Corporate Governance of Controlled Firms: An Empirical Study of Company Constitutions in China, Hong Kong, and Taiwan

Project: Research

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Corporate governance has no doubt been one of the most important topics relating to theregulation of business associations. The importance of corporate governance has beenrecognized not only by academia, evidenced by a rapidly growing body of literature since the1990s, but also by practitioners through the implementation of corporate governance ratings.However, the current corporate governance ratings adopt a uniform standard originallydeveloped for widely held firms and fail to recognize that most public firms in the GreaterChina region are controlled by families or the state. In academia, the body of literature on thecorporate governance of controlled firms has grown in recent years, but most of the studieshave examined the country-level governance rules where companies can usually contract outby adopting different rules in the companies’ constitutions. To fill in the literature gap anddevelop an appropriate standard for assessing corporate governance of controlled firms, wepropose to study firm-level governance choices in the company constitutions of publiccompanies in Greater China.Drawing on existing theoretical research on the corporate governance of controlled firms,we select 18 corporate governance provisions to create a corporate governance index forcontrolled firms. The rules can be divided into three groups: voting rules and director election,board independence, and conflicted transactions. Our sample includes all listed companies(excluding foreign and financial firms) listed on the Main Board of Shanghai (SSE), Shenzhen(SZSE), Hong Kong (HKEx) and Taiwan (TWSE) stock exchanges, which yields a total of2,491 firms, with 1,064 from SSE, 457 from SZSE, 178 from HKEx and 792 from TWSE. Weintend to code the articles of association in 2007, 2015, and 2018. That yields 7,473 firm yearobservations. This project not only seeks to understand the current state of corporategovernance in practice but, more importantly, also empirically investigates the determinantsand value relevance of firm-level governance attributes in Greater China. In particular, wewould like to discern the relation between firm value and our corporate governance index forcontrolled firms. We also want to know the determinants of firm-level governance choices, thatis, whether firms that are more dependent on external financing or with fewer fixed assets adoptmore pro-investor provisions. In light of the dominance of state capital in Chinese capitalmarket, we test whether state-owned enterprises have worse governance than privately heldfirms. Finally, we test the theoretical argument that firms in weaker investor protectionjurisdictions should adopt stricter ex ante governance rules as a substitute for weakerenforcement of laws.


Project number9042597
Grant typeGRF
Effective start/end date1/09/17 → …