Does regulation matter? Changes in corporate governance in China and its impact on financial market growth: an empirical analysis (1995-2014)

• DOI: https://doi.org/10.1108/CG-07-2018-0256
• Date: 07 October 2019
• Pages: 985-998
• Published date: 07 October 2019
• Author: Ding Chen,Navajyoti Samanta,James Hughes
• Subject Matter: Strategy

Does regulation matter? Changes in

corporate governance in China and its

impact on financial market growth: an

empirical analysis (1995-2014)

Ding Chen, Navajyoti Samanta and James Hughes

Abstract

Purpose –Over the past two decades,China’s stock market has experiencedrapid growth. This period

has seen the transplantation of many ‘‘OECD principles of corporate governance’’ into the Chinese

corporate regulatory framework. These regulations are dominated by shareholder values. This paper

aims to discover whether there is a causal relationship between the changes in China’s corporate

governanceand financial market growth.

Design/methodology/approach –This paper uses data from 1995-2014to create a robust corporate

index by looking at 52 variables and a financial index out of five financial market parameters.

Subsequently, data are subject to a panel regression analysis, with the financial market index as the

outcome variable, corporategovernance index explanatory variable and a variety of economics, social

and technologicalcontrol variables.

Findings –This paper concludes that changesin corporate regulation have in fact had no statistically

significantimpact on China’s financial marketgrowth, which must therefore be attributedto other factors.

Originality/value –The study is the first in the contextof Chinese corporate governance impact studies

to use Bayesian methodology to analyse a panel dataset. It uses OECD principles as the anchor to

providea clear picture of evolution of corporategovernance for a 20-year period which is alsolonger than

previousstudies.

Keywords Chinese corporate governance, Law and financial development, Leximetrics

Paper type Research paper

1. Introduction

Corporate governance as a “band aid” to financial malaise has been in vogue for several

decades. Repeated accounting frauds and related corporate and financial crises in early

1990’s Europe gave rise to the modern day avatar of corporate governance, gradually

morphing into a shorthand tool to justify exporting ‘good corporate values’ to developing

countries, to stimulate financial market growth. Transitioning to established international

models relating to unified corporate governance practices is, according to the World Bank

and OECD, “one important element in strengthening the foundation for individual countries’

long-term economic performance” as well as “a strengthened international financial

system”[1]. Corporate governance within these institutions ascribe principles based on

microeconomics focussing on internal relationships of companies which subsequently

attribute to a strengthened national and, therefore, international financial system[2]. This

economic rationale was similarly reflected by the United Nations Conference on Trade and

Development’s view that improvements to corporate governance would “facilitate

Ding Chen and Navajyoti

Samanta are both based at

the Department of Law,

University of Sheffiled,

Sheffiled, UK.

James Hughes is based at

the University of Sheffield,

Sheffield, UK.

Received 31 July 2018

Revised 31 January 2019

Accepted 7 February 2019

DOI 10.1108/CG-07-2018-0256 VOL. 19 NO. 5 2019, pp. 985-998, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 985