Aligning the Interests of Multiple Principals : Ownership Concentrationand Profitability in China's Publicly-Traded Firms

Across the social sciences, agency theory has become one of the basicframeworks through which to analyze the organizational problem ofaligning interests between owners (principals) and those who carry outthe work of the corporation (agents). Less often analyzed within thisframework is the problem of multiple principals with differentincentives and agendas. In today's global economy, this is a problemthat institutional investors from around the world encounter on aregular basis. We argue that ownership concentration holds the key todealing with the collective action problems that emerge in thesecircumstances. To provide empirical insight into these issues, weanalyze the impact of ownership concentration in multiple-principalfirms that have been listed on the Shanghai and Shenzhen stock exchangesover the last decade. Through these data, we show that the strongestfactor shaping performance among this population of firms is ownershipconcentration: the higher a firm's ownership concentration, the betterit performs, both in terms of profitability and in terms of efficiency.Further, as markets in this context have become more competitive overthe last decade, overall profitability has declined, but the effect ofownership concentration has increased, suggesting that ownershipconcentration becomes even more important for achieving corporate goalsas markets become more competitive