Abstract/Summary

This thesis conducts three empirical analyses by studying China, one of the largest emerging markets across the world; and it is motivated by two recent regulatory changes in China: adding independence to the board and promoting mass privatisation in state owned enterprises (hereafter SOEs). The first analysis investigates the relation between the exogenous changes in board composition and operating performance by examining 2,371 firm–year observations over the period 1999–2005, a period that witnessed the publication of a regulation that required every listed firm to introduce independent directors within a very short time period. Our main finding is that appointing independent directors has a significantly negative impact on firm performance, both on return on assets (hereafter ROA) and earnings per share (hereafter EPS). However, we also present a regression estimating cash flow measurement on the presence of board independence and find insignificant results, which implies there may exist the possibility of earnings management issues. Limited by the sample size, we are unable to provide further tests to rule out this possibility. In addition, the first empirical chapter also provides evidence that foreign ownership may contribute to an increased willingness of firms to appoint independent directors. The second analysis re-examines the same data to explore the role of information cost in the impact of board independence on firm performance. The main finding is that high information costs make this negative impact more pronounced, as high information costs will limit the independent directors in performing both monitoring and advisory activities. The potential benefits of a more diversified board and sub-committee independence do not offset this negative impact. The first two empirical analyses provide some advice to the regulators: they should allow companies to choose a better board structure for themselves, rather than forcing them to adopt regulations in a short period. In addition, firms are encouraged to introduce foreign investors and lower information costs. The last analysis examines whether state ownership has a causal relationship with capital structure, and if so, why; and it explores the role of institutional and market development level in leverage decisions by state shareholders. By analysing 1,141 Chinese listed firms over the period 1999-2013, the empirical results show that state ownership is negatively associated to capital structure, and that this negative association is more pronounced in less developed areas. We also provide fresh evidence to explain why such an association is negative from the perspective of corporate risk-taking, as state shareholders are risk averse and hence are reluctant to borrow external funding.