The Role of Foreign Strategic Investors (FSI) on the Performance and Corporate Governance of H-share Firms

This project examines the role of foreign strategic investor (FSI) on the performance and corporate governance of H-share firms listed in Hong Kong. FSI is a form of entry for foreign investors in the Mainland Chinese firms. FSI is a non-PRC investor, it is different from an institutional investor as FSI has equity stake in H-share firm and tends to maintain a long-term relation with the H-share firm. Particularly, FSI has board representation and the ability to intervene the management of H-share firm.China is an attractive market, but there are many barriers to direct investment into China. The immaturity of the Chinese domestic stock markets deters foreign investors from entering the markets. Similarly, the Mainland Chinese firms also find it difficult to get international capital. For the past 15 years, HK has been serving as the window to and out of China. The liquid stock market, sound financial system and ordered regulatory structure of HK provide a platform for Mainland firms to get international capital and foreign investors to invest China-concept stocks freely. The percentage of market capitalization of Mainland firms listed in HK has risen from 5% in 1994 (of which 0.96% are H-shares) to 47.67% in 2006 (of which 25.39% are H-shares). HK is the number one choice for listing of Mainland firms and has raised over US$100 billion.The increasing importance of H-share firms in HK has been evidenced by its number, substantial market capitalization and turnover. Therefore, it is of interest to examine how these firms integrate with the more mature HK market with developed financial system and high corporate governance standard. Some H-share firms are state-owned enterprises with a unique ownership characteristic of non-tradable shares. The parent SOEs located in China can exert substantial influence on the H-share firms listed in HK. Although being a minority shareholder, FSI can have board representation and so may play an important role to intervene the management of H-share firms. It is expected that the corporate behaviors of H-share firm which is state-owned or nonstate- owned, which is with FSI or without FSI should be different. The researchers focus their study to examine the performance and corporate governance of H-share firms. Performance and corporate governance are positively related. The findings whether FSI makes a difference on performance and corporate governance may be useful for Mainland firms and government to consider inviting foreign ownership in firm management.