporate is the sum of internal and external mechanisms. It can motivate the selfish corporate managers to maximize the interests of principals.
To solve the problem that holding shareholders hurt the interest of small shareholders, we should improve the following two kinds of corporate governance mechanisms. The first kind is the internal mechanism, including structure of board of directors, incentive system of senior management, ownership structure, kinds of holding shareholders, institutional investors’ holding, financial information disclosure, and corporate transparency. The second kind is external mechanism, including market competition for corporate control, legal environment, protection of small shareholders’ interests, market development, and competition at the product market. It is necessary and imperative to study the impact of these two mechanisms on asset appropriation empirically, as it would provide the solution to improve corporate governance and resolve the problem of asset appropriation by large shareholders. The current paper firstly analyzes the relationship between corporate governance and asset appropriation. Then it proposes relevant research hypotheses for further research.
Internal mechanisms
In China, internal mechanism mainly includes the following items: structure of board of directors, incentive system of senior management, ownership structure, kinds of holding shareholders, institutional investors’ holding, financial information disclosure, and corporate transparency.
Structure of board of directors
Share of outside directors in the board of directors
Internal board members are familiar with the firm’s operation and relevant conditions (Yermack, 1996). This can enhance the efficiency and decision-making of the board of directors. However, the higher the share of the internal board members, the more easily the firm can be controlled by the management. Then, the board is controlled and manipulated, which violates the objective of the board. In contrast, external board members can resolve this problem to a certain extent. Tang Qingquan, Luo Danglun, and Wang Li (2004) found that the higher the share of external board members in the board of directors, the less likely the board is controlled by internal board members, and the less major shareholders appropriate assets. Therefore, we propose
HYPOTHESIS 1: High share of outside directors depresses asset appropriation by holding shareholders.
(2) Structure of board of directors: The independence of firm’s CEO from the board
As different countries have distinct social, economic, and legal environments, they have different corporate governance structures. In countries such as the USA, the ownership is highly dispersed, the market for managers is well developed, and the legal system to protect investors is mature, thus these countries can well protect the interest of small shareholders. In these countries, as ownership is widely dispersed, no shareholders are motivated and able to control managers. But the managers have enough ability to monitor the actions of major shareholders. Thus, major shareholders are not capable to appropriate. But consequently, there exists the conflict of interests between managers and external shareholders. Comprehensive legal system is especially important. That is why countries like the USA can protect the interests of small shareholders. Moreover, the highly developed market for managers greatly decreases the opportunism and moral hazard of managers.
In China, a dominant shareholder often exists, market for managers is not well developed, and the legal system to protect investors is still immature. In this context, are Chinese major shareholders unable to conduct tunnel digging, like their American counterparts? Can Chinese managers balance and supervise major shareholders? Shi Donghui and Situ Danian (2004) found that in 2001, in % of listed firms, CEOs are selected from holding shareholders. This phenomenon shows that in China, where stock ownership is highly concentrated, major shareholders not only affect shareholder convention and board of directors, but also determine firm’s daily operation by appointing their “own persons” as managers. Moreover, they found that % board directors or CEOs hold positions at holding shareholders. This phenomenon possibly causes managers, while making decisions, favor major shareholders, thus damage the interests of small shareholders.
In today’s China, managers often represent the interests of major shareholders. They do not monitor major shareholders. Instead, they even act as executors in tunnel digging. In order to conceal their tunnel digging, holding shareholders often creates the impression that board and managers are separated to avoid the attention and scrutiny of supervisors and populace. Therefore, this paper argues that the separation of board and managers merely exist in formality. Thus, we propose:
HYPOTHESIS 2: When corporate managers are separated from board in formality, holding shareholders are more likely to appropriate assets.
(3) Size of board of directors
Jensen and Murphy (1990) argued that reasonably increasing the size of the board of directors can improve the board’s efficiency. In a big board, directors come from more diverse sources. Consequently, it is more difficult for the general manager or director of the board to manipulate the board. Therefore, this paper proposes that the larger the board is, the more unlikely that the board would be controlled by a few persons. Thus, the board can better function to coordinate and balance the interests of all parties and can resist tunnel digging. Of course, the size is not the bigger, the better. When the size is too big, communication would become difficult and the efficiency of the board decreases. Therefore, we propose:
HYPOTHESIS 3: In a reasonable range, the board’s size helps to reduce asset appropriation.
(4) Frequency of the board’s activities
Generally speaking, the more frequently the board hold activities, the more important it is in the firm’s decision making, the higher the level of corporate governance. But, if the activities are caused by abnormal conditions in the firm’s operation, then it gives signal that the firm probably faces serious governance problems; for instance, the firm’s asset is appropriated by major shareholders. In China, from 1998 to 2002, on average one listed company holds board meeting. There is great variation between companies and years. Some firms convene as few as one meeting in a year, while some firms hold as many as 37 meetings. About % firms hold more than ten meetings in a year. Obviously, these firms are abnormal in terms of meetings. We speculate that this anomaly is because of firm’s abnormal operation conditions. Therefore, this paper argues that excessive meetings give the signal that the firm’s asset is seriously appropriated. Thus, we propose
HYPOTHESIS 4: The more meetings a board holds in a year, the more seriously the firm’s asset is appropriated.
Incentive system of senior management
Generally speaking, senior managers receive both short-term and long-term benefits. A package that balances short-term and long-term benefits would achieve higher efficiency. Wage is short-term benefit for managers. Stocks for managers are long-term benefit. Holding stocks makes the senior managers also owners of the firm. This arrangement aligns the interests of the managers and of the firms. It resolves the agency problem between managers and shareholders and the problem between major shareholders and small shareholders. Therefore, we propose
HYPOTHESIS 5: Stocks held by senior manages help to reduce asset appropriation.
Stock ownership structure
Gomes and Novaes (2001) argued that ownership structure is important because holding shareholders can use firm asset for personal use. In China, the stocks of holding shareholders could not be circulated. Thus, holding shareholders can not materialize value through stock transaction. Then the holding stockholders have two ways to materialize the value of stock ownership: cash dividend and asset appropriation (Huang Zhizhong and Xue Yunkui, 2005). Therefore the non-circulation feature of Chinese holding shareholders gives great incentive for holding shareholders for asset appropriation. Zwiebel (1995) asserted that if a firm had concentrated stock ownership, the firm would take two forms. Firstly, there is one holding major shareholder and some small shareholders. Secondly, there is not a single holding major shareholder, but there are several major shareholders.
In China, most publicly listed companies come from stated-owned-enterprises. As the state wants to ensure its dominance, the common stock ownership structure is featured with one dominant holding shareholder. Compared with other firms, the firm with single holding shareholder is more easily appropriated. In firms with multiple major shareholders, major shareholders have to negotiate, thus, some decisions which damage small shareholders could possibly be avoided. Bloch and Hege (2001) argued that if there are multiple shareholders struggling for control, then the return for holding is relatively small. Highly dispersed ownership structure is rather rare in China. Dispersed ownership reduces the main shareholder’s ability to appropriate asset. Henceforth, we propose
HYPOTHESIS 6: As the holding shareholders’ shares can not be traded in China, holding shareholders are motivated to appropriate corporate asset. Compared with firms with multiple major shareholders and highly dispersed ownership structure, firms with single holding shareholder have more assets appropriated as the single holding shareholder has greater ability for asset appropriation.
Type and nature of holding shareholders
(1) Type of holding shareholders
The existing literature indicates that when holding shareholders and publicly listed firms can conduct associated transactions through corporation groups, holding shareholders can more easily appropriate corporate assets (Khanna, 2000). Jian and Wong (2003) study Chinese listed firms and find out that compared with holding shareholders not in the form of corporation group, holding shareholders in the form of corporate groups can more easily use associated transactions for tunnel digging. Therefore, we propose
HYPOTHESIS 7: Compared with firms with holding shareholders not in the form of corporation group, firms with holding shareholders in the form of corporation group suffer more from asset appropriation.
(2) Nature of holding shareholders
As said, most Chinese publicly listed companies are transformed from stated-owned-enterprises. In the transformation, well-performing assets are separated and listed, while the remaining inferior part serves as parent company. Consequently, when the parent company encounters difficulties, it would use the resources of the listed company to maintain its operation. Moreover, the government is usually aimed to expand employment, and enhance social stability, not to maximize firm value. Bai Chongen, Liu Qiao, Lu Zhou, Song Min, Zhang Junxi (2005) proposed that firms with the state as the holding shareholders are very likely to suffer from tunnel digging. Based on the analysis above, we bring forward:
HYPOTHESIS 8: Firms where the state is holding shareholder faces more serious asset appropriation.
Institutional investors’ holding
Jarrell and Poulsen (1987) and Brickley, Lease and Smith (1988) discovered that institutional investors tend to oppose firm’s actions that reduce shareholder’s asset. Shleifer and Vishny (1986) and McConnell and Servaes (1990) found out that institutional investors indeed effectively discipline corporate management so that the managers assume the firm’s goal. Tang Qingquan, Luo Danglun, and Wang Li (2004) found Chinese listed companies whose second largest shareholder is institutional investor badly suffer from asset appropriation. This is opposite to the empirical findings in other countries. We think the reason is that Tang Qingquan, Luo Danglun and Wang Li (2004) included private fund as institutional investors. Private funds in China are not real institutional investors. Xiao Xing and Wang Kun (2004) found out that Chinese institutional investors indeed choose to invest in firms with superior corporate governance. The paper argues that the higher share of a firm is held by institutional investors, the better corporate governance the firm has. Thus, we propose
HYPOTHESIS 9: the higher share the institutional investors hold, the better is the corporate governance, and the firm is unlikely to suffer from serious asset appropriation.
Financial information disclosure and corporate transparency
(1) Independent audit opinion
The information disclosed in annual report is the most important financial information disclosed by listed firms, while independent audit directly affects the quality of the financial information that the firm discloses. Generally speaking, the annual audit report with Non-clean Opinion tends to decrease the quality of the firm’s financial information. The low quality reflects the firm’s low transparency, which hurt the efforts of supervisor and small shareholders to control tunnel digging. Therefore, we propose
HYPOTHESIS 10: Compared with firms whose annual audit report is Non-clean Opinion, the firms whose annual report is Clean Opinion are less likely to suffer from asset appropriation.
(2) Size and reputation of independent audit firms
Generally speaking, audit firms with larger size and better reputation offer superior audits and more reliable audit opinions. According to the signal theory of game theory, when listed firms hire audit firms which charge high fees and offer high-quality audit opinions, they give the signal that the firm has sound corporate governance. Therefore, we believe that if a firm hires audit firms with large size and good reputation, it is unlikely that this firm suffers from asset appropriation. We can assume that international audit firms have larger size and better reputation than Chinese audit firms. Thus, we propose
HYPOTHESIS 11: If a firm invites big five audit firms to audit its annual reports, then it is unlikely that this firm suffers from asset appropriation.
External mechanisms
In China, external corporate governance mechanisms mainly include the following items: market competition for corporate control, legal environment, protection of small shareholders’ interests, market development, and competition at the product market.
Market competition for corporate control
Market competition for corporate control is very important for the effective allocation of resources (Bai Chongen, Liu Qiao, Lu Zhou, Song Min, Zhang Junxi, 2005). Such competition enables competent managers to replace incompetent managers quickly and effectively and efficiently control the firm’s resources. It is difficult to quantify the degree of competition for corporate control. Therefore, this paper focuses on the perspective of stock ownership structure for quantitative research. Generally speaking, compared with firms with a single dominant shareholder and firms with highly dispersed ownership structure, firms with multiple major shareholders are under stronger competition for corporate control. This has positive impact on preventing the asset appropriation by major shareholders. Therefore, this paper proposes
HYPOTHESIS 12: Compared with firm with a single major shareholder and firms with highly dispersed structure, firms with multiple major shareholders have high competition for control right. Consequently, the degree of asset appropriation is low.
Legal environment and protection of small shareholders
La Porta, Lopez-De-Silanes, Shleifer and Vishny (1998) found out that in common law countries, the level of corporate governance is high, and the interest of small shareholders is well protected. In contrast, in civil law countries, the protection of small shareholders is normally weak, and the level of corporate governance is low. Obviously, legal system is an effective external mechanism to protect investors. In China, there exist B-share market and opportunities for some firms to get listed overseas (such as H-share in Hong Kong, and ADR in the USA). These mature markets have strict regulation and mature legal system. It can be argued that they can better than China protect investor’s interest. Therefore we propose
HYPOTHESIS 13: Firms issuing B-share or H-share are subject to the legal system in more developed markets. Therefore, the degree of asset appropriation is low.
Market development
In the corporate governance evaluation system of Standard & Poor, the country’s market development is an important indicator regarding country grade. We believe that China’s eastern costal area has better market development than western area. Consequently, the corporate governance level in eastern coast is higher. We propose
HYPOTHESIS 14: Compared with firms in western and central China, firms in eastern coast have better market development, and consequently higher corporate governance level. Thus, the degree of asset appropriation is low.
Competition in the product market
One important external mechanism is competition in the product market. If corporate managers waste resources, the firms would ultimately lose in the product market. Therefore, fierce competition in the product market would decrease manager’s laziness, limit inefficient actions, and increase the risk of tunnel digging. Generally speaking, firms operating in the protected industries face less competition. Thus, these firms might suffer more from asset appropriation. We propose
HYPOTHESIS 15: Firms operating in the protected industries suffer more from asset appropriation
3 Research design
Variable description
In order to test the research hypotheses proposed above, we have designed the following variables: dependent variables that measure the severity of asset appropriation, independent variables measuring corporate governance mechanisms, and control variables. The details are in Table 1.
Table 1 Variable definition and description
Type
Name
Definition and computation
Category
Dependent
occupy
Asset appropriation, asset embezzled/total asset
real
Independent
single
Single major shareholder, =1when top1>50%or(40%<top1<50%andtop1>cr2_5),otherwise0
dummy
Independent
union
Multiple major shareholders, =1when10% <top1<50% andtop2>10%and top1<cr2_5,otherwise0
dummy
Independent
decentralize
Dispersed,=1hentop1<20% top2<10% and top1<cr2_5,otherwise0
dummy
Independent
duality
Leadership, =1 when manager is not board director, otherwise 0
dummy
Independent
board_size
Size of board, number of board members
Real
Independent
meeting
Number of board meetings in a year
Real
Independent
outs_ratio
Share of outside directors in the board
Real
Independent
all_share
Share of stocks held by senior managers
real
Independent
audit
=1 for standard non-reservation audit opinion, otherwise 0
dummy
Independent
bigfive
Reputation=1 for big five, otherwise 0
dummy
Independent
hbshare
Legal foundation,=1 when the firm issues B or H share, otherwise 0
dummy
Independent
state
=1 when the holding shareholder is the state, otherwise 0
dummy
Independent
group
=1 when the holding shareholder is corporate group, otherwise 0
dummy
Independent
fund_share
Share of stocks held by institutional investors
Real
Independent
protected
=1 if the firm operates in field protected by the government, otherwise 0
dummy
Independent
developed
Market foundation, =1 if the firm is located in eastern coast, otherwise 0
dummy
Control
lnsale
Firm size, natural log of firm’s net sale revenue
real
Independent
leverage
Capital structure, debt/asset ratio
real
Asset appropriation (occupy): This paper obtains this indicator (asset embezzled/total asset) by the following process. Firstly, we read annual reports and locate the payable and receivable of related parties. Then we subtract receivable from payable to get the net asset embezzled. To control for size, we divide the asset embezzled by the firm’s total asset.
Single major shareholder (single), multiple major shareholders (union) and highly dispersed structure (decentralize): This paper follows the definition used by Zhao Jingwen and Yang Hongtu (2003). Top1 represents the portion of shares held by the number one shareholder, and cr2_5 represents the sum of proportions of shares held by from the second to the fifth largest shareholders.
Share of stocks held by senior managers (all_share): Here senior managers include all board members, supervisors, and top management team members.
Prestige of audit firms (big five): Here the international five big accounting firms are: Anderson, KPMG LLP, Ernst & Young, De-loitte & Touche, and PriceWaterCooper. In 2002 Anderson withdraws from the audit business, hereafter only four big international accounting firms remain.
Nature of holding shareholders (state): Defined following the concept of final property right developed by Liu Shaojia, Sun Pei, and Liu Naiquan (2003).
Form of holding shareholder (group): Defined following Tang Qingquan, Luo Danglun, and Wang Li (2004). Non corporation groups refer to management agencies of state assets, research institutions, institutions of higher education, social groups, banks, insurance companies, and investment companies. All others are corporation groups.
Share of stocks held by institutional investors (fund_share): Here the institutional investors refer to public funds, including open and closed funds.
Product market competition (protected): We follow the definition of industries protected by the state in Chen Donghua, Chen Xinyuan, and Wan Hualin (2005). The fields protected are petroleum chemical industry, energy and raw material. Specifically, there are five such fields: Excavation industry (B), petroleum processing and coking industry (C41), ferrous metal smelting and rolling processing industry (C65), non-ferrous metal smelting and rolling processing industry (C67), electric power, coal gas and water production and supply industry (D).
Market development: The eastern region defined in this paper includes: Beijing, Tianjin, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong and Guangdong.
Sample and data
This paper uses the data of asset appropriation, finance, and corporate governance from 1998 to 2002 of all firms listed at Shanghai and Shenzhen stock exchanges. We find that the asset appropriation by large shareholders has positive values and negative values. When the asset appropriation is negative, large shareholders transfer asset to the firm. It is very hard to address the issue of corporate governance in explaining this phenomenon. We deleted these samples while doing regression analysis. Thus, we get 2632 samples for inferential statistics. To investigate the corporate governance comprehensively, we include the samples with negative asset appropriation while making descriptive analysis. Thus, we get 3793 samples for descriptive statistics. We obtain the corporate financial information and corporate governance data from CCER database.
Model
To test the above hypotheses, we use linear regression model as follows (the meanings of the variables are contained in Table 1):
occupy=c0+c1*single+c2*union+c3*decentralize+c4*duality+c5*board_size+c6*meeting+c7*outs_ratio+c8*all_share+c9*audit+c10*bigfive+c11*hbshare+c12*state+c13*group+c14*fund_share+c15*protected+c16*developed+c17*lnsale+c18*leverage+ζ
4. Model test results
Basic descriptive statistics
Table 2 contains basic descriptive statistics. We can observe the following features of asset appropriation and corporate governance. (1) In the recent few years, the share of asset embezzled over total asset remains rather constant, at about 5% level. This shows that the corporate governance reform carried out by the Chinese government has not resolved the agency problem; (2) The share of single major shareholder is declining, but still majority (%). The share of multiple major shareholders is increasing, but still pretty low (%). Share of firms with highly dispersed ownership structure is low (%); (3) More and more firms have separation of management team from owners. But the share is still low (%); (4) On average, the board has 9-10 persons; (5) The board holds more and more meetings, the average being ; (6) The share of outside directors is rising rapidly. Till 2002 it is more than 20%. This can be regarded as the result that the Chinese Securities Regulation Commission vigorously promoted this system; (7) The share of stocks held by senior managers is low. Thus, few companies use this measure to motivate managers; (8) The majority (%) of firms have annual report with standard non-reservation audit opinion; (9) More and more firms hire international big five audit firms, but the share is still low (%); (10) The share of firms issuing B and H share is low (%); (11) The majority of firms (%) are ultimately controlled by the state; (12) The majority (%) of the firms exist as corporate groups; (13) The share of institutional investors is low; (14) A small share of firms (%) operate in fields protected by the government; (15) About half of the firms are located on relatively prosperous eastern coast.
From the above statistics, we can observe the extent and tendency of asset appropriation and problems in corporate governance. These observations would guide us to reduce asset appropriation and improve corporate governance.
Table 2 Basic descriptive statistics
Name
variable
1998
1999
2000
2001
2002
all
Asset appropriation
occupy
Single major shareholder
single
Multiple major shareholder
union
Highly dispersed
decentralize
Leadership structure
duality
Size of board
board_size
Frequency of meetings
meeting
Share of outside
directors
outs_ratio
Share of stocks
Held by managers
all_share
Audit opinion
audit
Reputation of audit firms
bigfive
Legal foundation
hbshare
Nature of shareholder
state
Type of shareholder
group
Share of institutional
investors
fund_share
Product market
competition
protected
Market foundation
developed
Sample size
680
732
913
726
742
3793
Table 3 Regression results
Annual model
Period
Whole sample
1998
1999
2000
2001
2002
98－00
01－02
all
(Constant)
***
***
***
***
***
***
***
***
()
()
()
()
()
()
()
()
single
***
*
***
***
()
()
()
()
()
()
()
()
union
*
*
()
()
()
()
()
()
()
()
decentralize
**
**
()
()
()
()
()
()
()
()
duality
*
*
**
()
()
()
()
()
()
()
()
board_size
()
()
()
()
()
()
()
()
meeting
()
()
()
()
()
()
()
()
outs_ratio
***
()
()
()
()
()
()
()
()
all_share
()
()
()
()
()
()
()
()
audit
***
***
***
***
**
***
***
***
()
()
()
()
()
()
()
()
bigfive
()
()
()
()
()
()
()
()
hbshare
*
()
()
()
()
()
()
()
()
state
*
*
()
()
()
()
()
()
()
()
group
**
*
**
***
()
()
()
()
()
()
()
()
fund_share
**
***
()
()
()
()
()
()
()
()
protected
*
**
*
***
()
()
()
()
()
()
()
()
developed
()
()
()
()
()
()
()
()
lnsale
*
**
***
***
***
***
***
***
()
()
()
()
()
()
()
()
leverage
*
***
***
***
***
***
***
()
()
()
()
()
()
()
()
Adj_R2
case
462
537
625
509
499
1624
1008
2632
Note：T-statistics are given in brackets; *, **, *** denote statistically significant at 10%, 5%, and 1%, respectively.
Analysis of empirical results
Our empirical results are in Table 3. Now we analyze the empirical results from internal and external mechanisms of corporate governance.
Internal mechanisms
The following internal mechanisms have significant impact on asset appropriation: share of outside directors, board structure, stock ownership structure, nature and type of holding shareholders, share of institutional investors, and audit opinion. Now we analyze these results in detail.
In the annual model of year 2002, the coefficient of the share of outside directors (outs_ratio) is statistically significantly negative. This suggests that in 2002, outside directors indeed prevented asset appropriation. Hypothesis 1 holds true in 2002. But in other years and in all-sample model, the coefficient is not significant. In years before 2002, outside directors did not seem to prevent asset appropriation, probably because before 2002, China did not widely adopt the outside director system.
In all-sample model, the model covering period 2001-2002, and annual model of 2002, the coefficients of variable duality are positive and statistically significant. Firms with the separation of management team from owners suffer more from asset appropriation. This outcome proves hypothesis 2. Therefore, as we analyzed in the theoretical part, the separation of management from owners in formality does not enhance monitoring major shareholders.
In the all-sample model, period model for 2001-2002 and yearly model in 1999 and in 2001, the coefficients of variable single are positive and statistically significant. Firms with a single major shareholder suffer more from asset appropriation. This confirms hypothesis 6. In period model 1998-2000 and annual model 1998, the coefficients of union are statistically significantly negative. From 1998 to 2000, the ownership structure with multiple major shareholders reduces asset appropriation to a certain extent. In the annual model for 1998 and 2000, the coefficients for variable decentralize are statistically significantly different from zero. Yet the signs are opposite. This shows that the impact of dispersed ownership structure varies from year to year.
In all-sample model, period model 2001-2002 and annual model for 2001 and 2002, the coefficient of variable type of holding shareholder (group) is statistically significant positive. This shows that firms in the form of corporation group suffer more from asset appropriation. Hypothesis 7 is proven. This outcome is consistent with Tang Qingquan, Luo Danglun, and Wang Li (2004).
In period model 2001-2002 and annual model for 2002, the coefficient of the variable nature of shareholder (state) is statistically significant positive. This shows that from 2001 to 2002, firms controlled by the state suffer more from asset appropriation. We confirm hypothesis 8.
In all-sample model and in the period model 1998-2000, the coefficients for the share of institutional investors (fund_share) are statistically significant negative. This indicates that the firms with a higher share of institutional investors suffer less from asset appropriation. Institutional investors choose to invest in firms with superior corporate governance and less asset appropriation. Hypothesis 9 is confirmed.
In all models, the coefficients of audit opinion (audit) are statistically significantly negative. This indicates that firms whose annual audit reports are Clean Opinion suffer less from asset appropriation. This confirms hypothesis 10.
There are other internal corporate governance mechanisms, such as size of the board, frequency of board meetings, and share of stocks held by senior managers. These mechanisms do not have significant impact on asset appropriation.
External mechanisms
Asset appropriation is affected by the following external corporate governance mechanisms: market competition for corporate control, legal environment, and competition at the product market. We analyze these results at length.
In period model 1998-2000 and annual model 1998, the coefficients of variable union, which measures the market competition for corporate control, are statistically significantly negative. This means that the stronger the competition, the less likely asset appropriation is. Hypothesis 12 confirmed for period 1998-2000.
In annual model 2002, the coefficient for variable hbshare, which measures legal environment, is statistically significantly positive. This shows that although firms issuing B share or H share face strict regulation and sound legal system in developed markets, they suffer from asset appropriation. The opposition of hypothesis 13 is confirmed. Of course, this might because we did not measure legal environment properly.
In all-sample model, period models for both periods and annual model for year 1999, the coefficient of variable protected, which measures product market competition, are statistically significantly positive. This indicates that competition at the product market exert significant influence upon asset appropriation. As firms protected by the government faces less competition at the product market, they are likely to suffer from asset appropriation. Hypothesis 15 gets confirmed.
In all models, we do not have evidence showing that market development has impact on asset appropriation. The possible reasons are: (1) the difference between market development in eastern and western China is not big; (2) although that is significant difference between market development in eastern and western China, the difference does not have much impact on asset appropriation.
In summary, we obtain some valuable evidence from the regression outcomes contained in Table 3. Three internal corporate governance mechanisms exacerbate asset appropriation: separation of management from owners, single dominant shareholder, and holding shareholder in the form of corporation group. We also have evidence that two internal mechanisms suppress asset appropriation: institutional investors’ holding and opinions of independent audit firms. Only in yearly models for 2001-2002 do we get the strong evidence that firms controlled by the state suffer more from asset appropriation. Only in yearly model for 2002 do we obtain strong evidence that the higher share of outside directors at the board of directors helps to prevent asset appropriation. We have no evidence showing that asset appropriation is affected by the size of the board, frequency of board meetings, share of stocks held by senior management, and size and reputation of audit firms. Concerning external corporate governance mechanisms, we obtain evidence that weaker competition at the product market exacerbates asset appropriation. Only for period model for 1998-2000 do we obtain evidence that multiple major shareholders prevent asset appropriation. Only for model for year 2002 do we obtain evidence that legal environment facilitates asset appropriation. We do not have evidence that market development exerts influence upon asset appropriation.
5 Conclusions and implications
This research paper addresses the issue how corporate governance mechanisms affect asset appropriation in the Chinese context. The conclusions are as follows.
In terms of internal corporate governance mechanisms, asset appropriation is affected by share of outside directors, structure of board, stock ownership structure, type and nature of holding shareholders, institutional investor’s holding, and independent audit opinions. To be exact, asset appropriation is exacerbated by separation of management from owners, the existence of single dominant shareholder, holding shareholder in the form of corporation group, and the state as holding shareholder. Asset appropriation is suppressed by high share of outside directors, institutional investor’s holding, and independent audit’s Clean Opinion.
In terms of external corporate governance mechanisms, asset appropriation is significantly affected by market competition for corporate control, legal environment and competition at product market. To be exact, the ownership structure with multiple major shareholders suppresses asset appropriation. Asset appropriation is exacerbated by operation in the protected industries and issuing B share or H share. But asset appropriation is not affected by size of the board, frequency of board meetings, shares held by senior management, size and reputation of audit firms, and market development.
Our findings in this paper provide guidance about how to control asset appropriation with corporate governance mechanisms. Of course, this paper suffers from some shortcomings. It is well known that corporate governance is difficult to quantify. So, some measures of quantification used in this paper might not be very proper. Moreover, this research is confined to asset appropriation. Further research can be done on the appropriation of other resources.
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