Bonding, Law Enforcement and Corporate Governance in China
40 Pages Posted: 17 May 2007 Last revised: 4 Apr 2008
Protection of minority shareholders is crucial to developing a strong capital market. Yet, formal legal enforcement is one, but not the only effective mechanism to offer this protection. When a country's formal legal enforcement is weak, to attract investment, entrepreneurs have incentives to develop functional alternatives to assure minority shareholders' interests are protected, and, as such, entrepreneurs may voluntarily bond themselves. China's experience provides many examples of company-initiated bonding practices. Among the various bonding mechanisms that have been utilized, diversifying the ownership structure and cross-listing are so far the most effective. As such, to improve corporate governance in China is not only a question of improving the quality of legal enforcement mechanisms, but also a challenge of finding ways to encourage, facilitate, and support voluntary bonding practices. In this article, three polices are proposed to improve corporate governance, with the common theme of facilitating voluntary bonding practice. First, companies who are willing to bond themselves and improve their corporate governance should be encouraged to cross-list their stock overseas and voluntarily subject themselves to higher disclosure standards and more stringent legal liability. Second, China should facilitate competition between exchanges within its jurisdiction and allow more non-state-owned enterprises to go public. Finally, the corporate law in China should follow the self-enforcing model, where private enforcement is emphasized and encouraged.
Keywords: China, stock market, corporate governance, corporate law, bonding, legal enforcement
JEL Classification: K12, K00, O12
Suggested Citation: Suggested Citation