The Relation between Firm Value and Corporate Ownership: Evidence from China’s Listed Companies

In this study of China’s listed companies, we apply a 2SLS fixed effects model in a simultaneous equation system to study the interaction among firm value (Tobin’s Q), managerial ownership, and the largest shareholder’s ownership, controlling for two sources of endogeneity: unobserved firm heterogeneity and the simultaneity problem. We find all three variables are jointly determined under a cross-sectional framework of simultaneous equation analysis. However, when taking into account unobserved firm-specific effects under a panel data framework, we find only that firm value and the largest shareholder’s ownership are jointly determined, although managerial ownership still affects firm value in a linearly positive way. Firm value has positive effects on the largest shareholder’s ownership, while the largest shareholder ownership is found to have an inverse-“U” shape influence on firm value. To further allow for ultimate ownership in the relation, we use cross-sectional data and find the separation between cash flow rights and voting rights is negatively related to firm value. This proves the coexistence of the incentive alignment effect (embodied by cash flow rights) and the entrenchment effect (embodied by voting rights). Finally, by using a dynamic random effect probit model to allow for unobserved firm heterogeneity, dynamic factors and endogeneity of initial conditions, we explore the occurrence mechanism of the largest shareholder’s tunneling. We find that tunneling of the largest shareholder is rather persistent during sample years. Firms with longer listing histories and higher debt levels are more likely to suffer from tunneling problems. Firms located in western area of China are more likely to be tunneled by their controlling shareholders. We find government policy against such behavior becomes more and more effective. From local authorities’ perspective, however, we only find an insignificant negative role for the local unemployment rate. On the other hand, local fiscal deficit has insignificantly positive relation to tunneling occurrence, reflecting the tax evasion nature of tunneling