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

AuthorCheng Zhang, Kee Cheok Cheong, Rajah Rasiah
Publication Date03 Apr 2018
Board independence, state ownership and
stock return volatility during Chinese state
enterprise reform
Cheng Zhang, Kee Cheok Cheong and Rajah Rasiah
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
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
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,
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

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