Monitoring or tunneling by large shareholders: evidence from China private listed companies

Abstract

Purpose – The purpose of this paper is to analyze the relationship between ownership concentration and company performance in China private listed companies. Design/methodology/approach – By taking into account of the difference of managerial positions of large shareholders in listed companies (whether they assume the posts as presidents or general managers), and based on the two agency theories, the paper analyzes the state dependency of the relationship between ownership concentration and the company performance of listed companies with the samples of China private listed companies from 2003 to 2011. Findings – The paper finds that if the large shareholders assume no posts in the listed companies, there is an inverted U shape relation between shareholding ratio of the largest shareholders and the company performance. This result indicates the inadequate or excessive monitoring to the companies by the large shareholders according to different shareholding ratios. If large shareholders assume posts in the listed companies, there is a U shape relation between shareholding ratio of the largest shareholders and the company performance. This result indicates the tunneling and propping to the small shareholders by the large shareholders according to different shareholding ratios. Research limitations/implications – This paper has not taken the influence of earnings management of the listed companies. Practical implications – For strengthening the protection of investors, proper distinction shall be made among shareholders of different conditions, and difference of roles large shareholders play in the company under different conditions shall be understood correctly, so as to formulate and perfect market rules for corporate governance, rather than just restraining the power (rights) of large shareholders. The study in this paper is for helping understand the different roles large shareholders play under different corporate governance conditions. Originality/value – First, different from the research paradigm of relationship between ownership concentration and company performance in existing literature, the paper discriminates the study background with the post-assuming conditions of large shareholders in listed companies and believes that relationship between ownership concentration and company performance shall be presented differently under different post-assuming conditions. Second, by using monitoring theory and tunneling and propping theory to explain the behaviors of large shareholders under different post-assuming conditions respectively, a new theory explanation view is provided for explaining the relation between ownership concentration and company performance.