Minority shareholder protection, corporate governance, and investment efficiency

Abstract

In 2016, the China Securities Investor Service Center (CSISC) held 100 shares of listed firms and exercised its rights as a minority shareholder in pilot regions. Using the hand-collected exercise data and a propensity score matching and difference-in-difference (PSM-DID) design, this study examines whether and how enhanced minority shareholder protection affects investment efficiency and explores the relationship among external governance mechanisms. We find that the exercise of rights by CSISC alleviates corporate underinvestment, especially for non-state-owned enterprises and firms with high levels of pre-existing tunneling activities and cash holdings. Furthermore, we document that the effect is more pronounced for firms audited by non-Big 4 and covered by fewer analysts, suggesting a substitutional relationship among external governance mechanisms. Collectively, our paper complements the studies concerning shareholder protection and renders practical references for regulators and policy-makers. Minority shareholders should not only be well-informed but also actively encouraged to enhance their engagement in corporate governance.