China Securities Firms: Institutional Development, Corporate Governance And Risk

As an merging industry, China Securities Firms got out of line repeatedly over their 20-year history of development, which finally led to risk outbreak all through the industry. What happened to securities industry? Based on the institutional evolution, which was caused by China's transition to markets, in securities industry, this dissertation tries to answer the following two questions with both theoretical and empirical analysis: what were the characteristics of institutional evolution in securities industry, and what impact did these characteristics have on securities firms'irregularities?Firstly, under the economic reform environment, we divide the development of securities firms into five stages: Bud Stage, Growth Stage, Reorganization Stage, Expansion Stage and Rectification Stage. During this process, the property arrangement of securities firms changed from originally banking property, to local government property, private and foreign property.Secondly, we demonstrate that the irregularities in securities industry were appropriation of customer funds, including customer deposit, trust money and customers'treasury repurchase. Then we set up a theoretical framework: the evolution of property brought two types of agency problems -"insider control"and"domination of controlling shareholder", which were the motivation of securities firms; the restriction of business and separation of banking and securities industry resulted in securities firms'lack of financing channels, which was financing environment facing securities firms; the defects in the custody system were external condition. These three factors made it possible for securities firms to appropriate customer funds. The financial crisis finally broke out during the four-year bear market periods.Finally, we conduct the empirical research to verify the cause of irregularities in securities industry. We divide the securities firms into four groups according to their development paths. And the results show that there are significant differences among these groups:"insider control"phenomenon existed in Origin and Separation groups while"domination of controlling shareholder"phenomenon existed in Control and Private groups. Then we investigate the impact of corporate governance on the firms'risk. The results show that if the firms had better internal control, the more conferences and special committees, they would have less risk, which represented the higher net capital, the less likelihood of appropriating customer deposits and being shut down. For Origin and Separation groups, the more extent the"insider control"problem had, the more risk the firms had; For Control and Private groups, the more concentrated the shareholdings, the less risk the firms had. Compared to private-controlled firms, the SOEs-controlled firms had less risk. Furthermore, through the Principal Component Analysis, we construct the governance index, combined with two accounts (account receivables and principal investments), to identify the firms'risk. The empirical evidence indicates that the property rights reform and corporate governance are the major ways to solve agency problems and reduce risk exposure for securities firms.