State Control, Legal Investor Protection, and Ownership Concentration: Evidence from China

Shinong Wu · Nianhang Xu · Qingbo Yuan

77 citations0/0 files storedCorporate Governance An International Review

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Corporate Finance and Governance Financial Markets and Investment Strategies Corporate Governance and Law

Abstract

ABSTRACT Manuscript Type: Empirical Research Question/Issue: To control for the omitted‐variables and aggregation biases problem existing in previous cross‐country studies, our paper investigates the relationship of ownership concentration and legal investor protection across regions and over time in one emerging economy, China, during the period 1992 to 2003. Moreover, this paper examines whether state control affects this relationship. Research Findings/Results: For state‐controlled firms, we cannot find the typical inverse relationship between ownership concentration and legal investor protection documented by La Porta, Lopez‐de‐Silanes, Shleifer, and Vishny (1998 ), since state per se works as a substitute for formal legal investor protection in protecting property rights by exploiting political power. However, for non‐state‐controlled firms, the inverse relationship does hold. Theoretical Implications: Our findings suggest that the nature of the controlling shareholder should be taken into account when examining the relationship between ownership concentration and legal investor protection. Moreover, our findings give new insights, especially to the study on other emerging economies that share similar characteristics with China in terms of legal development and government control. Finally, the cross‐region study within one country provides a new perspective on the research in this area. Practitioner Implications: First, to provide a level playing field for different types of investors, the state's dual role of controlling shareholder and political power holder should be separated. Second, it is important to build up a good legal system to protect investors in order for a country to develop its capital markets, especially for the development of the non‐state sector.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1998Law and Finance 1999Corporate Ownership Around the World 1933The Modern Corporation and Private Property 1988Management ownership and market valuation 2000Investor protection and corporate governance 1985The Structure of Corporate Ownership: Causes and Consequences 2005Law, finance, and economic growth in China

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