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Overview of Corporate Governance research in China

Overview of Corporate Governance research in China . Chen Xinyuan Shanghai University of Finance and Economics. Outlines . Why CG is important in China? Institutional Background Theoretical Framework Current Research Progresses Future Research Directions . Why CG is important in China?.

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Overview of Corporate Governance research in China

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  1. Overview of Corporate Governance research in China Chen Xinyuan Shanghai University of Finance and Economics China Research Incubator, 2004

  2. Outlines • Why CG is important in China? • Institutional Background • Theoretical Framework • Current Research Progresses • Future Research Directions China Research Incubator, 2004

  3. Why CG is important in China? • The focus of CG • “Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.” (Shleifer and Vishny,1997） • Protect investors and/or stakeholders’ interests • To assure the inside controller to maximize firm value not at expense of any investor and/or stakeholder’s interests. China Research Incubator, 2004

  4. Why CG is important in China? • Weak CG may slow the stock market development. Data source: China Economy database China Research Incubator, 2004

  5. Why CG is important in China? • By the end of 2002, about 1.5 percent of the total population (about 20,000,000) are active investors in China stock markets. • Financing from direct stock markets is about 10 percent of that from bank loan. • CG is especially important when China is facing the SOE transition. • Many scandals show that weak CG might be bottleneck in the capital market. China Research Incubator, 2004

  6. Institutional Background • Transition economy • Plan economy to market economy • Traditional government to modern government • Social democracy tradition • Weak law protection and strong implicit contracts China Research Incubator, 2004

  7. Theoretical Framework • Transition economy • Learning process • How to privatize SOEs? • Ideology lag • dual-class-ownership structure, tight gov’t control on state-owned-shares’ transfer • Regulation • Regulation on capital and personnel resources allocation • Moral hazard • Decentralization or deregulation • Federalism • Delegation of control rights to firms who have special knowledge- “Fang Quan Rang Li”(放权让利) China Research Incubator, 2004

  8. Theoretical Framework • Social democracy tradition • Public interest • Local and/or central gov’t interests may penetrate firm interests. • Local protection/collusion between local gov’t and firms • Soft-budget constrain • Politician’s private interests • Rent-creating and rent-seeking activities • State capture China Research Incubator, 2004

  9. Theoretical Framework • Weak law protection and strong implicit contracts • Reputation • An important way to facilitate long-term co-operation • Tight-relationship-based groups • Firm groups • Groups between different persons • Family codes • Insecurity of property rights • Governments’ reputation China Research Incubator, 2004

  10. A fundamental picture Ambiguous property rights Multi-firm-objectives Un-efficient specialization Low economic performance China Research Incubator, 2004

  11. Current Six-Year Research Progresses • Period (1998~2003) • Journals covered • 9 main academic journals • <经济研究><中国社会科学><金融研究><中国会计与财务研究><管理世界><会计研究><财经研究><审计研究><中国工业经济> • 6 main international journals (in process) • JF, JFE • AR, JAR, JAE, CAR China Research Incubator, 2004

  12. Current Six-Year Research Progresses China Research Incubator, 2004

  13. Current Six-Year Research Progresses China Research Incubator, 2004

  14. Current Six-Year Research Progresses • Most empirical studies lay emphases on the following 7 subjects: • Block shareholders 24% • Audit quality 10% • The market for corporate control 9% • Gov’t intervention/regulation 9% • Managerial incentive plans 7% • Management structure 5% • Transparency policy 5% China Research Incubator, 2004

  15. Current Six-Year Research Progresses • Few empirical study on the following subjects: • Competition in the product market 0% • Law protection 0% • Audit committee 0% • Self-discipline 0% • Social responsibility 0% • Internal labor market 1% • Non-exec directors 1% • Employee 1% • Reputation 1% • Debtholder monitoring 3% • Managerial labor market 1% • Institution investors 1% China Research Incubator, 2004

  16. Current CG research on block shareholder • Classification of block shareholders • SOE vs private • Concentrated vs non-concentrated • Family vs non family • SOE, TVE, Joint venture, foreign investor • SAMB (state assets management bureau) vs SOC (state-owned-corporate) China Research Incubator, 2004

  17. Current CG research on block shareholder • Findings • Performance (孙永祥＆黄祖辉，1999；陈晓＆江东，2000；刘小玄，2000；朱武祥＆宋勇，2001；陈小悦＆徐晓东，2001；卢文彬＆朱红军，2001；杜莹＆刘立国，2002；吴淑琨，2002；平新乔＆范瑛＆郝朝艳，2003；苏启林＆朱文，2003；施东晖，2003；刘芍佳＆孙霈＆刘乃全，2003；刘小玄，2003;聂长海＆姜秀华＆杜煊军，2003；宾国强＆舒元，2003；向朝进＆谢明，2003；Sun＆Tong,2003) • Dividend policy (吕长江＆王克敏，1999；原红旗，2001；陈信元＆陈冬华＆时旭，2003) • Financing (袁国良＆郑江淮＆胡志乾，1999；郑江淮＆何旭强＆王华，2001；孙永祥，2001) • Expropriation (唐宗明＆蒋位，2002) • Related party transaction (秦玉熙，2003) • Firm reputation (李维安＆李建标，2003) • Ownership structure determinants (王红领＆李稻葵＆雷鼎鸣，2001；李涛，2002；冯根福＆韩冰＆闫冰，2002) China Research Incubator, 2004

  18. Current CG research on audit quality • Quick introduction of relevant background • Audit market emerges since the end of 1980s • De-affiliation reform in 1998 and 1999 (脱钩改制) • Qualification regulation on listed company auditing • Most CPA firms are of limited liability • Independent auditing standards have been promulgated since 1995 China Research Incubator, 2004

  19. Current CG research on audit quality • Findings • Earnings management (夏立军＆杨海斌，2001；李爽＆吴溪，2003) • Fraud (胡奕明＆周智辉＆郑德成，2002；葛家澍＆黄世忠，2002) • Market reaction (李增泉，1999；Chen＆Su＆Zhao,2000) • Auditor independence (王跃堂＆陈世敏，2001；刘峰＆张立民＆雷科罗，2002；原红旗＆李海建，2003；Defond＆Wong＆Li，2000) • Auditor change (李爽＆吴溪，2001；耿建新＆杨鹤，2001；李东平＆黄德华＆王振林，2001；陆正飞＆童盼，2003) • Audit quality (刘明辉＆李黎＆张羽，2003) • Auditing fee (刘斌＆叶建中＆廖莹毅，2003；夏冬林，2003) China Research Incubator, 2004

  20. Current CG research on the market for corporate control • Quick introduction of institutional background • Most listed companies are controlled by gov’t • The transfer rights of state shares are held by gov’t • Privatization in listed company are facing many implicit regulations which researchers might have not totally known yet. China Research Incubator, 2004

  21. Current CG research on the market for corporate control • Findings • Hostile takeover (刘守刚，1999) • Accounting performance (朱宝宪＆王怡凯，1998；王跃堂，1999；冯根福＆吴林江，2001；李心丹等，2003) • Market performance (陈信元＆张田余，1999；洪锡熙＆沈艺峰，2001；李善民＆陈玉罡，2002) • CEO turnover (朱红军，2002) • Predicting takeover targets (李善民＆曾昭灶，2003) China Research Incubator, 2004

  22. Current CG research on gov’t intervention/regulation • Quick introduction of institutional background • CSRC regulates how capital allocate in the market • One of the most important measure CSRC uses to regulate is accounting numbers • Gov’ts may require firms to fulfill some gov’t targets China Research Incubator, 2004

  23. Current CG research on gov’t intervention/regulation • Findings • Earnings management (陆建桥，1999；孙铮＆王跃堂，1999；陈小悦＆肖星＆过晓艳，2000；Aharony＆Lee＆Wong，2000；陈晓＆李静，2001；陈信元＆叶鹏飞＆陈冬华，2003) • Gov’t regulation and transparency (刘峰，2001；王立彦＆刘军霞，2003) • Financing (叶鹏飞，2000) • Management appointment (中国企业家调查系统，2000) • The efficiency of regulation (宁向东＆张海文，2001) • Standard setting (陈冬华＆陈信元，2003) • Subsidies (陈冬华，2003) China Research Incubator, 2004

  24. Current CG research on managerial incentive plans • Quick introduction of institutional background • Manager compensation for SOEs are regulated by gov’t • Intuitively, monetary income only accounts for a small part of SOE managers’ total income, of which most parts are not easily observable, like perking, rent-seeking, promotion, gov’t secret bonus, etc. • Listed companies are not required to disclose the details of incentive plans China Research Incubator, 2004

  25. Current CG research on managerial incentive plans • Findings • Firm performance (刘小玄＆郑京海，1998；李增泉，2000；魏刚，2000；李勇，2002；＊新民＆刘善敏，2003；林浚清＆黄祖辉＆孙永祥，2003；周建波＆孙菊生，2003；张俊瑞＆赵进文＆张建，2003；刘斌等，2003) • MBO （毛道维＆蔡雷＆任佩瑜，2003） • Incentive plan design (“效绩评价余年薪制研究”课题组，2003) • Capital structure (吴晓求＆应展宇，2003) China Research Incubator, 2004

  26. Current CG research on management structure • Quick introduction of institutional background • Managers, especially key members, are appointed by gov’t and how managers are appointed is unobservable • Most managers are sent from parent company • Soft budget constrain make it very difficult to measure manager performance • Absence of an efficient managerial labor market China Research Incubator, 2004

  27. Current CG research on management structure • Findings • Performance (吴淑琨＆柏杰＆席酉民，1998；孙铮＆姜秀华＆任强，2001；于东智，2003) • Manager turnover (王珺，2001；龚玉池，2001；张建琦＆王凡，2003) • Accounting transparency (刘立国＆杜莹，2003) China Research Incubator, 2004

  28. Current CG research on transparency policy • Quick introduction of institutional background • Listed companies disclosure is regulated by CSRC • Accounting and auditing standards setters are MOF and CICPA respectively • Like most Asian firms, the organization of Chinese firms is complicated • Punishment on fraud is weak China Research Incubator, 2004

  29. Current CG research on transparency policy • Findings • Descriptive studies (原红旗，1998；李婉丽＆张晓岚，2002；李明辉＆何海＆马夕奎，2003；张立民＆钱华＆李敏仪，2003) • Transparency and firm financing (王宣喻＆储小平，2002) China Research Incubator, 2004

  30. Future Research Directions • For areas where we have done quite a lot of studies, further studies are needed. • For the rest areas, are there some questions we should not miss? China Research Incubator, 2004

  31. Future Directions for China CG Research • Block shareholders • Why are ownership structures formed? • Audit quality • What are the contracting roles of audit? • How to measure audit quality? • The market for corporate control • Is there really a market for corporate control? • Is there any other mechanisms which can induce corporate control change? If yes, how about their economic consequences? • Gov’t intervention/regulation • Will gov’t regulations lower the efficiency of resources allocation? • Managerial incentive plans • How promotion incentives affect manager efforts? China Research Incubator, 2004

  32. Future Directions for China CG Research • Management structure • What are the determinants of current management structures. • Transparency policy • How do firms choose transparency policy? • Competition in the product market • How competition shape CG? • Non-exec directors • How are independent directors selected? • Employee • What are employee’s rights in the firms? And how about the enforcements of these rights? • How are employee’s rights protected or expropriated? China Research Incubator, 2004

  33. Future Directions for China CG Research • Reputation • Is reputation a mechanism to mitigate the weak law protection? • Will SOEs be motivated to establish reputation when property rights are ambiguous? • How does reputation affect firm performance? • Debtholder monitoring • Who are debtholders? How about debtholders’ governances? What are debtholders’ objectives? • Which mechanisms are used by debtholders to monitor firms? Contracts or reputation? • Managerial labor market • Is there a quasi-market for SOE managers inside the gov’t? • For private firms, is managerial labor market pressure effective? China Research Incubator, 2004

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