Board Independence, Ownership Concentration and Corporate Performance –
Chinese Evidence

Ke Li, Lei Lu, Usha R. Mittoo, Zhou Zhang

PII: S1057-5219(15)00106-4
DOI: doi: 10.1016/j.irfa.2015.05.024
Reference: FINANA 863

To appear in: International Review of Financial Analysis

Received date: 23 December 2014

Revised date: 2 May 2015
Accepted date: 31 May 2015

Please cite this article as: Li, K., Lu, L., Mittoo, U.R. & Zhang, Z., Board Independence,
Ownership Concentration and Corporate Performance – Chinese Evidence, International
Review of Financial Analysis (2015), doi: 10.1016/j.irfa.2015.05.024

This is a PDF file of an unedited manuscript that has been accepted for publication.
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 ACCEPTED MANUSCRIPT

Board Independence, Ownership Concentration and Corporate Performance

– Chinese Evidence*

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Ke Li Lei Lu

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Shanghai University of Finance and Economics Peking Univeristy

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rocksonlee@aliyun.com leilu@gsm.pku.edu.cn

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Usha R. Mittoo Zhou Zhang
University of Manitoba University of Regina
usha.mittoo@umanitoba.ca zhou.zhang@uregina.ca

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MA Abstract

This paper exploits two sequential exogenous regulatory reforms in China (2001 board independence and 2005 share
restructure) to study the incremental effect of the board independence on firm performance as ownership
concentration declines. We examine this effect in the 2003-2008 period when independent directors‟ ratio was
relatively stable but ownership concentration declined significantly among Chinese publicly listed firms. We find
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that the impact of board independence on firm performance increases as ownership concentration declines but this
effect varies by the types of ownership. Private-controlled firms exhibit statistically and economically significant
positive board effectiveness, whereas state-controlled firms have insignificant effects, irrespective of whether they
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are state or locally controlled. The results are robust to a battery of endogeneity checks and are stronger with market-
based (Tobin‟s Q) performance measure compared to accounting-based measure (ROA). Our results support the
notion that high ownership concentration has a moderating influence on board effectiveness but the effect also
depends on ownership types and the country‟s institutional environment.
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JEL Classification: G32, G34

Keywords: Independent directors; Ownership concentration; Corporate performance; Ownership type; private-
controlled firms; state-controlled firms; Chinese share structure reform; Institutional environment

*Lei Lu (Corresponding Author) acknowledges financial support from the National Nature Science Foundation of
China (#71271008). Ke Li acknowledges financial support from the National Nature Science Foundation of China
(#71302074) and Shanghai Planning Office of Philosophy and Social Science (2013BJB005). Usha Mittoo
acknowledges financial support from the Social Sciences and Humanities Research Council of Canada (SSHRC)
and the Stuart Clark Professorship in Financial Management. Zhou Zhang acknowledges support from the Viterra
Faculty Fellowship. We thank the seminar participants at the University of Saskatchewan, Nanjing University, 2012
Midwest Finance annual meeting, and 2012 Cross-Strait Banking and Finance (CSBF) conference for their
comments and suggestions.

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1. Introduction

The theoretical literature suggests that board independence and ownership concentration are

the two most important corporate governance mechanisms that affect firm performance (e.g.,

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Denis and McConnell, 2003; Bozec, 2005; Gillan, 2006; Adams et al., 2010). An independent

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board can protect shareholder interests and enhance firm value by monitoring top management

and by advising managers in designing and executing corporate strategy. A large controlling

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blockholder can serve as an effective governance mechanism monitoring managers, but can also

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extract private benefits of control that potentially reduce firm value, especially in countries with

weak shareholder rights (e.g., Jensen, 1993; La Porta et al., 1998).

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While a large number of studies have examined the individual effects of board

independence and ownership structure on firm value, how the interaction of these two
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governance mechanisms affects firm value is still a largely unexplored issue. Theory suggests
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that board effectiveness varies not only by the level of ownership control but also by ownership

types and the protection of minority shareholders in a country (e.g., Denis and McConnell, 2003;
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Claessens and Yurtoglu, 2013). However, measuring their joint effects empirically is challenging
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because each firm is likely to elect an optimal board structure relative to its ownership structure,

firm characteristics, and the country‟s institutional environment (e.g., Hermalin and Weisbach,

2003). Thus, to measure the interactive effects of board independence and ownership structure,

an ideal experiment would require that we keep a firm‟s board structure and other characteristics

unchanged as we change the firm‟s ownership concentration or vice versa.

In this study, we exploit two major corporate governance reforms in China that were

implemented in close succession and study the effectiveness of board independence on firm

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performance in the presence of controlling shareholders.1 The first regulation, passed on August

2001, required that the boards of all Chinese domestically listed companies include at least one-

third independent directors on their boards by June 2003. The second, 2005 share structure

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reform, was aimed at the conversion of non-tradable shares in Chinese listed companies that

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comprised about two-thirds of the total number of shares outstanding into tradable shares. The

share restructuring program was completed quickly and resulted in an increase in the proportion

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of tradable shares and a decline in ownership concentration ratios for a large population of

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Chinese listed firms. 2 Because these two reforms were mandatory, they provide us a natural

experiment to study the effectiveness of board independence on firm performance as ownership

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concentration declines. To minimize the impact of other reforms and endogeneity concerns, we

focus on a narrow window around the reforms (2003-2008) when the ratio of independent board
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directors was relatively stable but ownership concentration declined significantly. We also
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examine whether the impact differs between state- and private-controlled firms since the

marginal costs and benefits of an independent board are likely to differ between the two groups.
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The board independence reform in China has attracted a lot of attention of researchers and
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is extensively researched but the results are mixed and debatable. Wang (2014) reviews 30

empirical studies on the relationship between board composition and firm performance in

Chinese listed firms and finds that while 63% of them report a positive relation, 30% report a

negative relation and the remaining 7% report no significant relation. These differences could be

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Adams et al. (2010) suggest that one way to mitigate the endogeneity problems is to look for natural experiments,
such as mandatory corporate governance reforms undertaken in a country. Several studies have conducted such
experiments by examining the impact of recent board structure reforms implemented in several countries, and most
find a positive average effect of these reforms on firm value but also a large cross-sectional variation across firms
(e.g., Dahya and McConnell, 2005; Black and Kim, 2012). For example, Lasfer (2006) finds a negative relationship
between managerial ownership and board structure in U.K.
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On average, the companies transferred 3 shares per 10 shares owned by holders of tradable shares, with higher
compensation by state-owned firms (e.g., Li et al., 2011).

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attributed to several plausible factors. First, the corporate governance reforms in China have

been a continuous and rapidly evolving process since early 2000 (e.g., Chow, 2007), making it

difficult to disentangle the effects of board independence from other governance reforms and

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compare results in different sample periods. In particular, several corporate governance reforms

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immediately preceded or followed the board independence reform. Second, cross-sectional

differences in ownership and board structures may also drive some of these differences. State

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was the controlling shareholder in most Chinese enterprises in early phase of privatization

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whereas the number of private-controlled firms has increased steadily in recent years. The

corporate governance reforms may have different effects on private versus government
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controlled shareholder because the latter may have incentives to pursue political and social

objectives. Finally, some empirical studies use accounting-based measures (e.g., ROA or ROE)
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to assess firm performance whereas others use market-based measures (Tobin‟s Q).3 Although
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these two measures are interrelated, they could produce different results, especially when

governance reforms also affect share prices and liquidity (Morck et al., 1988; Demsetz and
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Villalonga, 2001). Wang (2014) suggests that there is a need for more focused and in-depth
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studies on the association between independent directors and firm performance that address these

issues. In a recent study, Liu et al. (2015) reexamine the effectiveness of board independence

using a large Chinese sample from 1999 to 2012 period. Their study addresses many of above

mentioned concerns and concludes that board independence has a statistically significant and

economically positive impact on Chinese firms‟ performance but the effect is stronger for state-

controlled firms compared to private-controlled firms.

Our study complements and extends Liu et al. (2015) work but differs from their study in

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Among 28 studies testing the relationship between board independence and firm performance, a majority of 22 studies use only
accounting or market based measures; only six studies use both measures (Table 4.1, Wang (2014)).

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several aspects. First, in contrast to Liu et al. (2015) who examine broadly on the relation

between board independence and firm performance, we focus narrowly on the impact of 2005

share structure reform on the effectiveness of board independence that has not been examined by

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any prior studies. Second, Liu et al. (2015) use accounting measures (ROA and ROE) to proxy

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for firm performance whereas we use both accounting-based (ROA) and market-based (Tobin‟s

Q) measures. This is an important issue in our study because operating performance may not

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fully capture markets‟ expectations about the reforms, especially due to the changes in stock

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liquidity and corporate governance structure. Finally, we also examine the differences in board

effectiveness across state- and private-controlled firms and conduct several robustness and
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endogeneity checks for our results. 4 In addition, we test whether there is a structural change

before and after the share structure reform.

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We hypothesize that the effectiveness of board independence will improve as the ownership
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concentration declines because theory suggests that the board is likely to be less effective in the

presence of a single controlling shareholder (Jiang et al., 2010). Shan and McIver (2011)
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examine the influence of corporate governance characteristics and ownership concentration on

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the financial performance of Chinese companies prior to the reform (2001 to 2005) and find that

ownership concentration is a significant factor in determining firm performance; the degree of

board independence has a positive and significant impact on performance only for larger firms.

We show that the proportion of independent directors and ownership concentration are both

positively related to corporate performance. The effectiveness of board independence on

corporate performance strengthens significantly as the ownership concentration declines, after

controlling for several common control variables. Using Tobin‟s Q as an example, we find that

4
We appreciate an anonymous referee pointing out that the endogeneity issue should be a less severe concern in Chinese context
because Chinese firms‟ governance mechanisms are in a less optimal level compared to western countries due to government
intervention, state ownership and weak institutional environment.

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the effectiveness of board independence on performance increases by about 30% if the

ownership concentration ratio declines from 75th percentile to 25th percentile. We confirm the

robustness of our results by considering the possible endogeneity between board independence

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and corporate performance using the lagged value of the board independence ratio and the

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average value of industry board independence ratio as alternative instrumental variables.

The share structure reform was also accompanied by the increase in stock liquidity that is

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likely to improve the participation of institutional investors, and increase risk sharing among

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more shareholders. We hypothesize that the positive impact of board independence due to share

structure reform will be greater for private-controlled firms compared to government-controlled

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firms. Prior to the reform, the controlling shareholders in private-controlled firms face non-

diversifiable idiosyncratic risks. Their inability to sell block of shares limits the benefits of price
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appreciation to the controller, and consequently, the illiquidity of shares increases their incentives
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to extract benefits via other channels, such as expropriation of minority shareholders (see the

discussion of “Tunneling” in Jiang et al., 2010). The increased liquidity after 2005 is likely to
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mitigate this incentive providing them a channel to increase firm value. Thus, private-controlled
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firms will welcome board efficiency if greater board independence leads to higher firm value.

The government-controlled firms, on the other hand, may have less such incentives and they are

likely to be driven by the political and social objectives (Chen et al., 2011).

Consistent with our prediction, we find that the positive impact of board independence

associated with the 2005 reform is driven predominantly by private-controlled firms. There is no

statistically significant impact of board independence on corporate performance for state-

controlled firms, irrespective of whether they are State Asset Management Bureaus (SAMBs),

SOEs affiliated with the central government (SOECGs), and SOEs affiliated with local

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governments (SOELGs).

We also test whether there is a structural change in board effectiveness after the 2005 share

structure reform, and whether this change is more pronounced for private-controlled firms than

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for state-controlled firms. We confirm the structural change using Chow test by introducing an

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After 2005 dummy and interact it with all of our explanatory variables. We find differences in the

results using ROA and Tobin‟s Q as measures of firm performance. When we use ROA as a

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performance measure, we find that the effectiveness of board independence is significant before

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and after 2005. In contrast, the statistical and economical significance of the effectiveness of

board independence is observed only in the post-2005 period for Tobin‟s Q. This finding is not
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surprising as the share structure reform should provide a more direct boost to share price rather

than firms‟ accounting performance. The subsample analysis also confirms our earlier results that
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the efficiency of board independence is driven primarily by private-controlled firms.

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Our study contributes to the corporate governance literature in three ways. First, while a

preponderance of studies have examined the impact of board independence on firm performance,
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few have investigated the board effectiveness and its interactive role with ownership
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concentration. This is because such an experiment requires keeping a firm‟s board structure

constant while changing its ownership concentration or vice versa. Dahya et al. (2008) is one of

the few studies that examines the relation between corporate value and the proportion of

independent directors among firms with a dominant shareholder across 22 countries, and they

find a positive relation between the two, especially in countries with weak shareholder protection.

We complement and extend their work by examining this relation during a period of declining

ownership concentration in Chinese publicly listed firms. Our research design also minimizes

endogeneity problems since both regulatory reforms were exogenous and applicable to all

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publicly listed firms regardless of firm performance and ownership structures.

Second, we contribute to the growing body of literature that examines the impact on firm

value of several corporate governance reforms implemented in China since 2000 (e.g., Beltratti

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and Bortolotti, 2006; Li et al., 2011; Qian and Zhao, 2011; Tang et al., 2013; Liu et al., 2015).

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Most of these studies document a positive impact of these reforms but also a substantial cross-

sectional variation across firms. In general, prior evidence suggests that the impact is more

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positive for private-controlled firms and for firms with poor stock performance and weak

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corporate governance.5 In a recent study, Conyon and He (2011) investigate the relation between

executive pay and firm performance in China‟s publicly traded firms from 2001 to 2005 and find
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that pay-for-performance is stronger in non-state-controlled firms. Beltratti et al. (2012)

document a more positive stock price reaction to share restructuring reform for stocks
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characterized by historically poor returns, and issued by firms with weak governance. We
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complement and extend this stream of the literature by examining the effectiveness of board

independence before and after share structure reform between state- and private-controlled firms
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and among different types of state-controlled firms. Our finding of a significant positive impact
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for private-controlled firms but no impact among state-controlled firms is consistent with the

evidence in prior studies and supports the notion that reforms are less effective for politically

connected firms.

Finally, our study contributes to the literature that examines the relation between country-

specific factors and firm-level corporate governance mechanisms. Several studies document that

firms located in countries with weak legal systems are valued less than their peers in countries

with strong investor protection, but also show that this value discount can be offset partially by

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Sun et al. (2002) find that the government ownership and firm performance are positively related. However, this positive
relation only holds when government ownership is below a certain level.

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strengthening the quality of firm-level governance structure (e.g., La Porta et al., 2002; Klapper

and Love, 2004; Durnev and Kim, 2005; Balasubramanian et al., 2009; Cheung et al., 2009).

Appointing an independent board is an important mechanism that can be a substitute for weak

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legal system protection for minority shareholders and enhance firm value even in the presence of

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a dominant shareholder (e.g., Dahya et al., 2008; Claessens and Yurtoglu, 2013). Our results in

the Chinese context support these findings but also show that the relationship between board

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independence, ownership concentration and firm performance is complex and depends on the

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ownership types as well as on the political and institutional framework in a country (e.g.,

Bebchuk and Hamdani, 2009; Black et al., 2012).

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The rest of the paper is organized as follows. Section 2 discusses the background of the

Chinese institutional environment and regulatory changes and develops testable hypotheses.
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Section 3 describes the data and the sample, and this is followed by our empirical results in
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Section 4. Section 5 presents the conclusions.

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2. China’s Institutional Background, Literature Review, and Hypotheses

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In this section, we first discuss the Chinese board independence and share structure reforms

and then develop testable hypotheses with regard to their impact on firm performance.

2.1. Corporate Governance Reforms in China

Over the past thirty years, China has transformed itself from a centrally planned economy to

a more market-based economy with the privatization of many state-owned enterprises (SOEs).

Two domestic stock exchanges (Shanghai and Shenzhen) were established to meet the increasing

funding demand from Chinese firms. However, the Chinese capital market is still influenced by a

high degree of government intervention, weak legal enforcement, poor protection for minority

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shareholders, and low levels of disclosure and transparency (e.g., Tam, 2002; Chen et al., 2013).

At the same time, the government maintains tight control over the SOEs and has retained

substantial ownership in many publicly listed firms. For instance, when an SOE is listed, only a

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small proportion of equity, including tradable A-shares and foreign B- or H-shares, are sold to

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private investors in the IPO process, and a large proportion (about two-thirds) of total shares

outstanding is non-tradable and owned by the state or its agencies (e.g., Firth et al., 2010; Li et

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al., 2011).6

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Since early 2000, China‟s public firms have been under pressure from investors to reform

and improve their corporate governance structures (e.g., Allen et al., 2005; Conyon and He,
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2011). The Chinese government has recognized these deep-rooted problems and introduced

several regulatory reforms in recent years to improve the institutional and capital market
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environment (e.g., Claessens and Yurtoglu, 2013). Below we discuss two major corporate
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governance reforms, the 2001 board independence and 2005 share structure reforms, which are

the focus of our study.

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The Board Independence Reform. In August 2001, the CSRC issued “Guidance Opinion
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on Establishment of Independent Director System in Listed Companies” aimed at safeguarding

the interests of minority shareholders. The Guidance required that by the end of June 2002 the

boards of listed companies should include at least two independent directors and that by the end

of June 2003 they should include at least one-third independent directors. In 2005, the

importance of independent directors was further emphasized in Article 123 of the China

Corporation Act, which states that “Listed companies are to establish independent directors, and

specific measures shall be formulated by the State Council.” The board reform was effective, and
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Many of Chinese listed companies are former state-owned enterprises and have six ownership types: (1) state shares held by the
government; (2) institutional shares owned by Chinese domestic legal entities (also called “legal persons” shares); (3) public
shares held by investors; (4) management shares; (5) foreign shares; and (6) employee shares. The last three types of ownership
comprise less than 2% of the outstanding shares, and thus they do not account for major voting shares (e.g., Chen et al., 2009).

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there was a significant change in board size and the number of independent directors on boards

of publicly listed firms in China. According to a report released by the Chinese official media on

February 2004, about 64% of companies listed on the Shanghai and Shenzhen Stock Exchanges

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had boards contained more than one-third independent directors by the end of June 2003,

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compared with almost none before 2000.7

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Split Share Structure Reform. Prior to 2005, one distinct feature of Chinese domestically

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listed firms‟ ownership structure was the existence of share structure divided between tradable

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shares (TS) and Non-tradable shares (NTS). The NTS shares had the same cash flow and voting

rights as TS shares but could not be traded on the stock exchanges. The NTS shares comprised
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about two-thirds of shares outstanding in Chinese listed firms, and a majority of them were held

by the state or legal persons (e.g., Beltratti and Bortolotti, 2006; Li et al., 2011; Liao et al., 2014).
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The large proportion of non-tradable shares led to an illiquid and volatile domestic stock market.
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Moreover, share illiquidity also elevated the conflict of interest between NTS and TS

shareholders who tended to be minority shareholders with limited power to influence

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management decisions because of China‟s weak legal system (e.g., Firth et al., 2010).
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In early 2000, the Chinese government officially recognized NTS as a major hurdle in stock

market development and stated its commitment to reforms. In June 2001, the government began

to sell non-tradable shares in the market. However, the market reacted very negatively to the

action - share prices plummeted by more than 30% because investors were worried that increased

supply of shares would depress share prices (e.g., Kim et al., 2003). In early 2005, the CSRC

announced pilot projects with a small number of companies that allowed TS shareholders within

those firms to bargain for compensation with NTS shareholders. In August 2005, the CSRC

formally launched a full-scale share structure program to convert non-tradable shares to tradable
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http://news.xinhuanet.com/stock/2004-02/06/content_1301120.htm (in Chinese)

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shares. To avoid repeating the mistake of 2001 and to expedite the reforms, the CSRC stated that

reform-compliant companies would be given priority to raise new capital. The government also

enacted a series of measures to stabilize the market, such as extending the purchase of A-shares

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to all investors who are willing to buy a minimum 10% stake in the company and hold it for

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longer than three years (e.g., Beltratti and Bortolotti, 2006). The reform was effective; 94% of

listed companies completed the share restructure by the end of 2006 (e.g., Jiang et al., 2008; Li et

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al., 2011).

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The share structure reform applied to both state- and private-controlled firms. The state-

controlled firms provided more generous compensation terms compared to private-controlled

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firms to encourage a speedy and smooth completion of the share restructuring process in order to

set a benchmark for other companies (Firth et al., 2010). Beltratti and Bortolotti (2006) show that
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firms completing share restructuring experienced significant stock price appreciation and
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Beltratti et al. (2012) find that the share-structure reform particularly benefited small firms with

low transparency and poor governance.

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2.2. Related Literature and Testable Hypotheses

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The literature suggests that an independent board and a controlling blockholder are both

important governance mechanisms and can affect firm value. Denis and McConnell (2003) and

Claessens and Yurtoglu (2013) provide a comprehensive review of the corporate governance

literature in U.S. and non-U.S. countries. Theory and empirical evidence supports that a stronger

board can improve firm performance through more effective monitoring of managers and the

reduction of agency problems and can serve as a substitute for a weak legal system in protecting

minority shareholder rights (e.g., Yeh and Woidtke, 2005; Black et al., 2006; Choi et al., 2007;

Dahya and McConnell, 2007; Black and Kim, 2012).

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Theory also suggests that ownership concentration can influence firm value in two opposite

ways. On the one hand, controlling shareholders can enhance firm value because they have the

incentives and ability to monitor managers. On the other hand, they could reduce firm value by

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diverting corporate resources for their private benefits, especially in countries with weak legal

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system protection for shareholders. Empirical evidence shows that firms located in countries

with weak legal systems are valued less than their peers in countries with strong legal systems,

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and that this value discount partly reflects the ability of controlling shareholders to divert

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corporate resources for their personal benefits (e.g., La Porta et al., 2002; Durnev and Kim,

2005; Claessens and Yurtoglu, 2013).

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While a large number of studies have investigated the individual effects of board

independence and ownership concentration on firm value, few have examined the effect of board
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independence in the presence of a dominant controlling shareholder. Dahya et al. (2008) examine
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the relation between corporate value and the proportion of independent directors on the board in

firms with a dominant shareholder across 22 countries and find a positive relation between the
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two, especially in countries with weak shareholder protection. Studies of board independence
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reforms in countries such as in Korea with a dominant shareholder and weak shareholder

protection also confirm the positive impact of an independent board on firm value (e.g., Young et

al., 2008; Black and Kim, 2012).

Many studies have examined the impact of the 2001 board independence reform in China

and most of them report a positive impact on firm value (see Wang, 2014; Liu et al., 2015).

Several studies have also examined the price impact of the 2005 share structure reform. For

example, Beltratti and Bortolotti (2006) document a positive market reaction to the

announcement of the share structure reform and Li et al. (2011) provide evidence on the relation

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between the size of compensation paid by NTS shareholder to TS shareholder and risk-sharing

gains. However, to the best of our knowledge no prior study has examined the impact of the 2005

share structure reform on the effectiveness of board independence. Because the share structure

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reform was accompanied by a large decline in ownership concentration for most firms, it

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provides us a unique laboratory to study the marginal impact of a decline in ownership

concentration on the board effectiveness and firm value.

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We argue that the impact of board independence on corporate performance will strengthen

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when ownership concentration declines in China for two reasons. First, high ownership

concentration provides controlling shareholders incentives and opportunities to exploit corporate

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resources for their own benefits (Morck et al., 1988; Shleifer and Vishny, 1997). The weak legal

protection for investors in China offers few options for minority shareholders to take private
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enforcement action against blockholders‟ misconduct (e.g., Allen et al., 2005). In addition, the
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external governance mechanisms to discipline managers, such as takeovers or investor activism,

are almost nonexistent in China. An independent board is likely to play an important role in
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reducing some of these problems by serving as a substitute for the weak legal system, leading to
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better firm performance. However, board effectiveness is a function of the board members‟ costs

and benefits of monitoring and advising, given the firm‟s characteristics and their ability to

obtain information from blockholders (e.g., Raheja, 2005; Adams and Ferreira, 2007; Duchin et

al., 2010; Ferriera et al., 2011). The presence of a dominant role may reduce its effectiveness as

noted by Dahya et al. (2008, page 77), “Appointment of a strong board, for example, may be

ineffective because a dominant shareholder can easily replace strong directors with weak ones,

especially in countries with weak shareholder protection, and this may be especially so in

countries with weak shareholders protection”. Consequently, a decline in ownership

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concentration is likely to increase board effectiveness by reducing the power of the dominant

shareholders.

Second, prior to the reform, the illiquidity of NTS shares exacerbated the agency conflicts

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between minority and majority shareholders and provided incentives for the controlling

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shareholders to divert corporate resources for personal benefits. Jiang et al. (2010) argue that the

inability of shareholders to sell block shares contributes to the tunneling problem since it limits

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the ownership benefits of price appreciation to the controllers, and increases their incentive to

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obtain benefits through other channels. The 2005 share structure reform increased the percentage

of traded shares by 30% and resulted in increased risk sharing and stock liquidity (Li et al., 2011).
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As a result, the reform is expected to decrease the incentives for tunneling, increase risk-sharing

among more shareholders, and encourage institutional ownership that would provide additional
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monitoring mechanisms for minority shareholders. In sum, we expect that board effectiveness
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will increase as the ownership concentration ratio declines, leading to better firm performance.

This leads to our first hypothesis:

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Hypothesis 1: The positive effect of board independence on firm performance will increase as
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ownership concentration decreases, all else being equal.

The incentives and marginal costs and benefits of board effectiveness are likely to vary

across firms with different types of controlling blockholders. The ownership of Chinese listed

firms is highly concentrated and can be broadly divided into state- and private-controlled firms.

Prior to 2001, the state was the only major shareholder in China, but the proportion of private-

controlled firms has been steadily increasing (e.g., Chow, 2007).8 The share structure reform

accelerated this trend by enhancing share liquidity, increasing the participation of minority

8
Gul et al. (2010) find that 43% of the outstanding shares of Chinese firms are owned by the largest shareholder, among whom 66%
are state-owned during the 1996-2003 period. Huyghebaert and Quan (2011) also document that by 2005, the state and legal
persons controlled nearly 80% of non-tradable shares of Chinese SOEs.

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shareholders in corporate decisions, and encouraging the issuance of new shares to raise capital

(e.g., Beltratti and Bortolotti, 2006; Li et al., 2011). Leung and Cheng (2013) show that the

average percentage of state-owned shares declined from approximately 46.5% of the total shares

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before the reform (between 2001 and 2005) to 26.9% in 2007.

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We predict that private-controlled firms will have higher incentives to increase board

effectiveness compared to government–controlled firms for two reasons. First, the incentives to

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adopt better governance practices are likely to be greater for private firms since they had

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generally poor performance and weak governance structures prior to reform and are likely to

benefit more from adopting better governance practices (e.g., Chen et al., 2009). Consistent with
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this view, several studies have reported a much stronger and positive impact of Chinese

corporate governance reforms on private-controlled firms (e.g., Beltratti and Bortolotti, 2006;
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Conyon and He, 2011; Li et al., 2011; Qian and Zhao, 2011; Tang et al., 2013). For example,
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Berkman et al. (2010) show that the positive market reaction to three new regulations introduced

by the CSRC in 2000 to protect minority shareholders against expropriation is stronger for firms
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with private controlling blockholders and weaker for blockholders with strong connections with
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government. Beltratti and Bortolotti (2006) document a more positive stock price reaction to

share structure reform for stocks characterized by historically poor returns, and issued by firms

with low transparency and weak governance.

Second, controlling shareholders in private firms are often exposed to non-diversifiable

idiosyncratic risks since they typically hold an undiversified portfolio. The entrepreneurs‟ non-

diversifiable position in their investments makes them value liquidity in their business decisions

(e.g., Chen et al., 2010; Panousi and Papanikolaou, 2012; Wang et al., 2012). Prior to the share

structure reform, blockholders in private-controlled firms often installed themselves or their

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representatives as the CEO and the chairman of board to divert corporate resources for their

personal benefits and one reason was the illiquidity of their share holdings. As a result, the

tunneling problems, such as related-party transactions, were more severe in these firms relative

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to state-owned enterprises (e.g., Chen et al., 2009). The private-controlled firms are likely to

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benefit more from the enhanced share liquidity, access to capital, and risk-sharing as a result of

the reform which may decrease their tunneling incentives. In contrast, state-controlled firms have

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less incentive to appoint an independent board since owners and managers do not directly benefit

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from the higher stock liquidity or risk sharing. In state-controlled firms, the state holds a

diversified portfolio that include shares of several publicly listed firms, and thus the liquidity of
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shares contributes little to the idiosyncratic risk premium. Moreover, the objectives and mandate

of state-controlled firms are likely to be different from those of private-controlled firms.

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Traditionally, the state had a large influence on the appointment of the board and supervisory
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board members and could impose significant influence on state enterprises through various

channels, such as appointing corporate executives or providing favorable tax policies. For
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example, Fan et al. (2007) suggest that directors with political ties are more likely to be
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appointed to the board. Thus, the incremental benefit of independent directors for state-

controlled firms might be small since these firms have less motivation to tunnel the assets and

are subject to stricter supervision and monitoring by various government departments. Berkman

et al. (2010) argue that regulators may not enforce the new rules on firms in which blockholders

have strong political connections, or may enforce them selectively.

In sum, the decline in ownership concentration for private-controlled firms could lead

independent directors to play a more important and active role in monitoring the management of

the firm. Shareholders in private-controlled firms are more likely to enjoy a direct benefit from

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higher share price after share structure reform if the increasing presence of independent directors

leads to an increase in firm value. The state-controlled firms, on the other hand, have less

incentive to reduce ownership concentration and increase board independence since doing so

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may reduce the direct state control of those firms. Based on the above discussion, we test the

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following hypothesis:

Hypothesis 2: The impact of board independence on firm performance will be stronger for

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private-controlled firms compared to state-controlled firms, all else being equal.

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The state controlled firms can be further divided into three ownership types: State Asset

Management Bureaus (SAMBs), SOEs affiliated to the central government (SOECGs), SOEs
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affiliated to the local government (SOELGs). Although both state and local controlled firms

could pursue different objectives than private firms, they are run and managed differently.
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Several studies have investigated the association between different types of government
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ownership and firm value in Chinese listed firms and find it varies widely across different groups.

Chen et al. (2009) examine the performance of Chinese listed firms and find that SOECG-
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controlled firms have the best performance and operating efficiency, SOELG-controlled firms
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rank in the middle, and SAMB- and private-controlled firms perform the worst and conclude that

these differences reflects varying degrees of managerial monitoring and efficiency as well as the

expropriation problems in China. Jiang et al. (2010) finds that the problem of „„other

receivables‟‟, a form of loans used to tunnel funds to parties related to the controlling shareholder,

is greater for non-state-owned firms, and that among SOEs tunneling is more severe for SOELGs

than for SOECGs. Cheung et al. (2009) also find that expropriations through transfer pricing

appear to be relatively more severe in SOELGs. Leung and Cheng (2013) examines the influence

of corporate governance mechanisms on the value of central and local government controlled

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firms from 2007 to 2009 and find that the aggregate ownership of other large shareholders and

the remuneration of top executives exhibit different effects on firm value in both groups. Because

poorly managed firms are likely to have greater marginal benefits of increase in firm value due to

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board effectiveness, we will expect that SAMB firms will have strong incentives to increase

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board effectiveness (similar to that for private-controlled firms) compared to state controlled

firms. Based on the above discussion, we test the following hypothesis:

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Hypothesis 3: The positive impact of board independence on firm performance due to share

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structure reform will be stronger for SAMBs and weaker for SOECG controlled firms, all else

being equal.
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3. Data and the Sample
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We use the China Stock Market and Accounting Research (CSMAR) database as the main
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data source. Within the CSMAR database, we combine corporate governance and performance

information from (1) the Corporate Governance Research Dataset, (2) the Shareholders Research
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Dataset, and (3) the Stock Market Financial Dataset. Our sample firms are those that were listed
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on the Shanghai and Shenzhen Stock Exchanges during the 2003-2008 period. We choose 2003

as the beginning year for our sample because this is the first year that CSMAR reports the types

of controlling shareholders.9 In addition, since the CSRC required that board members of listed

companies should include at least one-third independent directors by the end of June 2003, this

sample period allows us to control for relatively stable independent director ratios and observe a

decline in ownership concentration ratio after 2005. We exclude financial firms, and require that

each firm be listed for more than one year, and exclude firms listed after 2004. In our empirical

9
Chen et al. (2009) collect the information of shareholder types from a different source. Their efforts allow them to identify and
classify the types of shareholders covering an earlier period of 1999-2004.

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analysis, we further restrict the sample to firms with complete financial and governance data

available. Our final sample has 6,823 firm-year observations by 1,241 firms. To alleviate the

impact of extreme outliers, we winsorize all firm-level variables at the 1st and 99th percentile

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level.

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[Insert Figure 1 about here.]

In Figure 1, we show the average ratios of independent directors and the top three (five)

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shareholders‟ ownership concentration during the 2003-2008 period. The average independent

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director ratio increased slightly over time, from 32.7% in 2003 to 36.1% in 2008.10 In contrast,

the ownership concentration ratio experienced a significant decline. The top three (five)
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shareholders‟ ownership concentration ratio decreased from 55.6% (58.7%) in 2003 to 46.0%

(48.8%) in 2008, with the largest decline occurring in 2006.

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[Insert Table 1 about here.]

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Table 1 reports the sample characteristics. The mean (median) number of board directors is

9.467 (9). The average ratio of board independence is 0.347, suggesting that on average
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independent directors do not constitute a major proportion of the boards of Chinese listed firms
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and that this ratio is merely meant to meet the threshold ratio of one-third required by the CSRC.

The measures for firm performance, ROA and Tobin‟s Q ratio, are about 3.6% and 1.41,

respectively. 11 The sample firms are quite large (34 billion RMB in average assets), carry

reasonable levels of debt (book leverage ratio = 56.9%), and have a long history (age = 10.611)

10
In an untabulated analysis, we examine the cross-sectional variation of independent director ratios in our sample. Despite that
the CSRC required that all Chinese listed firms have at least one-third of independent directors on their boards by June 2003, not
all firms successfully met this requirement by the deadline. Our data suggests that at the end of year 2003, 24% of our sample
firms have less than one-third independent directors on their boards. This proportion declines over the years - at the end of year
2008, only 4.8% of firms had less than one-third independent director ratio. Our data are consistent with a report released by the
Chinese official media in 2004 (http://news.xinhuanet.com/stock/2004-02/06/content_1301120.htm (in Chinese)). Therefore,
rather than a constant number, there is a cross-sectional variation of board independence in our sample.
11
The median number of directors has been quite stable over the time even before 2003, and remains at 9 during the 1999-2002
period (results not tabulated). However, between 1999 and 2001 the independent director ratio in China was extremely low. The
mean independent director ratio was 0.8% in 1999, 2% in 2000, and 6.2% in 2001, and it rose to 24.2% in 2002.

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since the firm was incorporated.

4. Empirical Evidence

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In this section, we first outline our empirical framework and then test three hypotheses. We

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also provide robustness checks to our findings.

4.1. Empirical Specifications

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Our main regression model is as follows:

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Performancei,t = α + β1INDDIR%i,t + β2CRi,t + β3INDDIR%*CRi,t + β4Log(Board size)i,t +

β5Log(Assets)i,t + β6Leveragei,t + β7Log(Age)i,t + εi,t (1)

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Following the prior literature (e.g., Dahya and McConnell, 2007; Bhagat and Bolton, 2008;

Shan and McIver, 2011), we use both ROA and Tobin‟s Q as alternative measures for firm
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performance.12 As Shan and McIver (2011) highlight, ROA is an accounting-based measure and
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reflects backwards-looking information; Tobin‟s Q is a market-based measure and captures

investors‟ forward-looking valuation perceptions. While both measures have been used to
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measure corporate performance, they could produce different results, especially if market value
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is affected by other factors such as liquidity or corporate governance. Morck et al. (1988) argue

that Tobin‟s Q will better reflect the value of a firm‟s intangible assets. This is an important in

our study because the 2005 reform was accompanied by a decline in ownership concentration as

well as increase in liquidity and share prices. Thus, we expect a stronger effect based on Tobin‟s

Q compared to ROA.

ROA is calculated as earnings before interest and tax (EBIT) divided by total assets. Tobin’s

Q is computed as the ratio of the market value of assets over the book value of assets, where the
12
We document an increase in corporate performance over the period 2003-2008 (results not tabulated): in 2003 the average
ROA and Tobin‟s Q were 2.9% and 1.259, respectively, and they increased to 4.1% and 1.401 in 2008. In particular, the average
(median) ROA and Tobin‟s Q were 7.4% (6.2%) and 2.351 (1.885) in 2007, the highest values of corporate performance for our
sample period.

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market value of assets equals the sum of the year-end market capitalization of tradable shares,

the product of net assets per share by number of non-tradable shares, and the total amount of net

long- and short-term liabilities. Our key independent variables include INDDIR%, CR, and their

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interactive term INDDIR%*CR. INDDIR% is the ratio of number of independent directors over

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the total number of directors, and CR is the ownership concentration ratio. We define CR3 and

CR5 as the ratio of shares owned by the largest three and five shareholders to total shares,

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respectively. The coefficients of INDDIR% and CR reflect their individual impacts on firm

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performance. The interactive term INDDIR%*CR is the focus of our analysis and tests the

effectiveness of board independence on performance in the presence of ownership concentration.

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We use several control variables that are commonly used in prior studies. A summary of

variable definitions is reported in Appendix A. Log(Board size) is the logarithm of the total
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number of board directors, and its coefficient could be negative. As the number of board
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members increases, the agency cost of the board increases and its efficiency decreases, and thus

firm performance declines (e.g., Lipton and Lorsch, 1992; Jensen, 1993; Yermack, 1996).
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Log(Assets) proxies for firm size and is computed as the logarithm of total assets. Log(Age) is the
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logarithm of the number of years since the firm was incorporated. The coefficients of Log(Assets)

and Log(Age) could be negative because larger and mature firms tend to have lower growth rates

and have difficulty in achieving higher performance. Leverage is the ratio of total liability over

total assets. The predicted sign on Leverage is not clear. A higher leverage could amplify the

firm‟s earning level but also increase the variability of earnings. We also control for fixed firm

effects and year effects and estimate robust standard errors with firm clusters that account for a

lack of independence between observations for each firm.

4.2. Tests of Hypothesis 1: Efficiency of Board Independence as Ownership Concentration

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Declines

We test the impact of board independence on firm performance in the presence of

ownership concentration and report the evidence in Table 2. The coefficients on INDDIR% and

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CR3(CR5) are all positive and statistically significant at less than 5% level. The individual

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coefficients on INDDIR% and CR3(CR5), however, only reflect their individual effects on firm

performance. To measure the joint effect, we focus on the coefficient of INDDIR%*CR3(CR5).

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Because most firms reached a relative stable independent director ratio after 2003 but their

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ownership concentration ratio declined significantly after share structure reform, a negative

coefficient on INDDIR%*CR3(CR5) implies an increase in board effectiveness with declining in

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ownership concentration. In column 1, we show that the coefficient of INDDIR%*CR3 is

negative (-0.718) and significant at the 5% level. This result suggests that reducing the
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ownership concentration ratio from the 75th percentile (61.90%) down to the 25th percentile
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(40.70%) will increase the positive impact of board independence on ROA by 0.053

(=0.718*0.347*(61.90%-40.70%)). The results are similar for INDDIR%*CR5 as the coefficient

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of INDDIR%*CR5 is negative (-0.844) and significant at the 1% level in column 2. The results
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for Tobin‟s Q are presented in columns 3 and 4 and show that that the coefficient on

INDDIR%*CR3 (CR5) is also negative and statistically significant at the 5% level. Using column

3 as an example, the reduction in ownership concentration from 75th percentile to 25th percentile

will increase the effectiveness of board independence on Tobin‟s Q by 0.416

(=5.650*0.347*(61.90%-40.70%)). Considering that the average Tobin‟s Q is 1.408, an increase

in Tobin‟s Q by 0.416 implies an almost 30% increase in the effectiveness of board independence

on firm valuation.13

13
Some additional common governance control variables, such as duality role of the CEO and supervisory board size, are also
tested in the unreported regressions. We find that adding CEO duality and supervisory board size do not change our findings and

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[Insert Tables 2 and 3 about here.]

We conduct several robustness checks for our results. Prior literature suggests that board

composition and firm performance could be endogenously determined - poor corporate

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performance could lead to an increase in board independence (e.g., Hermalin and Weisbach,

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1998; 2003). To alleviate the endogeneity concerns, we first include the lagged value of the

board independence ratio as an instrumental variable and use two-stage least square (2SLS)

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regressions to rerun the regression. The results of the second stage regression are reported in

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Table 3 (columns 1 to 4), and confirm that our results remain robust. The coefficients of

IV(INDDIR%)*CR3 and IV(INDDIR%)*CR5 are all negative and significant at the 1% level
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under ROA and Tobin‟s Q as alternative dependent variables. The coefficients of IV(INDDIR%)

and CR3(CR5) remain positive and significant. Second, following Liu et al. (2015), we use the
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average value of percentage of independent directors in the same industry as the instrumental
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variable. The results are reported in Table 3 (columns 5 to 8). We find that while the coefficients

of IV(INDDIR%)*CR3 and IV(INDDIR%)*CR5 remains negative and significant at the 1% level.

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Finally, we also use GMM-SYS level estimation following Arellano and Bover (1995) (results
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not tabulated). The lagged first differences are used as instruments for level equations, and the

lagged level terms are used as instruments for equations in first differences. We find that the

coefficients of INDDIR%*CR3 and INDDIR%*CR5 are all negative and significant at the 1%

level.

4.3 Tests of Hypotheses 2 and 3: Does the Board Efficiency Vary between Firms with Different

Controlling Shareholders?

We follow the design in Chen et al. (2009) and classify our sample into private-controlled

both variables are not significant at any level. In addition, including the CEO duality variable reduces our sample size by about
more than 150 observations. Therefore, we decide not to include these two variables in our paper.

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and state-controlled firms. We lose 14 observations because we cannot identify their controlling

ownership in the CSMAR database. State-controlled firms account for the majority (71%) of our

full-sample observations. We further separate state-controlled firms into SAMBs, SOECGs, and

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SOELGs, and then compare them with private-controlled firms. Among the state-controlled

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firms in our sample, the SOELGs form the majority of sample and account for 61% of the total

state-controlled sample.

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[Insert Table 4 and Figure 2 about here.]

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Table 4 reports the univariate evidence on key variables. The sample characteristics

comparison between state- and private-controlled firms shows that median private-controlled
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firms have lower concentrated ownership, higher ROA and Tobin‟s Q, smaller asset base, and

higher leverage. The difference tests based on t-test and Wilcoxon rank sum z-test show that
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private-controlled firms differ significantly from state-controlled firms in all matrices.14 We also
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compare private-controlled firms with SAMBs, SOELGs, and SOECGs individually and find

that they exhibit statistically different firm characteristics.

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The univariate evidence in Table 4 reports only the average (mean and median) difference in
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sample characteristics between firms with different types of ownership controls. To enhance our

understanding of the sample difference between state- and private-controlling firms, we present

box plots of annual board independence and ownership concentration ratios for these two types

of firms separately in Figure 2. The annual box plots allow us to have a visual comparison of the

variable distributions, in which the bottom and top of the box are the first and third quartiles and

the band inside the box is the median. Panel A shows that private-controlled firms have more

independent directors in each year and particularly in years 2007-2008. Panel B shows that the

14
In an untabulated analysis, we also test the sample characteristics difference among different types of state-controlled firms.
There are some differences among SAMBs, SOECGs, and SOELGs, but their differences are less pronounced relative to the
comparison between state- and private-controlled firms.

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ownership concentration ratios for private-controlled firms are consistently lower in each sample

year compared with state-controlled firms. In addition, we observe that both state- and private-

controlled firms experienced large declines in their ownership concentration ratios after 2005,

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suggesting that the share structure reform impacts both types of firms. Next, we test our second

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and third hypotheses by running regressions separately for different controlling types of firms

and report the findings in Table 5.

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[Insert Table 5 about here.]

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In columns 1 and 2, we report the results using ROA as the dependent variable for state- and

private-controlled firms, respectively. We find that for private-controlled firms (column 1) the
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coefficient of INDDIR% is positive and significant (=1.202, t=2.356); the coefficient of CR3 is

also significant and positive (=0.904, t=2.508). More importantly, the coefficient of
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INDDIR%*CR3 is negative and significant at the 5% level (=-2.099, t =2.079). In contrast, for
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state-controlled firms (column 2), none of the coefficients on INDDIR%, CR3 and

INDDIR%*CR3 are significant at any conventional level. Moreover, the coefficient on

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INDDIR%*CR3 in column 2 is 0.030; its absolute size is much smaller than that in column 1 (=-
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2.099). In sum, the results in columns (1) and (2) support the prediction of H2 and suggest that

the positive impact of board independence on performance as ownership concentration declines

is driven mainly by private-controlled firms. Our results are opposite to that in Liu et al. (2015)

who report a stronger independent board effect on state-controlled firms compared to private-

controlled firms.

To test H3, we run regressions separately for SAMBs, SOELGs, and SOECGs, and report

the results in columns 3-5. We do not find supporting evidence for our H3. The coefficients on

INDDIR%*CR3 are positive and insignificant for SAMBs, SOELGs, and SOECGs. We also find

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that the coefficients of CR3 and INDDIR% are not significant at any conventional level in most

cases. We repeat the same regressions by replacing ROA with Tobin‟s Q as the dependent

variable and report the results in columns 6-10. The similar conclusion holds – privately

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controlled firms exhibit much stronger effect of board efficiency on corporate performance as

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ownership concentration declines. In contrast, we find no significant effect for state-controlling

firms, regardless whether they are controlled by central or local government.

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[Insert Table 6 about here.]

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We also employ a first-difference regression to examine whether those firms with greatest

decline in ownership concentration ratio exhibit better corporate performance, after controlling
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for the change in the board independence ratio, and whether this effect is stronger for private-

controlled firms than for state-controlled firms. We report the regression results in Table 6 using
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the change in ROA and change in Tobin‟s Q as performance measures. The results support our
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expectation – we find that the coefficients on the interactive term of change in board

independence ratio and change in ownership concentration ratio (INDDIR%*CR) are

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significantly negative. The stronger board efficiency is solely driven by the private-controlled
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firms; we find no such relationship for state-controlled firms.

4.4. Is there a Structural Change around 2005 Share Structure Reform?

Our results so far are based on a pooled sample of firm and year observations before and

after 2005 share structure reform. Since the board independence ratio remained relatively stable

through our sample period while the large decline in ownership concentration level completed in

2006, we thus test whether there is a structural change around 2005, and whether such change

varies by private- and state-controlled firms. To test the discrete impact of share structure reform,

we introduce a dummy variable After that takes the value of zero for the years 2003-2005 and

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equals one for the years 2006-2008. We then interact the After dummy with all explanatory

variables in regression model (1) and report the findings in Table 7.

[Insert Table 7 about here.]

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We first use the Chow test to evaluate whether there is a structural change before and after

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2005 by testing the joint significance of all interactive terms with After dummy. The F-statistics

consistently show the significance at less than 1% level, supporting the notion of a structural

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change around 2005. More importantly, we find different results under ROA and Tobin’s Q as

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alternative dependent variables. In column (1), we find that under ROA as the dependent variable,

the coefficient on INDDIR%*CR3 is negative (-0.692) and significant at the 10% level. In
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contrast, the coefficient on After*INDDIR%*CR3 is -0.054 but not significantly at any

conventional level. This result suggests that the efficiency of board independence on ROA is
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similar before and after share structure reform. Similarly, we observe that the coefficient on
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INDDIR% is positive (0.481) and significant at the 5% level while the coefficient on

After*INDDIR% is not significant at any level; this result further indicates a positive effect of
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board independence on ROA before and after 2005. The positive and significant coefficient on
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After dummy indicates that ROA increases after share structure reform for all of our sample

firms. We further report the subsample analysis by private-controlled firms and state-controlled

firms. Similar to that in Table 5, we find that private-controlled firms exhibit stronger

effectiveness of board independence on performance in the presence of ownership concentration.

In columns (4) to (6), we find a different result using market-based performance measure –

Tobin‟s Q compared to that of ROA. Using column (4) regression results as an example, none of

the coefficients on INDDIR%, CR3 and INDDIR%*CR3 are significant at any conventional level.

The values of these coefficients are also very small. However, the interactive terms of After with

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these variable are statistically and economically significant. The coefficient on

After*INDDIR%*CR3 is -9.089 (t=2.004) whereas the coefficient on INDDIR%*CR3 is only

0.016 (t=0.008). The negative coefficient on After*INDDIR%*CR3 is also much larger (= -

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18.599, t=1.916) for private-controlled firms than for state-controlled firms (=-5.206, t = 1.119).

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In sum, the results in Tables 5, 6 and 7 support the predictions of H2 and suggest that the

effectiveness of board independence with ownership concentration is particularly stronger for

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private-controlled firms as compared to state-controlled firms. We also show that the results for

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board effectiveness are different for accounting-based versus market-based performance

measures. The findings are stronger using market–based measure, indicating that the stock
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market assigns a higher valuation for the effectiveness of board independence after the 2005

share structure reform. Our results indicate that private controlling shareholders could benefit
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more from the reduction in ownership concentration and the improvement of corporate
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governance by increased participation of independent directors and minority shareholders in

corporate decisions, which could reduce the possibilities of tunneling the firm‟s resources to
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related parties. In contrast, state-controlled firms, regardless of whether they are SAMBS,
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SOELGs, or SOECGs, have less incentive to reduce ownership concentration and increase the

presence of independent directors, resulting in an insignificant effect of board independence on

firm performance. Our findings are also consistent with the line of literature on entrepreneurial

decisions and idiosyncratic risk (e.g., Chen et al., 2010; Panousi and Papanikolaou, 2012; Wang

et al., 2012). For example, Chen et al. (2010) argue that entrepreneurs are exposed to non-

diversifiable idiosyncratic risks and that their options to use external equity lead to better

diversification of their wealth and increase the private value of the firm. By a similar rationale in

our study, privately controlling shareholders have lower liquidity in their wealth and are less

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diversified than the state, and therefore they are more motivated to decrease ownership

concentration and enhance board independence, consequently leading to higher firm value,

which in turn allows them to monetize their holdings at higher share prices.

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5. Summary and Conclusions

In this study, we exploit two sequential exogenous and mandatory regulatory changes in

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China to examine the incremental effect of board independence on firm performance as

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ownership concentration declines. The first regulation required that all publicly listed Chinese

firms to have at least one-third of independent directors on their boards by the end of 2003. The
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second regulation mandated the conversion of non-tradable shares held by the state or legal

persons into tradable shares. These two regulations provide us a natural experiment to assess the
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board effectiveness as ownership concentration declines with minimum endogeneity issues. We

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examine this effect in a narrow window from 2003 to 2008 when independent board of directors‟

ratio was relatively stable but there was a large decline in ownership concentration using both
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accounting-based (ROA) and market-based (Tobin‟s Q) performance measures.

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We find that the positive effect of board independence on performance strengthens as the

ownership concentration declines, after controlling for other determinants of performance

commonly used in prior studies. However, the positive effect is statistically and economically

significant only for firms with private controlling shareholders. For government-controlled firms,

there is generally an insignificant effect irrespective of whether the controlling shareholders are

state or local government (SAMBs, SOECGs, or SOELGs). Our results are robust to a several

additional tests for endogeneity and Chow test for structural changes before and after the

implementation of the 2005 reform.

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Our study extends the literature on corporate governance in several ways. First, a large

number of studies have examined the effects of board independence and ownership concentration

individually but few have investigated the interactive effects of these two governance

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mechanisms. This is an important issue because theory and evidence suggest that an independent

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board can serve as a substitute for poor investor protection in countries with weak legal and

institutional systems. However, whether an independent board can serve as an effective

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mechanism in the presence of a dominant shareholder is an important but relatively unexplored

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issue. Our study complements the findings in Dahya et al. (2008) by showing that a decline in

ownership concentration increases board effectiveness and firm value.

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Second, our study also contributes to the literature on the effect of corporate governance

reforms on firms with different types of controlling shareholders. Our findings that the positive
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effect of the 2005 share structure reform on firm performance is mainly driven by private-
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controlled firms is consistent with prior studies on the reform since most find a more positive

impact of the reform on small and low transparence firms (Beltratti et al., 2012). Our findings are,
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however, contrary to the findings in Liu et al. (2015) who report a stronger effect of the board
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independence reform on firm performance for government-controlled firms relative to the

private-controlled firms. There are two plausible explanations for these differences. First, Liu et

al. (2015) examine a much larger sample (1999-2012) and do not explicitly control for the

impact of the 2005 share structure reform in their study. Their post-2005 subsample (2006-2012)

is also much larger than our sample (2005-2008) and may incorporate the effects of other events

and reforms. Second, they measure firm performance using only accounting measures (ROA and

ROE) that may not fully capture the major impact of the reform on share price, liquidity and risk-

sharing gains which were different for private- and government-controlled shares (Li et al., 2011).

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We show that the positive impact of board independence is more pronounced for Tobin‟s Q than

for ROA. Our results thus suggest that the results on the effectiveness of board independence

need to be carefully interpreted as difference performance measures may lead to different

T
findings.

P
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Finally, our study supports the view that good governance design is not universal but rather

conditions on country-specific legal and institutional structures, as well as on firm-specific

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characteristics and corporate governance mechanisms (e.g., Black et al., 2012). Our findings

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suggest that while a transition from “shareholder centrism” to “board centrism” could be the

right direction for China, this may not be a complete solution for improving performance for all
MA
firms and more reforms are needed to establish an effective corporate governance mechanism,

especially for government-controlled firms. However, some caution may be used in interpreting
ED

our results because private-controlled firms comprise only a small percentage (about 30%) of our
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sample that could weaken the power of our tests. We have also not directly examined major

incentives to increase board independence, such as capital needs and lower costs of capital,
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which may vary across different types of ownership. Future studies should conduct more in-
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depth analysis examining these incentives and employing a larger sample of private-controlled

firms.

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Appendix A: Data sources and definitions

Predicted
Variables Definition
signs

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ROA The ratio of earnings before interest and tax over total assets
Tobin's Q

P
The ratio of the market value of assets over the book value of assets, where the

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market value of assets equals to the sum of the year-end market capitalization
of tradable shares, the product of net assets per share by the number of non-
tradable shares, and the total amount of net long- and short-term liabilities.

SC
A dummy variable equals one for years 2006-2008 and zero for years 2003-
After
2005
The ratio of the number of independent directors over the total number of +

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INDDIR% directors
CR3 The ratio of shares owned by largest three shareholders to total shares +
CR5 The ratio of shares owned by largest five shareholders to total shares
MA +

Log(Board -
size) The logarithm of total number of board directors
Log (Assets) The logarithm of total assets -
ED

Leverage The ratio of total liability over total assets +/-

Log(Age) The logarithm of the number of years since the firm was incorporated -
PT
CE
AC

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Figure 1. Independent Director Ratios and Ownership Concentration Ratios for Chinese Listed
Companies during the 2003-2008 Period.
Director data is from the CSMAR‟s Corporate Governance Research Database. The ownership data is from the
CSMAR‟s Shareholders Research Dataset. Sample firms are those listed on Shanghai and Shenzhen Stock
Exchanges during the 2003-2008 period. See variable definitions in Appendix A.
70%

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60%

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50%

SC
40%

30%

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20%
MA
10%

0%
2003 2004 2005 2006 2007 2008
ED

Independent Director Ratio Top 3 Shareholders Ownership Ratio

Top 5 Shareholders Ownership Ratio
PT
CE
AC

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Figure 2. Distribution of Annual Independent Director Ratios and Ownership Concentration

Ratios For Chinese Listed Companies (State- and Private-controlled) during the 2003-2008
Period.
Figure 2 shows the box plot of annual independent director ratios and ownership concentration ratios. Director data
is from the CSMAR‟s Corporate Governance Research Database. The ownership data is from the CSMAR‟s
Shareholders Research Dataset. See variable definitions in Appendix A.

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Panel A. Box plot of independent director ratios

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State-controlled firms Private-controlled firms
.8

SC
.6

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INDDIR%

.4

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.2

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0

2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008
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Panel B. Box plot of ownership concentration ratios

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State-controlled firms Private-controlled firms

1

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.8
.6
CR3

.4
.2
0

2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008

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Table 1.Summary of Sample Characteristics

The table reports sample characteristics for Chinese firms that listed on Shanghai and Shenzhen Stock Exchanges
during the 2003-2008 period. The data is from three sub-dataset of the CSMAR database. See variable definitions in
Appendix A. We winsorize all firm-level variables at the 1st and 99th percentile levels.

Mean 25th Percentile Median 75th Std.

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Percentile
Number of board members 9.467 9.000 9.000 11.000 2.068

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Independent director ratio 0.347 0.333 0.333 0.364 0.054

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Top 3 shareholders ownership 0.513 0.407 0.520 0.619 0.150
Top 5 shareholders ownership 0.544 0.442 0.553 0.648 0.146

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Return on Assets 0.036 0.023 0.046 0.076 0.119
Tobin’s Q 1.408 1.005 1.146 1.468 0.871
Total assets (billions) 33.763 9.140 17.257 34.483 58.310

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Leverage 0.569 0.389 0.528 0.652 0.410
Age 10.611 8.000 11.000 13.000 3.851
MA
ED
PT
CE
AC

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Table 2. Testing of H1: The Impact of Board Independence on Firm Performance with
Concentrated Ownership.
This table reports the regression results for the effectiveness of board independence on firm performance in the
presence of concentrated ownership. ROA and Tobin‟s Q are two alternative dependent variables. We control for
firm and year fixed effects and estimate regressions using robust standard errors with firm clusters that account for a

T
lack of independence between observations for each firm. See variable definitions in Appendix A. We winsorize all
firm-level variables at the 1st and 99th percentile levels. Robust t statistics are in parentheses. ***, **, and * denote

P
significance at 1%, 5%, and 10%, respectively.

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ROA Tobin's Q

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(1) (2) (3) (4)
Intercept 0.389** 0.365** 11.368*** 11.334***
(2.312) (2.173) (8.259) (8.316)

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INDDIR% 0.486*** 0.576*** 3.347** 3.598**
(2.616) (3.042) (2.369) (2.440)
CR3 0.376*** MA 2.246***
(3.314) (2.693)
INDDIR%*CR3 -0.718** -5.498**
(2.356) (2.446)
CR5 0.447*** 2.305***
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(3.971) (2.714)
INDDIR%*CR5 -0.844*** -5.650**
(2.823) (2.511)
PT

Log(Board size) 0.038* 0.037* 0.149 0.147

(1.857) (1.816) (1.430) (1.410)
CE

Log (Assets) -0.025*** -0.026*** -0.570*** -0.573***

(3.116) (3.270) (9.603) (9.598)
Leverage -0.108*** -0.108*** 0.429*** 0.427***
AC

(6.156) (6.204) (3.696) (3.685)

Log(Age) -0.025 -0.021 0.155 0.153
(1.358) (1.163) (1.061) (1.049)
Firm fixed effects Yes Yes Yes Yes
Year fixed effects Yes Yes Yes Yes
N 6823 6823 6823 6823
Adjusted R2 0.303 0.305 0.567 0.567

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Table 3: Robustness Check on the Endogeneity Issue

This table provides the robustness check results for the impact of board independence on firm performance in the presence of concentrated ownership. We use two alternative
instrument variables (IV(INDDIR%)). In columns 1-4, we use the lagged value of independent board ratio as an instrumental variable. In columns 5-8, we use the average value of
industry board independence ratio as an alternative instrumental variable. Robust t statistics are in parentheses. See variable definitions in Appendix A. We winsorize all firm-level
variables at the 1st and 99th percentile levels. ***, **, and * denote significance at 1%, 5%, and 10%, respectively.

PT
Using Lag (INDDIR%) Using Industry average of INDDIR%

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as the instrumental variable as the instrumental variable
ROA Tobin's Q ROA Tobin's Q

SC
(1) (2) (3) (4) (5) (6) (7) (8)
Intercept -0.752** -0.819** 9.223*** 9.317*** -0.557*** -0.588*** 2.126* 2.341**
(3.234) (3.328) (1.846) (1.993)

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(2.184) (2.384) (5.017) (5.064)
IV(INDDIR%) 2.705*** 2.946*** 7.776** 7.798** 0.879** 0.941** 11.57*** 11.075***
(4.317) (4.592) (2.325) (2.270) (2.032) (2.087) (4.001) (3.693)

MA
CR3 1.141*** 3.230** 0.676*** 8.224***
(4.020) (2.133) (3.248) (5.913)
IV(INDDIR%)*CR3 -2.911*** -8.400** -1.818*** -24.16***
(3.058) (6.080)

D
(3.641) (1.968)
CR5 1.289*** 3.116** 0.671*** 7.327***

TE
(4.439) (2.005) (3.022) (4.964)
IV(INDDIR%)*CR5 -3.250*** -8.060* -1.773*** -21.489***
P
(3.987) (1.847)
0.009
(2.796)
0.011 0.0317
(5.097)
0.047
CE
Log(Board size) 0.165*** 0.161*** 0.478** 0.470**
(3.773) (3.721) (2.049) (2.024) (0.460) (0.525) (0.234) (0.348)
Log (Assets) -0.024*** -0.026*** -0.573*** -0.576*** 0.014*** 0.014*** -0.233*** -0.237***
AC

(5.214) (5.645) (23.480) (23.687) (8.294) (8.351) (20.927) (21.810)

Leverage -0.114*** -0.115*** 0.413*** 0.412*** -0.077*** -0.077*** 0.412*** 0.416***
(17.333) (17.535) (11.735) (11.735) (22.672) (22.725) (18.173) (18.492)
Log(Age) -0.002 0.003 0.120 0.112 -0.002 -0.001 0.002 0.002
(0.080) (0.123) (0.932) (0.874) (0.547) (0.263) (0.084) (0.095)
Firm fixed effects Yes Yes Yes Yes Yes Yes Yes Yes
Year fixed effects Yes Yes Yes Yes Yes Yes Yes Yes
N 6,751 6,751 6,751 6,751 6,709 6,709 6,709 6,709
Overall R2 0.0559 0.056 0.3435 0.3429 0.1063 0.1099 0.1113 0.1162

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Table 4: Sample Characteristics Difference across Firms with Different Ownership Controls
This table compares the differences in firm characteristics across state-controlled firms and private-controlled firms, including State Asset Management Bureaus (SAMBs), SOEs
affiliated with the central government (SOECGs), and SOEs affiliated with local governments (SOELGs). We use t-test and Wilcoxon z-test to compare mean and median
differences. See variable definitions in Appendix A. We winsorize all firm-level variables at the 1st and 99th percentile levels. ***, **, and * denote significance at 1%, 5%, and

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10%, respectively.
State asset SOEs affiliated to SOEs affiliated to

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Private- State-
management local central Difference test
controlled firms controlled firms

SC
bureaus governments government
A. Private B. State B1. SAMBs B2. SOELGs B3. SOECGs A=B A=B1 A=B2 A=B3
(N=1989) (N=4820) (N=793) (N=2948) (N=1079) t- z- t- z- t- z- t- z-

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Mean Median Mean Median Mean Median Mean Median Mean Median test test test test test test test test
Number of board members 8.91 9.00 9.70 9.00 9.95 9.00 9.59 9.00 9.81 9.00 *** *** *** *** *** *** *** ***

MA
Independent director ratio 35.33% 33.33% 34.44% 33.33% 34.87% 33.33% 34.57% 33.33% 33.76% 33.33% *** *** ** ** *** *** *** ***
Top 3 shareholders ownership 47.1% 47.6% 53.1% 54.1% 55.0% 55.8% 51.0% 52.0% 57.3% 58.7% *** *** *** *** *** *** *** ***
Top 5 shareholders ownership 51.3% 51.7% 55.8% 56.9% 57.6% 58.5% 53.8% 54.8% 59.9% 61.1% *** *** *** *** *** *** *** ***

D
Return on Assets 2.0% 4.7% 4.2% 4.6% 4.8% 4.6% 4.1% 4.5% 4.3% 4.7% *** *** *** ***
Tobin’s Q

TE
1.58 1.20 1.33 1.13 1.40 1.15 1.32 1.11 1.33 1.15 *** *** *** *** *** *** *** ***
Total assets (billions) 19.87 12.15 39.44 20.23 62.58 24.16 34.89 20.44 34.84 16.65 *** *** *** *** *** *** *** ***
Leverage 65.8% 55.6% 52.8% 51.7% 51.4% 51.5% 53.3% 52.3% 52.6% 50.5% *** *** *** *** *** *** *** ***
Age 11.50 12.00 P
10.24 10.00 10.16 10.00 10.75 11.00 8.90 9.00 *** *** *** *** *** *** *** ***
CE
AC

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Table 5. Testing of H2 and H3 – Does the board effectiveness differ among firms with different ownership controls?
This table reports the separate regression results across firms with different ownership control – private-controlled firms and state-controlled firms (SAMBs, SOECGs, and
SOELGs). ROA and Tobin‟s Q are two alternative dependent variables. We control for fixed firm and year effects and estimate regressions using robust standard errors with firm
clusters that account for a lack of independence between observations for each firm. Robust t statistics are in parentheses. See variable definitions in Appendix A. We winsorize all
firm-level variables at the 1st and 99th percentile levels. ***, **, and * denote significance at 1%, 5%, and 10%, respectively.

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Dependent variable: ROA Dependent variable: Tobin's Q

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B1. B2. B3. B1. B2. B3.
A. Private B. State A. Private B. State
SAMBs SOELGs SOECGs SAMBs SOELGs SOECGs

SC
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Intercept 0.308 0.061 0.062 0.196 0.592 7.864*** 9.540*** 10.077** 10.059*** 8.199**

NU
(0.688) (0.323) (0.113) (0.789) (0.557) (3.023) (6.457) (2.309) (4.622) (2.126)
INDDIR% 1.202** -0.016 -0.372** -0.039 -0.303 8.932*** 0.128 -0.628 0.137 2.660

MA
(2.356) (0.115) (2.122) (0.170) (0.547) (3.127) (0.137) (0.372) (0.098) (0.485)
CR3 0.904** 0.035 -0.218 0.003 0.003 5.780*** 0.194 0.412 0.254 0.519
(2.508) (0.396) (1.597) (0.021) (0.011) (2.931) (0.362) (0.350) (0.319) (0.214)

D
INDDIR%*CR3 -2.099** 0.030 0.432 0.185 0.188 -15.404*** -0.552 0.241 -0.744 -3.965

TE
(2.079) (0.132) (1.430) (0.468) (0.253) (2.874) (0.358) (0.086) (0.315) (0.443)
Log(Board size) 0.080 0.004 -0.040 0.002 0.066 0.318 0.013 -0.132 -0.012 0.212
(1.440) (0.236) (1.143)P (0.079) (0.772) (1.545) (0.129) (0.502) (0.098) (0.348)
CE
Log (Assets) -0.038* 0.001 0.005 -0.003 -0.016 -0.576*** -0.399*** -0.497** -0.416*** -0.294**
(1.790) (0.148) (0.173) (0.306) (0.316) (5.439) (5.740) (2.418) (4.320) (2.027)
AC

Leverage -0.112*** -0.162*** -0.222*** -0.159*** -0.191*** 0.570*** 0.155 0.110 0.249 0.015
(3.949) (6.835) (4.738) (4.915) (3.527) (4.103) (0.767) (0.456) (0.848) (0.035)
Log(Age) -0.027 0.005 0.101* -0.009 -0.066 0.555 0.104 0.973** 0.019 -0.544
(0.568) (0.278) (1.769) (0.314) (0.823) (1.520) (0.675) (2.116) (0.073) (0.929)
Firm fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
N 1,989 4,820 793 2,948 1,079 1,989 4,820 793 2,948 1,079
Adjusted R2 0.278 0.454 0.540 0.465 0.238 0.662 0.540 0.613 0.522 0.363

Table 6.Robustness Check: First Difference Regression

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This table provides the robustness check results using first difference regressions. The dependent and independent variables are all taken the first difference. ROA and Tobin‟s Q
are two alternative dependent variables. Robust t statistics are in parentheses. See variable definitions in Appendix A. We winsorize all firm-level variables at the 1st and 99th
percentile levels. ***, **, and * denote significance at 1%, 5%, and 10%, respectively.
All firms Private-controlled firms State-controlled firms
ROA Tobin's Q ROA Tobin's Q ROA Tobin's Q

PT
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
INDDIR% 0.735*** 0.806*** 4.588*** 4.839*** 1.472*** 1.636*** 9.991*** 10.346*** 0.238 0.258 1.427 1.627

RI
(3.202) (3.467) (2.617) (2.602) (3.030) (3.309) (2.815) (2.879) (1.175) (1.265) (0.860) (0.843)
CR3

SC
0.320** 0.823 0.728** 4.592* 0.073 -1.099
(2.417) (0.796) (2.306) (1.960) (0.649) (1.224)
INDDIR%*CR3

NU
-1.142*** -7.676** -2.407*** -17.531*** -0.334 -2.554
(3.063) (2.563) (2.735) (2.726) (1.100) (0.896)
CR5

MA
0.351*** 0.759 0.786*** 3.913* 0.082 -0.935
(2.728) (0.728) (2.621) (1.765) (0.738) (0.927)
INDDIR%*CR5 -1.202*** -7.655** -2.531*** -16.754*** -0.354 -2.800

D
(3.345) (2.543) (3.069) (2.812) (1.181) (0.877)

TE
Log(Board size) 0.030 0.030 0.146 0.154 0.073* 0.080** 0.381 0.423* 0.016 0.016 0.018 0.020
(1.441) (1.492) (1.215) (1.279) (1.831) (1.990) (1.646) (1.802) (0.749) (0.747) (0.154) (0.166)
Log (Assets) 0.000 -0.000 -0.410*** P
-0.406*** -0.015 -0.016 -0.542*** -0.538*** 0.022* 0.022* -0.275*** -0.270**
CE
(0.029) (0.005) (5.065) (5.001) (0.540) (0.588) (4.023) (3.930) (1.773) (1.764) (2.602) (2.567)
Leverage -0.216*** -0.217*** 0.151 0.152 -0.214*** -0.215*** 0.110 0.108 -0.261*** -0.261*** 0.018 0.020
AC

(9.136) (9.145) (0.886) (0.892) (6.578) (6.605) (0.463) (0.453) (8.351) (8.351) (0.081) (0.089)
Log(Age) 0.039*** 0.041*** 0.491*** 0.472*** 0.054 0.056* 0.877*** 0.771*** 0.025* 0.025* 0.282*** 0.295***
(2.606) (2.710) (5.099) (4.883) (1.639) (1.689) (4.309) (3.735) (1.652) (1.659) (2.673) (2.796)
N 5,538 5,538 5,538 5,538 1,671 1,671 1,671 1,671 3,856 3,856 3,856 3,856
2
Adjusted R 0.132 0.132 0.042 0.043 0.141 0.142 0.060 0.061 0.149 0.149 0.031 0.030

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Table 7. The Structural Change Around 2005 Share Structure Reform.

This table tests whether the board effectiveness has a structural change before and after the 2005 share structure
reform. ROA and Tobin‟s Q are two alternative dependent variables. We control for fixed firm effects and estimate
regressions using robust standard errors with firm clusters that account for a lack of independence between
observations for each firm. Robust t statistics are in parentheses. See variable definitions in Appendix A. We
winsorize all firm-level variables at the 1st and 99th percentile levels. ***, **, and * denote significance at 1%, 5%,

T
and 10%, respectively.
ROA Tobin's Q

P
Private- State- Private- State-
All All

RI
controlled controlled controlled controlled
(1) (2) (3) (4) (5) (6)

SC
Intercept -0.455*** -0.839* -0.336* 6.539*** 2.273 5.911***
(2.692) (1.810) (1.752) (5.779) (0.931) (3.988)
INDDIR% 0.481** 1.099* -0.050 0.046 2.230 -1.516
(2.050) (1.778) (0.294) (0.040) (0.828) (1.506)

NU
CR3 0.276** 0.746* 0.003 -0.037 1.381 -0.858
(2.058) (1.840) (0.026) (0.049) (0.741) (1.293)
INDDIR%*CR3 -0.692* -2.062* 0.124 0.016 -4.249 2.335
MA
(1.860) (1.787) (0.476) (0.008) (0.867) (1.232)
Log(Board size) 0.032* 0.059 0.002 0.115 0.213 -0.015
(1.740) (1.204) (0.144) (0.995) (1.001) (0.124)
Log (Assets) 0.014* 0.018 0.022** -0.293*** -0.164 -0.201***
ED

(1.707) (0.850) (2.187) (5.082) (1.304) (2.668)

Leverage -0.250*** -0.326*** -0.220*** 0.158 0.489*** 0.064
(12.776) (10.276) (8.047) (1.141) (3.260) (0.239)
PT

Log(Age) 0.027** 0.063* 0.004 0.219*** 0.392** 0.028

(2.080) (1.810) (0.288) (2.800) (2.271) (0.318)
After 0.435*** 0.705** 0.285** 1.112 -0.031 0.931
CE

(3.664) (2.203) (2.447) (1.155) (0.015) (0.973)

After*INDDIR% -0.069 -0.388 0.077 5.556** 11.148** 2.939
(0.244) (0.584) (0.306) (2.411) (2.413) (1.382)
AC

After*CR3 0.042 -0.238 0.054 2.790* 5.959* 1.289

(0.238) (0.500) (0.328) (1.730) (1.732) (0.779)
After*INDDIR%*CR3 -0.054 0.718 -0.193 -9.089** -18.599* -5.206
(0.106) (0.521) (0.419) (2.004) (1.916) (1.119)
After*Log(Board size) -0.009 -0.021 0.006 0.139 0.383 0.125
(0.553) (0.427) (0.531) (1.329) (1.605) (1.114)
After*Log (Assets) -0.023*** -0.032*** -0.015*** -0.152*** -0.216*** -0.079***
(7.422) (3.975) (3.810) (6.114) (4.015) (2.959)
After*Leverage 0.164*** 0.234*** 0.072** 0.246* 0.081 -0.086
(8.952) (9.000) (2.566) (1.928) (0.567) (0.442)
After*Log(Age) 0.012 0.009 -0.005 0.191*** 0.207 0.112*
(1.275) (0.376) (0.478) (2.948) (1.558) (1.721)
Firm fixed effects Yes Yes Yes Yes Yes Yes
F-statistics (Chow test) 16.62*** 16.37*** 3.68*** 71.33*** 19.07*** 44.76***
N 6,823 1,989 4,820 6,823 1,989 4,820
Adjusted R-squared 0.365 0.368 0.467 0.377 0.469 0.320

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Board Independence, Ownership Concentration and Corporate Performance

– Chinese Evidence

Highlights

T
 We study the impact of declining ownership concentration on the board effectiveness

P
using a Chinese sample during the 2003-2008 period


RI
We find a stronger positive impact of board independence on firm performance after
2005 share structure reform
 The impact occurs only for private-controlled firms, not for state-controlled firms

SC
 The impact is stronger with Tobin‟s Q than ROA as firm performance measure

NU
MA
ED
PT
CE
AC

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