Large Shareholders's Effect On Corporate Performanc: Mechanism And Evidence

Comprehensive and systematic studies on large shareholders' behaviors and effect on corporate operating performance have an important implication for China's capital market development.This paper investigates the effect of large shareholders on corporate performance both theoretically and empirically.In respect of theory, we summarize and propose three types of mechanisms, which reflect how large shareholders exert influence on corporate performance. The three types are separation of large shareholder's cash flow right and control right, large shareholders' identity, and sharing of control by multiple large shareholders.In terms of empirical research, we construct an empirical model to explore the relations among largest shareholder's ownership, property and identity, the existence of other large shareholders, controlling patterns and corporate performance. With data from China's securities exchanges from 2001 to 2003, we get the following empirical results. Firstly, it demonstrates a significant U-shaped relationship between largest shareholders' ownership and corporate performance. Secondly, we find that companies with majority-controlling or no controlling shareholders achieve better performance that those with minority-controlling shareholders. Thirdly, companies with non-state-owned enterprises, foreign investors, and current equity investors as the largest shareholdersdo better than those with the states as the largest shareholders in term of performance. Fourthly, the effect of large shareholders on corporate performance displays distinct features as the largest shareholders are different in nature. When the largest shareholder is the state, the shareholder identity's effect is most prominent. However as the non-state-enterprises play the roles of the largest shareholders, ownership's influence is most notable. Finally, the existence of other large shareholders makes no difference, which means other large shareholders don't fulfill the responsibility of monitoring managers and the largest shareholders.