Double Principal-agent Context Of Internal Corporate Governance Mechanisms And Performance,

By examining how level of ownership concentration may exert influence on the board composition, we go one step further by not only treat principal-principal conflict as the incongruence of interest orientation among major shareholders and minority shareholders but also as a dominant internal governance mechanism, which, through structuring board composition, lead to higher agency cost and inferior company performance.Based on agency theory, resource dependence theory and stewardship theory, this paper proposed three assumptions:there is a substitution effect exists between ownership concentration level and board composition, proxied by percentage of independent directors on the board; Highly concentrated ownership structures represented by one dominant shareholder contribute negatively to the corporate value; While independent directors, which act as an important internal governance mechanism, take a positive role in improving corporate performance.Using panel data from Chinese companies listed on the Shanghai and Shenzhen stock exchanges before 2004 and was still remaining listed till 2009, we may conclude that the substitution effects between ownership concentration level and board composition does exist.As for the assumptions two and three, the result may depend on industrial differences though the assumptions were substantiated in most of the observed industries.We examine the implication of our finding for governance policy trend in China: further vigorously develop diverse investing bodies, promoting the role of institutional investors and private legal representatives in corporate governance. With a more balanced ownership structure, we can expect independent directors contribute more significantly to the corporate value improvement.