Foreign Shareholding, Corporate Governance and Firm Performance: Evidence from Chinese Companies

Abstract

This paper examines how a firm’s corporate governance characteristics and institutional environment affect the presence of large foreign shareholding, and how a firm’s foreign ownership influences its performance. For a sample of listed Chinese companies, we find that both firm-level governance characteristics and country-level institutional environment affect the presence and the extent of large foreign shareholding. We also find an inverted U-shaped relation between a firm’s foreign ownership and its return on assets, return on equity and Tobin’s q. The implied optimal foreign ownership increases when changes in institutional environment reduce the opportunity for controlling shareholders to extract private benefits.