Politician Control, Agency Problems, and Ownership Reform: Evidence from China

Abstract

Using data from a recent national survey on the ownership reform of state-owned enterprises in China, we study the effects of reducing politician control and agency problems on the financial performance of the reformed firms. Taking into account the endogenous nature of the reforms, we find that firm performance is positively affected by the lessening of politician control by increasing the firm's flexibility in labor deployment and by the mitigation of agency costs through the introduction of more effective corporate governance mechanisms such as one-share one-vote and shareholding-based board structure composition. Ownership structure also affects performance: relative to shareholding by the state, foreign ownership has a positive effect on firm performance; individual (mostly employee) shareholding has a negative effect; whereas the effect of collective and legal person shareholding is indistinguishable from that of state shareholding. Somewhat surprisingly, operating autonomy (excluding labor deployment flexibility) has a negative effect on firm performance, suggesting serious agency problems in the reformed enterprises.