Board Independence, Ownership Concentration and Corporate Performance

Abstract

This paper investigates two successive reforms in China -- 2001 board independence and 2005 share structure -- to study their joint effects on corporate performance as ownership concentration declines. We find that both independent directors and ownership concentration ratios are individually positively correlated with firm performance, and the positive effect of board independence strengthens as ownership concentration declines. However, the effect varies by the types of ownership. Private-controlled firms experience statistically and economically significant positive effects on firm performance, whereas state-controlled firms have insignificant effects. Our results support the notion that the board effectiveness depends not only on ownership concentration but also on ownership types and the country’s institutional environment.