Board independence, state ownership and stock return volatility during Chinese state enterprise reform

• DOI: https://doi.org/10.1108/CG-08-2016-0172
• Pages: 220-232
• Date: 03 April 2018
• Published date: 03 April 2018
• Author: Cheng Zhang,Kee Cheok Cheong,Rajah Rasiah
• Subject Matter: Strategy,Corporate governance

Board independence, state ownership and

stock return volatility during Chinese state

enterprise reform

Cheng Zhang, Kee Cheok Cheong and Rajah Rasiah

Abstract

Purpose –This studyaimed at investigating the influence of corporategovernance on firm risk during the

Chinese state enterprise reform. The purposes of this study are to examine the effects of board

independence,state ownership and other governancevariables on firm risk and to checkthe influence of

controllingshareholder types on firm risk.

Design/methodology/approach –This study uses the dynamicand static panel model to estimate the

effects of board independence, state ownership and other governance factors on return volatility. To

examine the influence of controlling shareholder types on corporate risk-taking, this study further used

the treatment effect model (or sample selection model) to analyze the effect of private, state-owned

enterprise(SOE) entity, central governmentand local government controls on corporaterisk-taking.

Findings –It was found that the enforcement of boardindependence significantly increases firm risk.

The strategy of decentralizingstate enterprises (from central governmentto local government) is a good

way to achieve stablestock returns.

Originality value –This study contributes to existing knowledge in several ways. First, it focused on

independent directorsrather than on the size of the corporateboard. Second, it highlighted the impacts

of state ownership and control on corporate risk. Instead of treating all types of state ownership as

homogenous,SOEs are further classified into directlycontrolled and indirectly controlled,in line with prior

studies.

Keywords Financial performance, Corporate governance, Board of directors, Ownership

Paper type Research paper

1. Introduction

Corporate board serves the most important role in corporate governance. It is to mitigate

agency problems arising between managers and shareholders in a firm where ownershipis

separated from management (Nakano and Nguyen, 2012;Ho et al.,2013;Alves et al.,

2015;Lu and Wang, 2015). Board independence[1] is a primary requirement for companies

in many countries. However, in spite of its perceived importance, prior studies provide

mixed empirical evidence on the effectiveness of board independence on various decision-

making processes within a firm (Bhagat and Black,1999;Bhagat and Black, 2001;Weir and

Laing, 2001;Kumar and Sivaramakrishnan, 2008).

The same scenario of mixed empirical evidence is also applicable to the context of

China. For example, Liu et al. (2015) found that board independence contributes to firm

performance in government-controlled firms. In contrast, Li et al. (2015) found that board

independence improves board effectiveness in only private-controlled firms. Therefore,

making any definitive conclusion is even more difficult for a transitional economy like

China, where the institutional environment and governance variables are constantly

changing.

Cheng Zhang is PhD

Candidate at the Institute of

Graduate Studies,

University of Malaya, Kuala

Lumpur, Malaysia.

Kee Cheok Cheong is

Senior Research Fellow at

the Institute of China

Studies, University of

Malaya, Kuala Lumpur,

Malaysia. Rajah Rasiah is

Professor of International

Development at the Asia

Europe Institute, University

of Malaya, Kuala Lumpur,

Malaysia.

Received 28 August 2016

Revised 27 February 2017

14 August 2017

Accepted 13 September 2017

PAGE 220 jCORPORATE GOVERNANCE jVOL. 18 NO. 2, 2018, pp. 220-232, © Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-08-2016-0172