From State to State: Improving Corporate Governance Where the Government is the Controlling Block Holder

Abstract

We examine stock returns for a sample of publicly traded Chinese firms around announcements of block share transfers from government agencies to corporatized firms where the State is the ultimate controlling shareholder. We provide evidence that these transfers improve corporate governance and firm value by partially reattaching cash-flow rights to control rights. We find that cumulative abnormal returns average 7.5% during the announcement period, and that more than 40% of the CEOs were replaced within 12 months. Moreover, we find that both the change in firm value and the likelihood of CEO turnover are functions of the incentives and managerial expertise of the new block holder. We conclude that corporate governance can be improved at State-controlled firms by including private block holders in the ultimate ownership structure, which more closely aligns cash-flow rights with control rights.

Keywords: annual meeting, block holder, board of directors, cash-flow rights, control rights, corporate governance, incentive compensation, politics and finance, privatization, State ownership, State-owned enterprise, ultimate shareholder

JEL Classification: G32, G34, G38