Ownership Structure and Financial Distress: Evidence from Public-Listed Companies in China

Abstract

Relationships between the ownership structure attributes and the risk of financial distress are empirically examined for public-listed companies in China. The results show that ownership concentration and state ownership are negatively associated with the probability of financial distressed, suggesting that large shareholders and the state share owners have incentives to hold back financial distress. Management and board member ownership is found to be unrelated with the distress status, which may be that the effects of convergence and entrenchment are weak due to minority of management and board member ownership. Stock turnover rate also turns out to be insignificant, implying the stock liquidity may not provide a valuable external discipline in Chinese emerging stock market. Proportion of tradable shares appears to be positively related with the likelihood of financial distress. It could be that the tradable shareholders' freeriding behaviors lead to a low level of governance efficiency. The attendance rate of annual shareholders' general meeting appears to be not an important determinant, which is possibly due to the exorbitant dominance of large shareholders in major decisionmaking and limited voting rights controlled by the institutional investors. Introduction Empirical studies so far have examined the association between ownership structure and the risk of financial distress. Teall (1993) finds insider shareholdings are positively related to managerial risk-taking behavior and corporate failure in thrift industry. Simpson and Gleason (1998) survey approximate 300 banking firms to explore the influence of board structure and ownership on probability of financial distress. The results indicate that the equity ownership of management and board members has no significant effect on the likelihood of financial distress. Elloumi and Gueyie (2001) report ownership held by blockholders and outsider directors is negatively related with the probability of financial distress for a sample of Canadian firms. Parker et al. (2002) investigate the impact of corporate governance attributes on the survival of distressed firms with the method of Cox Proportional Hazards analysis. Their empirical findings suggest that blockholders' and insiders' ownership is positively related to the firm's survival likelihood. Lee and Yeh (2004) deal with the relationship between the risk of wealth expropriation by the controlling shareholders and the probability of financial distress through investigating the companies listed in Taiwan. Their evidence reveals a positive relationship exits between the probability of financial distress and this type of expropriation. Under the condition of transitional economy, ownership structure in Chinese public-listed companies exhibits some typical features, such as separation and excessive unevenness of equity ownership, high market liquidity of tradable stocks, large proportion of state ownership and so on. Previous researchers have found that ownership structure is associated with firm's performance in Chinese companies (Xu and Wang, 1997; Wei and Varela, 2003). However, few studies discuss how the ownership structure characteristics influence Chinese companies' financial distress. The unique aspect of this study is to investigate the impact of ownership structure on the corporate financial distress in Chinese emerging stock market. From the last 1990s, with the worldwide tendency of improvement in corporate governance, China increasingly realized the importance of corporate governance. The results of this paper may be helpful for regulatory authorities or policymakers in making decisions regarding privatization and corporate governance reformation. Ownership structure characteristics of public-listed companies in China Shares in Chinese public-listed companies are classified into two categories, namely, tradable shares and non-tradable shares (the share classification can be seen in the appendix). …

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