The underlying mechanism of corporate governance in China

Abstract

Purpose

This paper aims to propose a strategy to analyze management governance in China.

Design/methodology/approach

This paper incorporates data on 989 Chinese listed firms over 2006 to 2016. A fixed effects model with panel data and an F-test are applied to exploit the relationship between management ownership and firm performance. A threshold model is introduced to explore the impacts of other governance mechanisms on management governance.

Findings

This paper finds an inverted U-shaped relationship between management ownership and firm performance. Furthermore, the threshold model demonstrates that large shareholders strengthen the positive effects of management governance and attenuate its negative effects; board size strengthens the positive effects of management governance but cannot attenuate its negative effects; and independent directors attenuate the negative effects of management governance.

Practical implications

This paper indicates that increasing management ownership could motivate managers to ameliorate the agent’s moral hazard problem which link the firm value premium when management ownership is less than 20.286 per cent. However, equity incentives are very rare in China. Thus, the authors expect that equity incentives will be a common phenomenon in Chinese listed firms.

Originality/value

This paper contributes to corporate governance literature by shedding some light on management ownership to explore the effects of management ownership. Specifically, this paper explores the effects of management ownership on firm performance and the impacts of other governance mechanisms on management governance to shape the management governance in China.

Citation

Yan, C., He, H., Li, J., Cheng, S. and Zhang, Y. (2019), "The underlying mechanism of corporate governance in China", Chinese Management Studies, Vol. 13 No. 2, pp. 447-467. https://doi.org/10.1108/CMS-10-2016-0202