Ownership Characteristics and Financial Performance: Evidence from Chinese Split-Share Structure Reform

Abstract

This paper investigates the relationship between two characteristics of corporate governance (concentrated and state ownership) and firm financial performance by bringing new and extensive evidence from an emerging market. Further, this study examines the impact of the recent stock split reform in China on the corporate ownership characteristics–firm performance relationship. The final sample of this study is comprised of 234 firms with 2340 annual observation values. The study hypotheses are examined using regression analysis of panel data. We found that concentrated ownership is positively and significantly related to firm performance. However, state ownership has a significant negative impact on firm performance. Further, we observed that the stock split reform has a substantial and positive effect on the ownership–corporate financial performance relationship. In particular, the positive relationship between ownership concentration and firm performance has increased following the split-share structure reform. The negative relationship between state ownership and corporate financial performance has been mitigated following the split-share structure reform. We contribute to the existing literature on corporate governance by investigating the ownership–corporate financial performance relationship in a unique research setting based on the impact of an exogenous regulatory change, namely, the split-share structure reform in China. The study presents implications for regulators, investors, and researchers interested in examining developing markets such as China. Our results imply that the institutional reform of the Chinese stock market has benefitted investors through enhancing corporate financial performance. The findings suggest that the reform of the Chinese stock market has significantly shaped the impact of ownership structure on corporate financial performance in a valuable way for effective capital allocation. Thus, collectively, the split-share structure reform enhances the quality of corporate governance, which is pivotal to the growth of the country’s economy. This, in turn, has policy implications for other emerging economies.

1. Introduction

Corporate governance (CG) is a system of checks and measures that prevent the detrimental actions of directors and conflicts of interest between owners and managers [1,2]. CG is well established in developed markets such as the USA and Canada, but what about emerging economies with emerging structures? In these economies, there is no clear evidence that CG impacts corporate performance [3,4,5,6]. This is an important question that needs special examination, especially within the broad economic reforms that have been recently launched in some developing countries, such as the latest stock split reform in China in 2005 [7,8,9].

This latest reform brought about significant changes in ownership structures in China’s listed companies, especially by removing restrictions on non-tradable shares. Ownership structures are crucial CG mechanisms [10,11,12,13,14,15], especially in settings with higher ownership concentrations and state ownership levels, such as the Asian markets in general and the Chinese market in particular [16]. In emerging markets, where (external) governance mechanisms and legal systems are not highly effective, as they are in developed markets, internal CG mechanisms, such as those related to ownership structure, become increasingly apparent as monitoring mechanisms [17,18,19].

Scholars worldwide have recently investigated the impact of ownership structures on firm performance [20]. However, the reported findings are mixed. In particular, a set of studies informed positive implications e.g., [21,22,23]. Other studies perceived ownership structures, especially state ownership, negatively e.g., [24,25,26,27]. The mixed results in the literature indicate the context-dependent nature of the CG–firm financial performance relationship and the importance of understanding this relationship in its institutional and contextual environment. In this regard, Nguyen et al. [28], for example, found that the positive impact of ownership concentration on company performance is more related to contexts with lower governance systems (such as Vietnam) than contexts with effective governance systems (such as Singapore). Despite the importance and the significant implications of the stock split reform in China, there is a limited empirical study with a recent broad set of data that examines its implications for the governance process. Thus, it is vital to investigate the impact of this reform on governance mechanisms to test the influences of regulatory interventions on the quality of corporate governance. It also provides a unique setting to contribute to the ongoing debate on the nexus of the ownership–firm financial performance relationship.

The Chinese market was chosen as the study context because it is currently one of the most important developing economies worldwide. In addition, economic reforms in China are underway where state-owned enterprises (SOEs) are being transformed into modern firms [29]. Notably, in 2005, the China Securities Regulatory Commission presented the split-share structure reform, allowing public companies’ non-tradable shares to be tradable by eliminating restrictions on all shares [8]. As a result, China’s economy has faced vast economic growth during the last years. During this economic transformation, state intervention was apparent, making this context worthy of a particular investigation.

The Chinese economy has unique characteristics that motivated us to conduct this study in this unique context. These include the higher levels of government interference and the lower levels of investors’ legal protection compared to developed markets, such as the USA; the economic transformation without political changes, as is the case with most emerging markets [29,30,31]; the apparent links between corporate executives and the government [32]; the minimal managerial equity ownership [6]; the presence of a unique ownership structure in which shares are classified according to five distinct classes of owners: the state, legal persons, employees, domestic individuals, and foreign individuals or institutional holders; the higher levels of ownership concentrations, where a single or a few owners own the majority of shares, in contrast to the case of developed markets, such as the USA, that have lower levels of ownership concentration [29]; and finally, the non-tradable nature of state ownership [33]. Despite these peculiar features, the studies conducted in the Chinese context are limited and report mixed findings, such as Wu and Cui [34], on the positive side, and Filatotchev et al. [17] on the negative side.

We revealed that concentrated ownership is positively and significantly associated with corporate performance. However, state ownership has a significant negative effect on corporate performance. Further, we observed that the stock split reform has a substantial and positive effect on the ownership–firm financial performance relationship. Particularly, the positive association between ownership concentration and firm performance has increased following the split-share structure reform. The negative association between state ownership and firm financial performance has been mitigated following the split-share structure reform. This research contributes to the previous studies by bringing evidence from an emerging market where a few studies have been conducted e.g., [8,17,28,35]. It also extends the limited studies related to the impact of ownership characteristics on firm performance in China, and the present inconclusive evidence reported in the literature in general see, e.g., [17,33,35,36,37]. Further, it extends the minimal studies concerned with the impact of stock market reforms on the governance (ownership) structures–firm performance relationship [8,38,39].

The study is organized as follows. Section 2 presents the contextual background of the study. Section 3 clarifies the theoretical lens of the study. Section 4 provides a literature review and hypotheses development. Section 5 clarifies the research methods. Section 6 presents data analyses and discusses the findings. Finally, Section 7 concludes the paper.

2. Background

The Chinese economy is one of the fastest-growing transitional economies globally [40]. As in most developing countries, China has embraced a comprehensive economic reform program since the early 1990s that liberalizes the economy and supports the private sector. The privatization program in China ushered in two stock exchanges: the Shanghai Stock Exchange, which opened in 1990, and the Shenzhen Stock Exchange, which opened in 1991. Since then, the Chinese market has attracted massive investments from China and overseas. The ensuing economic developments required the establishment of governance structures, especially ownership structures, to monitor corporate actions and performance. However, in contrast to developed countries, China’s CG process is determined by the political and institutional factors, where the state plays an essential part [41]. Hence, it is crucial to understand the institutional context where CG is applied before understanding the ownership structures–firm performance relationship.

Chinese companies were allowed to issue different types of shares to different kinds of owners. Domestic investors (including legal persons, the state, and individuals) can invest in shares of type A. SOEs own the majority of state and legal-person shares to retain voting control. State shares are owned by all country people and managed by the State Assets Management Bureau (SAMB) to nominate directors to the general shareholders meeting [6]. Legal shares are those owned by local organizations such as banks, insurance firms, and mutual funds. The management of those entities cannot change the present level of state ownership [6]. A-type shares are listed on Shanghai and Shenzhen stock exchanges and traded in Renminbi [29]. Foreign investors can invest in B- or H-type shares [33]. B-type shares are traded in USD (in Shanghai exchanges) or HKD (in Shenzhen exchanges). Finally, H-type shares are traded in USD in Hong Kong. Chinese companies can issue H-type shares in the Hong Kong Stock Exchange [29].

In 2001, local investors were allowed to invest in B-type shares, presenting more investment opportunities in the market. In the same year, the government sold out state-owned shares, raising the share of private firms in the market to 20% within the next two years, following their being sold [42]. By then, most A-type shares (owned by governmental institutions) were non-tradable; instead, they were traded on a contract basis that required the acceptance of regularity authority [43]. In contrast, tradable shares were owned by individuals and other private persons. This dual structure can be dated back to the earlier reform in 1978. Then, there were two types of ownership in China: SOEs (constituting most companies) and collectives run by municipalities and communities. However, this dual structure had severe economic impacts and increased the agency problem [44,45]. Thus, several reforms followed, but they were not successful enough to achieve real economic impacts [46].

One of the notable reforms was presented in 2005, noting that, as of February 2005, non-tradable shares represented approximately two-thirds of the whole outstanding shares [38]. In particular, on the 29 April 2005, the China Securities Regulatory Commission presented the split-share structure reform, allowing public companies’ non-tradable shares to be tradable by eliminating restrictions on all shares [8]. In doing so, non-tradable shareholders were requested to pay compensation to tradable shareholders to be able to sell their shares. The compensation is discussed through negotiation between the shareholders. This reform process was gradually implemented. Firstly, after 12 months of the agreement on the compensation, the restricted shares held by owners holding less than 5% of the company ownership became tradable. Then, within the next 12–24 months following the agreement, the restricted shares owned by owners holding more than 5% of the company ownership became tradable. Finally, 36 months after the agreement process, all restricted shares had become tradable [8]. This reform aimed at revitalizing and further liberalizing the stock market by opening the door for the second privatization wave. This significant change in ownership structures in China has attracted the attention of several researchers. Some studies noted that it could reduce the principal-agent agency problem see [43,46,47]. Further, by addressing the economic impacts of the stock split reform, Sun et al. [47] found that it had decreased tunneling and crash risk. Hence, the stock split reform significantly influences ownership structure, moving the market towards lower ownership concentration and state control [48]. However, despite these reforms, the state remains a significant owner in many enterprises [38,49].

3. Ownership Structure and the Agency Problem: Theory

The separation of ownership (principals) and management (agents) may result in conflicts of interests, which increases agency costs [50,51]. These costs are related to monitoring and controlling managers’ behaviors and the expected losses due to suboptimal performance. In contexts with significant ownership concentration, state ownership agency conflicts might appear, not only between owners and managers but also between large owners and minority owners [52,53]. Here, corporate governance mechanisms, including ownership structures, can have an influential role in monitoring the abusive behaviors of managers and owners. This could reduce the agency problem and direct organizational actions to serve the company’s interests, instead of performing a particular group’s interests [54].

Based on the agency theory, ownership concentration can work as an effective governance mechanism to decrease agency costs [55]. According to this perspective, when ownership is concentrated, individual investors have significant incentives to monitor and exercise more influence over the major company decisions [51,56]. This might eventually enhance the company’s performance [33].

In contrast, according to the agency theory, state owners, with unique objectives that differ from other parties’ objectives, may contribute to ineffective governance and lower managerial incentives [57]. This may result in lower corporate company performance compared to the case of privately-owned companies [58,59]. This is based on the argument that the state’s “grabbing hand” (the principal owner) would divert resources away from the company [60]. Instead, SOEs direct resources towards achieving social and political objectives (such as securing votes for the ruling party) rather than business objectives (such as profit maximization) [36,61,62]. Further, state owners are likely to retain surplus employees or appoint political allies, regardless of the company’s economic position [63]. In fact, they are reported to obtain supplies from expensive suppliers and make overinvestment decisions [57]. These suboptimal actions ultimately expropriate resources from minority owners and increase agency costs, negatively impacting corporate performance [36,53].

4. Literature Review and Hypothesis Development

CG mechanisms can induce managers to work in the company’s best interest rather than serve their interests, i.e., they can resolve the agency conflict arising from the ownership–management relationship [55]. As discussed below, a critical CG mechanism is related to ownership, such as ownership concentration and state ownership (SO), which can have different implications for firm performance.

4.1. Ownership Concentration and Financial Performance

High ownership concentration can have unique impacts on CG issues and firm performance that are worthy of special investigation [64]. We observed different studies conducted in different contexts and reporting variant performance implications by reviewing the literature [18,33]. On the positive side, by the knowledge and experience they have accumulated, and the power they have over managers, larger owners are noted to better control, monitor, or govern managers (agents) [18,19,65]. This can enable them to eliminate the opportunistic behaviors of managers, acting in the interest of minority owners and the whole company [66], see also [28,67,68]. In this regard, Joh [69] reported that higher levels of ownership concentration can enhance Korean companies’ economic performance. Further, Omran [70] noted that ownership concentration enhances Egyptian companies’ performance. Gaur et al. [21] observed that lower levels of ownership concentration are related to lower company performance in New Zealand. In the context of Pakistan, Waheed and Malik [71] found that ownership concentration can reduce the agency problem. In the Indian market, Nashier and Gupta [15] found that ownership concentration improves the monitoring of management, which eventually enhances corporate performance.

In contrast, another stream of studies noted that larger owners could work to serve their interests due to their information and power [72]. In this concern, Nguyen et al. [27] suggest that significant ownership concentration minimizes the positive impacts of CG mechanics, such as having more independent directors on the board [8]. This dominance of control by larger owners could ultimately manipulate the company and expropriate minority owners [73], resulting in conflicts between larger and minority owners [8,52,66]. For example, Leech and Leahy [74] and Mudambi and Nicosia [75] reported a negative relationship between ownership concentration and U.K. companies’ economic performance see also [68,76,77].

Other studies reported a U-shaped relationship, such as Morck et al. [78] in the USA and Altaf and Shah [16] in India [19,79]. Finally, other studies did not report a significant association between ownership concentration and corporate performance. For example, concentrating on the context of some Arab countries, Omran et al. [80] found that ownership concentration has no impacts on corporate performance. Demsetz and Lehn [81] and Agrawal and Knoeber [82] found an insignificant association between ownership concentration and firm performance in the US context. Further, Yasser and Al Mamun [83] reported no significant association between Pakistani companies’ financial performance and ownership concentration see also [84,85].

The case is not highly different in the context of China, where inconclusive results are also reported. For example, Xu and Wang [86] and Ma et al. [73] found that ownership concentration is associated with company performance. However, Tian [87] found a U-shaped relationship. Gunasekarage et al. [33] noted detrimental impacts of block ownership. Ding et al. [88] highlighted the expropriation problem by controlling owners due to ineffective governance systems.

In developing markets such as China, where governance mechanisms and legal systems are not as highly effective as is the case in developed markets, it is argued that ownership concentration impacts become more critical and apparent [17,35]. We contribute to studies in emerging economies by bringing extensive recent evidence from the Chinese market by testing the first hypothesis:

Hypothesis 1 (H1).

There is a significant positive relationship between ownership concentration and firm financial performance.

4.2. State Ownership and Financial Performance

Significant research has examined the impact of state ownership on company performance. The majority of these studies indicate the inefficiency of state-held companies compared to private companies. However, as in the case of ownership concentration, the literature has reported different results see, e.g., [57,62,89,90], highlighting the context-dependence of the reported results. Using international evidence, Aguilera et al. [24] found that the relationship between state ownership and corporate financial performance varies across different contexts.

Several studies reported negative findings. For example, Liljeblom et al. [26] found a weaker corporate performance when state owners dominate corporate ownership and control in Russia. Musallam [91] found a negative relationship between state ownership and company value in Indonesia. Similar results are also noted by Aguilera et al. [24], who drew upon international evidence see also [49,92,93,94,95]. These results agree with some arguments in the literature regarding SO, such as the high probability of practicing ineffective monitoring rules [96], which might weaken CG mechanisms’ impacts [27]. In addition, state owners are more risk-averse than private owners [97], and are associated with lower managerial quality [29]. Moreover, state owners give priority to socio-political goals (such as rising employment rates) instead of economic goals and means (such as pay-for-performance incentives) as in private enterprises [29]. Further, state owners are more likely to appoint their political allies in managerial positions, regardless of their expertise level [98,99].

Regarding the case of China, where a significant number of firms are classified as SOEs [44], contributing a high level of the country’s GDP, mixed findings are also observed [100]. Some studies reported negative impacts of state ownership on corporate financial performance see, e.g., [33,49,59,101]. However, other studies reported positive or beneficial impacts of SO on corporate performance see [36,41,62,102]. For example, on the positive side, Liu et al. [103] noted that CG mechanisms contributed to enhancing corporate performance in SOEs. Likewise, Liu et al. [104] pointed out that state owners could reduce the adverse effects of product market competition. In contrast, supporting the mixed results in the previous studies, Zhou et al. [105] found that while state owners help Chinese companies obtain R&D resources, they make these companies less efficient in using these resources. These variant findings indicate the present complexity of the Chinese context [24]. We contribute to this debate by examining the effect of state ownership through testing the following hypothesis:

Hypothesis 2 (H2).

There is a significant negative relationship between state ownership and firm financial performance.

4.3. The Role of Split-Share Structure Reform on the Relationship between State Ownership, Concentration, and Financial Performance

The mixed findings reported in the literature indicate the importance of interpreting results concerning the context where they occurred. That is, the context’s institutions, regulations, and environment might matter in understanding the relationships under study [20]. In this regard, some studies argued that internal governance mechanisms such as ownership concentration become more vital in civil law—rather than common law—contexts, where investors’ legal protection is lower [62,70,106]. Relatedly, Lepore et al. [20] associated the positive effects of ownership concentration on company performance with contexts having lower levels of investor protection, as in many emerging economies. Nguyen et al. [28] reported that the positive impact of ownership concentration on corporate performance is more pronounced in settings with ineffective (rather than well-established) governance structures. This supports the idea that ownership concentration can work as a substitute governed system in contexts where internal governance systems are ineffective. Likewise, Altaf and Shah [16] show that the effectiveness of investor protection in India moderates the association between ownership concentration and corporate performance.

This understanding has encouraged recent studies to examine the different impacts of economic policies and other changes in financial regulations on governance issues. For example, Omran [70] addressed the effect of ownership structure on Egyptian companies’ performance following the adoption of privatization programs in the country, reporting a positive relationship. In Hong Kong, Chen et al. [107] examined the association between (family) ownership and the adopted dividend policy and found a weak association.

From this perspective, it is argued that the recent stock split structure reform in China can impact the ownership concentration–corporate financial performance relationship. Some studies have addressed the economic implications of the reform e.g., [8,38,46,47]. However, few studies have examined the effect of the stock split reform on the ownership structure–corporate financial performance relationship [39]. For instance, Jiang et al. [39] examined the expected ownership structures following the 2005 stock reform policy. They observed that ownership concentration is the most critical factor in the concerned relationship. Further, Beltratti et al. [38] concluded that the stock split reform opened the door for significant changes in ownership and governance that may improve the Chinese companies’ performance. This study argues that the anticipated positive effect of ownership concentration can be more pronounced in the period following the reform than before the reform. Thus, we develop the third hypothesis as follows:

Hypothesis 3 (H3).

The positive relationship between ownership concentration and firm financial performance has increased after the split-share structure reform.

As mentioned above, new studies have started to investigate the impact of (state) ownership concerning the contextual environment. It is argued that the effect of state ownership on corporate performance can be better interpreted concerning the present institutional factors in the country [61,108,109]. In this regard, Borisova et al. [110], for instance, find that the negative relationship between state ownership and governance is related to contexts with an ineffective legal system. In contrast, as Estrin et al. [108] found, positive implications of state ownership can emerge in contexts with effective formal legal and informal institutions.

It is crucial to investigate the effect of economic policy and regulation changes on the SO–corporate performance relationship in this context. In this regard, Hanousek et al. [111], for example, note that, following the adoption of privatization programs, state ownership is less likely to improve corporate performance compared to private ownership. In the context of China, Wei and Varela [6] reported a negative association between state ownership and the financial performance of the recently privatized companies in 1994. Using a sample of companies registered on the Shanghai Stock Exchange as of year-end 2004, Jiang et al. [39] analyzed the effect of tradable share proportion and the state-owned share proportion on company performance before the stock split reform. The government-owned share proportion is reported to have a linear and positive influence on corporate performance. They found that the state ownership–firm performance relationship modifies when the percentage of tradable shares is accounted for in the analyses. Hou and Lee [8] noted that the 2005 stock split reform in China eliminated the trading restrictions for state owners. They also concluded that the stock split reform enhanced the incentive alignment between state and private owners, motivating them to monitor management. The present study uses a newer and more extensive data set to contribute to this debate by examining the SO–firm financial performance relationship related to 2005′s stock split reform by testing the following (fourth) hypothesis:

Hypothesis 4 (H4).

The negative relationship between state ownership and firm financial performance has decreased after the split-share structure reform.

5. Study Design

5.1. Sample Size

As shown in

Table 1. Sample selection.

The initial sample	2536
Less
The non-state-owned firms.	(1544)
Firms on B-type shares and H-type shares.	(36)
Financial and Utility Firms	(108)
Firms with state ownership less than 20%	(66)
ST companies.	(13)
Firms with incomplete data	(350)
The Final Sample	234

, the initial sample of this study comprises all firms listed on the Shanghai and Shenzhen Stock Exchanges from 2004 to 2013, totaling 2536 firms. After screening, 1544 firms were excluded, leaving 992 state-owned firms, by using the classification of ownership nature. For consistency and reliability reasons, this paper excludes 36 listed firms that issue B- and H-type shares and financial and public utilities firms—108 firms in total [112]. Following Del Bo et al. [113], this paper eliminates 66 sample data points with a ratio of state ownership of less than 20% in the initial year of the data sample. This paper also eliminates 13 firms with abnormal trading status, which are marked as ST firms. Finally, we exclude 350 firms with incomplete data. The final sample of this paper retained 234 firms, having 2340 annual observation values. All data were collected from the China Stock Market and Accounting Research database (CSMAR). Although our study uses ten years of panel data, it contains far fewer observations prior to the reform than what is considered after the reform due to data availability.

5.2. Research Models

This paper examines the association between CG and the performance of Chinese SOEs by using regression analysis on panel data. The following two models are used, where ${\beta }_0$ is the intercept,$\beta$ is the regression coefficient, and ${\epsilon }_i$ is an error term.

$$\begin{array}{cc}\hfill TOBIN Q/MTB& ={\beta }_0+{\beta }_{1}OWNCON+{\beta }_{2}STAOWN+{\beta }_{3 }REFORM\hfill \\ & +{\beta }_{4}OWNCON\ast REFORM+{\beta }_5 STAOWN\ast REFORM+{\beta }_{6}GENDIV+{\beta }_{7}BINDEP\hfill \\ & +{\beta }_{8}BSUPER+ {\beta }_{9}LNFSIZE+{\beta }_{10}LEV+{\epsilon }_{\mathrm{i}}\hfill \end{array}$$

(1)

Our model includes two main independent variables, two dependent variables, and five control variables. Furthermore, this study addresses the impact of the split-share structure reform on the association between ownership and performance. Therefore, two interaction terms, REFORM * OWNCON and REFORM * STAOWN, are introduced in the model to address the degree of change in the relationship before and after the reform. These two interaction terms refer to the incremental relationship between ownership concentration and the state ownership ratio of performance following the reform, respectively.

Our dependent variable is corporate financial performance measured using Tobin’s Q. Tobin’s Q is a market-based performance measurement method. It tends to be a forward-looking measure of firm financial performance that investors largely use [28,37,90,114,115]. Tobin’s Q is defined as the proportion between the market value of assets and the book value of total assets at the end of the period. The market value is the sum of the company’s equity value and debt value. As an alternative proxy of Tobin Q, this paper also presents the market-to-book value ratio (MBV) as the second dependent variable to measure firm performance. The market-to-book value ratio is the ratio of the market value to the book value.

Our principal independent variables are ownership concentration and state ownership. Consistent with previous studies, we employed the top ten shareholder ownership ratios to refer to the level of ownership concentration [114]. The ratio of state ownership is broadly employed to measure state ownership [111,112]. Thus, this study uses the state ownership ratio to study the association between state ownership and corporate performance.

Our study controls for some firm-level characteristics, namely, gender diversity, board independence, supervisor board, corporate size, and leverage. We employ the percentage of women on the board of directors as an indicator of board diversity and the ratio of independent directors in the board of directors to measure the independence of the board of directors [114,116]. Moreover, we employ the number of supervisory board members to measure the board of supervisors’ impact on firm performance [37,117]. Previous empirical studies have shown that firm size and leverage affect corporate performance [37,116,118]. Therefore, we also incorporate the natural logarithm of the company’s total assets to control the variables of firm size [37,116,119]. This study will also use the ratio of total liabilities and total assets of the company as the company’s leverage ratio [37,120].

Table 2. Definition of variables.

Variables	Description	Data Source
Tobin’s Q	The sum of the company’s equity value and debt value over the book value of assets.	China Stock Market and Accounting Research database (CSMAR)
The Market-to-Book Value Ratio	The ratio of market value to book value.	CSMAR
Ownership Concentration	Top ten shareholder ownership ratios.
State Ownership	The state ownership ratio.	CSMAR
Gender Diversity of Board of Directors	The ratio of female directors on the board of directors.	CSMAR
Board Independence	The ratio of independent directors on the board of directors.	CSMAR
Supervisor Board	The number of supervisory board’s members.	CSMAR
Gender Diversity of Board of Directors	The ratio of female directors on the board of directors.	CSMAR
Firm Size	The natural logarithm of total assets.	CSMAR
Leverage Ratio	The proportion of total liabilities and total assets.	CSMAR

presents a summary of the variables.

6. Results and Discussion

6.1. Descriptive Analysis

According to Panel A, the proportion of the top ten shareholders in Chinese state-owned enterprises ranges from 15% to 97.1%, with an average of 55.7%. This suggests that Chinese SOEs generally have a high degree of ownership concentration. According to panel B, before the reform, the average ownership concentration of Chinese SOEs was 57.8%, and the minimum was 21%. According to

Table 3. Descriptive statistics.

Panel A: Descriptive Statistics of the Full Sample
Variable	Obs.	Mean	Std. Dev.	Min	Max
TOBIN Q	2340	1.093	0.799	0.062	4.962
MBV	2340	2.371	1.517	0.38	9.878
OWNCON	2340	0.557	0.144	0.15	0.971
STAOWN	2340	0.388	0.158	0.042	0.841
REFORM	2340	0.5	0.5	0	1
GENDIV	2340	0.072	0.087	0	0.571
BINDEP	2340	0.356	0.049	0.091	0.714
BSUPER	2340	4.394	1.518	1	13
LNFSIZE	2340	22.156	1.207	19.256	27.955
LEV	2340	0.527	0.169	0.05	0.955
Panel B: Descriptive Statistics Before Reform
Variable	Obs.	Mean	Std. Dev.	Min	Max
TOBIN Q	1170	1.082	0.823	0.085	4.962
MBV	1170	2.261	1.569	0.535	9.878
OWNCON	1170	0.578	0.139	0.21	0.971
STAOWN	1170	0.409	0.155	0.042	0.838
REFORM	1170	0	0	0	0
GENDIV	1170	0.068	0.083	0	0.333
BINDEP	1170	0.347	0.043	0.111	0.6
BSUPER	1170	4.468	1.621	1	13
LNFSIZE	1170	21.795	1.057	19.256	27.346
LEV	1170	0.505	0.163	0.05	0.852
Panel C: Descriptive Statistics After Reform
Variable	Obs.	Mean	Std. Dev.	Min	Max
TOBIN Q	1170	1.104	0.775	0.062	4.528
MBV	1170	2.482	1.455	0.38	9.805
OWNCON	1170	0.536	0.147	0.15	0.961
STAOWN	1170	0.366	0.157	0.045	0.841
REFORM	1170	1.00	0.00	1.00	1.00
GENDIV	1170	0.075	0.091	0.00	0.571
BINDEP	1170	0.364	0.054	0.091	0.714
BSUPER	1170	4.321	1.405	2.00	10.00
LNFSIZE	1170	22.516	1.24	20.051	27.955
LEV	1170	0.548	0.173	0.069	0.955

, Panel C, following the reform, the average ownership concentration of Chinese SOEs is 53.6%, and the minimum is 15%, suggesting a significant decrease after the reform. Furthermore, as per Table 3, Panel A, the average proportion of state-owned shares in Chinese state-owned enterprises is 38.8%. Furthermore, we find that the average state ownership has declined from 40.9% before the reform to 36.6% following the reform, as shown in Table 3, Panels B and C. Thus, the ownership concentration and the proportion of state-owned shares have both obviously decreased after the reform. Nevertheless, the ownership structure concentration and state-owned share ratio of Chinese state-owned enterprises are both still relatively high.

Regarding control variables, the average ratio of female directors is only 7.2%. The standard deviation is 0.087, indicating that the overall power of female directors on the boards of Chinese SOEs is inadequate. Table 3, Panel A also shows that the average ratio of independent directors in Chinese SOEs is 35.6%. The supervisory board size of Chinese SOEs ranges from 1 member to 13 members, with an average of 4.394. Finally, the size of Chinese SOEs ranges from 19.256 to 27.955, with an average of 22.156. The average leverage proportion of Chinese SOEs is 0.527, the smallest leverage ratio is 0.05, and the largest leverage ratio is 0.955.

Table 4. Spearman correlation analysis.

	Tobin Q	OWNCON	STAOWN	GENDIV	BIND	BSUP	SIZE	LEV
Tobin Q	1
OWNCON	0.0535 **	1
STAOWN	−0.0869 ***	0.630 ***	1
GENDIV	0.0420 *	−0.118 ***	−0.0824 ***	1
BIND	−0.00259	−0.0288	−0.00417	0.0501 *	1
BSUP	−0.0635 **	0.151 ***	0.0711 ***	−0.150 ***	−0.0820 ***	1
SIZE	−0.484 ***	0.0118	−0.00063	−0.0439 *	0.0309	0.0512 *	1
LEV	−0.346 ***	0.271 ***	0.184 ***	−0.150 ***	0.0840 ***	0.195 ***	0.370 ***	1

Note: Values with asterisks *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively.

provides Pearson correlations between the continuous explanatory variables in the multivariate regressions. The correlation coefficient between OWNCON and Tobin Q is 0.053, which is significant at the 1% level. The finding indicates a positive correlation between ownership concentration and firm performance. We also find a negative correlation between STAOWN and Tobin Q, as the correlation coefficients between the ratio of state ownership and Tobin Q is 0.089, and significant at the 1% level. Table 4 shows a positive correlation between the ratio of female directors and Tobin Q and a negative correlation between BSUP, SIZE, LEV, and Tobin Q.

6.2. Main Analysis and Discussion

As discussed above, the main aim of this study is to investigate the relationship between two characteristics of ownership structure (concentrated and state ownership) and firm financial performance.

Table 5. Regression analysis.

VARIABLES	1. Tobin Q	2. Tobin Q	3. Tobin Q	4. MBV
OWNCON	0.484 **	0.254	0.460 **	1.162 **
	(2.299)	(1.175)	(2.194)	(2.547)
STAOWN	−0.390 **	−0.400 **	−0.686 ***	−0.883 **
	(−2.359)	(−2.400)	(−3.861)	(−2.416)
BIND	0.176	0.186	0.165	0.78
	(0.549)	(0.575)	(0.505)	(1.091)
BSUP	0.0015	0.00233	0.00127	0.0226
	(0.102)	(0.157)	(0.0857)	(0.699)
GENDIV	−0.136	−0.152	−0.16	0.0564
	(−0.593)	(−0.660)	(−0.699)	(0.108)
LEV	−1.948 ***	−1.953 ***	−1.958 ***	1.162 ***
	(−15.06)	(−15.03)	(−15.24)	(3.971)
SIZE	−0.162 ***	−0.165 ***	−0.164***	−0.417 ***
	(−7.136)	(−7.097)	(−7.124)	(−7.755)
OWNCON * Reform		0.417 ***
		(4.803)
STAOWN * REFORM			0.577 ***
			(4.823)
REFORM	0.0327 ***	−0.00307	−0.00217	0.0645 ***
	(5.243)	(−0.429)	(−0.278)	(4.724)
Constant	−60.09 ***	11.78	9.963	−119.2 ***
	(−4.917)	(0.822)	(0.640)	(−4.464)
Observations	2340	2340	2340	2340
R-squared	0.283	0.289	0.29	0.085

Robust t-statistics in brackets. Values with asterisks ** and *** indicate significance at the 5%, and 1% levels, respectively.

shows the multivariate regression findings between the variables and Tobin Q. The two main variables of interest are OWNCON and STAOWN. The first column presents the results of the first two hypotheses (H1 and H2), while columns 2 and 3 show the results of H3 and H4. Lastly, column 4 presents the findings of the four hypotheses using MTB as an alternative proxy. Along with H1, the coefficient of OWNCON is positive and significant (${\mathsf{\beta }}_1$ = 0.484) at the 1% level. The results imply a significant positive impact of ownership concentration on corporate value. This result agrees with the literature, supporting the value or benefits that ownership concentration can bring about, especially the exercise of better monitoring of management, which is consistent with the agency perspective [18,65,121]. This result also agrees with some studies performed in different contexts, such as Omran [70] in Egypt and Gaur et al. [21] in New Zealand. However, this finding is different from other studies that perceived ownership concentration negatively, such as Aboud and Diab [122]. This inconsistency invited us to address the association between ownership concentration and firm performance concerning the context specificities, such as the major economic events in a particular context (e.g., the stock split reform in China), as explained below.

Regarding H2, the coefficient of STAOWN (= −0.390 **) is negative and significant at the 5% level, suggesting that when the proportion of state ownership rises by one unit, the Tobin Q of the enterprise declines by 0.390 units. This finding is consistent with the extensive international evidence in the literature that perceived state ownership has negative influences on corporate performance e.g., [26] in Russia, 93 in Indonesia, [24]. This finding stresses the idea that significant levels of state ownership are related to ineffective monitoring [96], weak governance, and lower managerial quality [29]. This could increase the agency conflict between owners and management or between large and minority owners [52]. Further, this result agrees with the suggestion that state owners pay more attention to politics than economic goals, which negatively affects the financial performance of the state-owned companies [29,98,99].

Regarding H3 and H4, this research examines the effect of the Chinese 2005 stock split reform on the association between ownership structure (concentrated and state ownership) and firm financial performance. We introduced two interaction terms (REFORM * OWNCON and REFORM * STAOWN) to test how the reform shapes the positive impact of ownership concentration on firm financial performance and the negative effects of state ownership on corporate financial performance. Consistent with H3, we find that the coefficient of the interaction (REFORM * OWNCON) is positive (0.417 ***) and significant, indicating that the positive relationship between ownership concentration and corporate financial performance has increased following the split-share structure reform. This finding supports the studies that see the economic potential of the stock split reform e.g., [38,46,47]. Further, it supports the few studies in the literature that indicated the possible impacts of the stock split reform on the ownership concentration–firm performance relationship e.g., [39,123]. Further, this finding supports interpreting the association between ownership concentration and firm financial performance to context-specific features and events e.g., [16,20,28] For example, Lepore et al. [20] and Altaf and Shah [16] highlighted the importance of investor protection in understanding the ownership concentration–firm value relationship. Nguyen et al. [28] noted that the positive impact of ownership concentration on firm value is more pronounced in ineffective (rather than well-established) governance structures.

Moreover, our analysis shows that the split-share structure reform also shaped the effect of state ownership on firm financial performance. Table 5 indicates that the coefficient of REFORM * STAOWN is positive (=0.577 ***) and significant at the 1% level, suggesting that the reform has mitigated the negative impact of state ownership on firm financial performance. This positive finding agrees with the literature, indicating that the stock split reform could play a positive role in state-owned enterprises [39]. In particular, Jiang et al. [39] noted that government-owned shares following the stock split could positively influence corporate performance. Further, this finding supports the context-dependent nature of the SO–firm value relationship [6,108,110]. In particular, Borisova et al. [110] and Estrin et al. [108] highlighted the importance of interpreting findings concerning the effectiveness of the country’s legal system. Wei and Varela [6] and Hanousek et al. [111] linked the findings of the relationship between SO and firm performance to the value of the recently adopted economic reform (privatization) programs in China and the Czech Republic, respectively.

Hence, collectively, the findings of H3 and H4 imply that the split-share structure reform has improved the quality of CG and, therefore, the performance of Chinese firms, which supports the context-dependence of the governance–firm value relationship [28,66,70,106]. Hence, this finding highlights the importance of understanding and examining the ownership–firm financial performance relationship concerning the company’s institutional context see [58,90,91,123,124,125].

Regarding the control variables, we observed that the SIZE and LEV are significant and negative, suggesting that firm financial performance is negatively related to financial leverage and corporate size. All other control variables are insignificant.

7. Conclusions

This research investigated the association between corporate governance structures (specifically concentrated and state ownership structures) and company financial performance by bringing new and extensive evidence from an emerging market. Further, this research examines the impact of the recent stock split reform in China on the ownership characteristics–firm financial performance relationship. We found that ownership concentration is positively and significantly related to company performance. However, state ownership has a significant negative effect on firm value. Regarding the impact of the stock split reform on the ownership characteristics–firm financial performance relationship, we observed that the stock split reform has a significant and positive impact. In particular, the positive relationship between ownership concentration and corporate financial performance has increased following the split-share structure reform. The negative association between state ownership and corporate financial performance has been mitigated following the split-share structure reform.

This research contributes to the previous studies in some respects. Firstly, it brings evidence from an emerging market where a few studies have been conducted e.g., [17,28,35]. Investigating contexts such as this is important to understand how context specificities (including major economic events such as privatization programs and other economic reform programs) could bring remarkable results concerning the ownership characteristics–firm financial performance relationship see, e.g., [16,20,28,70,107].

Secondly, it contributes to the limited studies on the impact of ownership characteristics on firm financial performance in developing markets such as China, particularly the inconclusive evidence reported in the literature. Although some studies are concerned with concentrated ownership—in China, there was no clear evidence of the impact of ownership concentration on Chinses companies’ performance. The same also applies to SO, where variant impacts are also reported, such as Qi et al. [59], Wei et al. [49], Gunasekarage et al. [33] on the negative side, and Sun et al. [41], Tian and Estrin [99], and Le and Buck [36] on the positive side.

Finally, to the best of our knowledge, this study presents newer and more precise evidence on the economic implications of the recent economic events in developing markets, such as the stock split reforms in China, for the companies’ performance. The previous studies focused on the financial impact of these events, such as their effects on firm performance [38,46,47]. However, no clear and recent evidence was presented concerning their impacts on the ownership structure–firm financial performance relationship [38,39]. This finding highlights the importance of considering the impacts of the major economic events in the country on the examined relationships, especially the CG–firm financial performance relationship. This study agrees with the idea that the CG–firm performance relationship is not a universal one. Instead, it is dependent on the contextual features and economic environment under examination. This is also evident by the contrasting and unclear results concerning the ownership structures–firm performance relationship reported in the literature. For instance, Filatotchev et al. [17], Liljeblom et al. [26], Aguilera et al. [24], and Cuervo-Cazurra and Li [25] found a negative relationship. In contrast, Wu and Cui [34], Gompers et al. [22], Sami et al. [23], Gaur et al. [21] found positive relationships; and Omran et al. [80], Pham et al. [85], and Yasser and Al Mamun [83] did not report any relationship.

The study presents implications for regulators, investors, and researchers concerned with examining developing markets such as China. Our results imply that the institutional reform of the stock markets in developing countries could benefit the investors through enhancing firm performance. The results suggest that the reform of the stock market could shape the effect of ownership structure on corporate performance in a valuable way for effective capital allocation. In particular, it can reduce the incentive of large shareholders with monitoring power of a company’s executives to pursue their interests against other investors. Consequently, it enhances the incentive alignment effect, as large shareholder interests are associated with the firm’s performance. Furthermore, our findings imply that the stock market reform could augment the desire of state shareholders to oversee management and ensure they act to maximize shareholders’ interests and, therefore, enhance firms’ financial performance. Thus, collectively, economic reforms, especially those focusing on the stock market such as the split-share structure reform, can improve the quality of CG, which is pivotal to the progress of the country’s economy.

However, despite using ten years of panel data, our study contains far fewer observations prior to the reform than what is considered after the reform due to data availability. Therefore, future research may address a more balanced dataset or, alternatively, examine the long-term impact of the stock split by using recent years.