Maximising the External Governance Function of the Securities Market: A Chinese Experience

Abstract

Securities market and takeover activities are important issues of corporate law. They are also important mechanisms of corporate governance. The law and economics tradition recognises that the hostile takeover performs a desirable disciplinary function by placing management under the market’s judgment. According to the law and economics literature, the pressure of takeovers, the advantages of being listed and the efforts made for being a listed company in a stock exchange are effective stimuli of promoting good corporate governance. Furthermore, by having a wide and varied scope of owners, listed companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders. In China, the securities market and regulation have developed in tandem with its economic reforms. They are means of achieving the goals of the country’s economic reforms. The central task of the economic reforms is to enhance the economic performance of China’s enterprises by introducing modern management practice into these enterprises. By acknowledging the disciplinary function of the securities market, the Chinese have been expecting the securities market to play an important role in promoting good corporate governance in China’s listed companies. This is evidenced by the increasing attention paid to the development of and regulation over the securities market by the Chinese Government in the past decade. However, the Chinese experience in the past decade has shown that this does not necessarily follow in such a unilateral way. In fact, a well-functioning securities market and a sound system of corporate governance are mutually dependent: the development of the securities market provides an external monitoring mechanism of corporate governance, and good practice of corporate governance does, in turn, ensure the orderly operation of the securities market.

Keywords: securities market, corporate governance, China's economic reforms, Chinese securities market