Co-evolution of ownership reform and corporate governance effectiveness in Chinese listed firms

Abstract

Corporate governance is one of the most widely studied topics in management and business ethics. However, the effectiveness of firms’ corporate governance mechanisms has often been questioned. We adopt an institutional perspective to understand how firms’ corporate governance mechanisms will only be effective when the prevailing institutional context adequately addresses the rights and incentives of controlling shareholders. Taking China’s split-share structure reform in 2005 as a natural experiment, we examine whether shareholder monitoring, board monitoring, executive turnover, and executive compensation can mitigate the risk of organizational distress before and after the reform. Using matched samples of distressed and non-distressed Chinese public-listed firms, we observe that controlling and institutional ownership, executive turnover, and executive compensation reduce the likelihood of organizational distress only after the reform while board monitoring remains ineffective. Our theory and results offer important insights into how the effectiveness of firms’ corporate governance mechanisms co-evolves with prevailing institutional contexts in an emerging economy and how the principal-agent and principal-principal problems are integrally linked.