Research About Governance Effect Of Board Director Reform Of Central Government Enterprises Groups

Since 1978,reforming China’s state-owned enterprises(SOEs)has become the core of China’s transition to the market.Theoretically,the performance of SOEs suffers from both political costs and agency costs.Qian(1996)pointed out that Reform of SOEs in China should aim at reducing both political and agency costs,which can be done through de-politicization,effective corporate governance,and de-socialization.All three are essential,and the lack of any one would derail good enterprise reform.In practice,Chinese government has indeed adopted many measures in light of de-politicization and de-socialization.With the establishment of the two domestic stock exchanges in the early 1990s,state owned firms started to organize into joint stock companies and have been partially privatized through listing in the stock markets.In 2004,Chinese government established the State Assets Supervision and Administration Commission(SASAC),whose role was to serve as a holding company with the power of appointing key executives,supervising the operations and deploying of state assets of these listed firms.Further,the government decentralized its control of the SOEs by setting up multiple layers pyramid like“SASAC——SOEs group——the listed SOEs".Unfortunately,there are still two conflicting corporate governance in the pyramid structure:on the one hand,the newly established joint stock companies in the lowest layer of the pyramid establishing the modern corporate governance through adopting global standards for accounting and auditing,introducing the board,new information and financial intermediaries.On the other hand,the SOEs groups in the middle layer of pyramid still retain administrative governance model.With the rapid development of Chinese economy,such two conflicting corporate governance not only make the listed SOEs still face serious government intervention,but also result in the fabrication of modern corporate governance in listed SOEs,which weaken the effect of the decentralization reform of SOEs.Therefore,whether the government could reduce the political burden on listed SOEs and mitigate the agency costs,through increasing the firm’s flexibility and improving the corporate governance,is an important question open for theoretical analysis and empirical examining.In 2004,in order to improve the corporate governance of SOEs group,and make these firms exercise their rights as controlling shareholders regularly,and further ensure the effective operation and implementation of listed SOEs,State-Owned Assets Supervision and Administration Commission(SASAC)decided to establish board of directors in some Central Government Enterprises(CGEs)and then give some important rights of government(such as major investment and financing decision rights,the selection and appraisal of managers)back to the boards.The construction of board of directors in CGEs has provided a good nature experiment for our study.Firstly,the board reform of CGEs is aimed at Central Government Enterprises,so it is a relative exogenous event for SOEs that are controlling by these CGEs.Secondly,the board reform of CGEs is implemented year by year,which can provide good experimental group and control group for empirical tests.Based on this nature experiment,we examine how the perfection of controlling shareholders’ corporate governance mechanism affects the redundancy burden,incentive mechanism and value of listed SOEs.Specifically,this paper will answer the following three questions:first,whether the board reform of CGEs could reduce the redundancy burden of listed SOEs;second,whether the board reform of CGEs could increase the value of cash holdings of listed SOEs;third,whether the board reform of CGEs could reduce non-pecuniary of listed SOEs.Using the listed SOEs controlled by CGEs from 2002 to 2016 and a difference-in-differences(DID)design,we find the following conclusions:First,the board reform of CGEs can reduce the redundancy burden of listed SOEs,and this effect is more significant in firms which have less pyramidal layers.Then we use several approaches to mitigate potential concerns regarding our DID estimation.First,we use alternative DID specifications by restricting our sample with propensity score matched(PSM)firms.Second,we use a dynamical DID estimation to test the effect of this board reform of CGEs.Third,we drop the data of pilot year.We again find our results remain qualitatively similar.Furthermore,we find the board reform of CGEs can reduce the degree of compensation stickiness,and increase the value of listed SOEs.The results add to a large body of literature examining the valuation consequences of boards of directors,enrich the literature of the redundancy burden in SOEs,and provide empirical evidence about the positive effect of reform of SOEsSecond,the restructuring of boards of directors in CGEs can improve the value of cash holdings of listed SOEs,and this improvement is more significant in firms which have less pyramidal layers.Furthermore,we find the restructuring of boards of directors in CGEs can reduce the overinvestment of corporate excess cash holding and improve the margin innovation output of corporate cash holdings.The results not only enrich the literature of the value of corporate cash holdings,but also provide empirical evidence about the positive effect of board reforms and decentralization reform of SOEs.Third,the board reform of CGEs can reduce the non-pecuniary of listed SOEs,and this effect is more significant in firms which have less pyramidal layers and in listed SOEs whose largest shareholders have lower share ratio.