Managerial Ownership, Capital Structure and Firm V

73ManagerialOwnership,CapitalStructureandFirmValue:EvidencefromChina’sCivilian-runFirmsWenjuanRuan1,GaryTian2andShiguangMa2,3AbstractThispaperexaminestheinfluenceofmanagerialownershiponfirmperformancethroughcapital-structurechoices,usingasampleofChina’scivilian-runfirmslistedontheChinesestockmarketbetween2002and2007.Theempiricalresultsdemonstrateanonlinearrelationshipbetweenmanagerialownershipandfirmvalue.Managerialownershipdrivesthecapitalstructureintoanonlinearshape,butinanoppositedirectiontotheeffectofmanagerialownershiponfirmvalue.Theresultsofsimultaneousregressionssuggestthatmanagerialownershipaffectscapitalstructure,whichinturnaffectsfirmvalue.Ourfindingsimplythatthe“interestconvergence”and“entrenchment”effectsofmanagers’behaviourintermsofmanagerialownershipcanalsoexplaintheagency-relevantsituationofChina’scivilian-runfirms.Keywords:Managerialownership,Capitalstructure,Firmvalue,Civilian-runfirmsJELclassification:G31;G32,G341MurdochUniversity,Australia2UniversityofWollongong,[e-mail]|Volume5,no3,201174IntroductionTheeffectsofmanagerialownershiponfirmvaluehavebeenofparticularresearchinterestinthecorporatefinanceliterature(Denis&McConnell2003).Mostcommentatorsconcurthatmanagers’andshareholders’interestsarenotfullyaligned.Thisconflictofinterestproducesagencyproblemsthatreducefirmvalue.Thus,anincreaseofmanagerialownershiphelpstoconnecttheinterestsofinsidersandshareholders,andleadstobetterdecision-makingandhigherfirmvalue.However,whentheequityownedbymanagementreachesacertainlevel,furtherincreaseofmanagerialownershipmayprovidemanagerswithsufficientsharestopursuetheirownbenefitwithoutconcernfordecreasingfirmvalue.Whenmanagerialownershipapproachesaconsiderablyhighlevel,theagencyproblemcanbelargelymitigatedduetothefullalignmentbetweentheinterestsofmanagersandshareholders.Therefore,itishypothesisedthatmanagerialownershipandfirmvaluehaveanonlinearrelationship(Cho1998;McConnell&Servaes1990;Morck,Shleifer&Vishny1988).Mostofthecitedliteraturefocusesontherelationshipbetweenmanagerialshareholdingandfirmperformanceinthedevelopedmarket.Becauseoftheabsenceofessentiallegalprotectionsandappropriategovernancemechanisms,agencyproblemsinmanyemergingmarketsarerelativelymoreseverethanthosefoundindevelopedmarkets(LaPortaetal.1998;Wei,Xie&Zhang2005).ClaessensandDjankov(1999)examinedtherelationshipbetweenmanagementequityincentivesandfirmperformancefor706Czechfirmsandfoundthatprofitabilitychangesinhumancapitalarequiteimportantinbringingaboutimprovedcorporateperformanceintransitioneconomies.Bunkanwanicha,GuptaandRokhim(2008)investigatedtherelationshipbetweendebt,managerialbehaviorandfirmperformanceinThaiandIndonesianmarkets.Theirresultshighlighttheimportanceofthecountry-specificinstitutionalsettingsinmanagerialownership-relatedagencyproblems.TheChinesesecuritiesmarketemergedwiththeestablishmentoftheShanghaiStockExchangein1990andtheShenzhenStockExchangein1991.Duringthefirstfewyearsafterthemarketsopened,mostlistedcompaniescamefromstate-ownedenterprises;later,manynon-state-ownedcompanieswerealsolistedonthemarket.Generally,China’sfirmsarecategorisedaccordingtothedominantownership,forexample,a“state-ownedfirm”meansthatthecompanyisdominantlyownedbythestate;a“civilian-runfirm”isdominantlyownedandrunbycivilians,ratherthanbythecentralorlocalgovernment.OneoftheuniquecharacteristicsofthepresentChinesemarketistherapidlygrowingnumberofcivilian-runfirms.Thelistedcompaniesfromnon-governmententerpriseshaveappearedsince1992ontheShenzhenSecurityExchange(thefirstbeingShenHuayuanA,stockcode000014).Anaverageofonlysixcivilian-runcompaniesacquiredlistingqualificationeachyearbetween1992and1997,butafter1998thelistingofcivilian-runcompaniesaccelerated.Theproportionofcivilian-runcompanieslistedthroughinitialpublicofferings(IPOs)was6.97percentbytheendof2003,andthisincreasedto15.38percentbytheendof2005.By2007thetotalnumberofcivilian-runlistedcompanieswas410,representing26.53percentofatotalof1,545firmsonShanghaiandShenzhenstockexchanges.4Thesedataprovideevidencethatcivilian-runfirmsmayrepresentthetrendandshapeofpublicfirmsinthecontinuingeconomicreformofChina.AlthoughmanagerialownershipisoneofthewaysthatChinesecompaniesadoptWesterncorporategovernance,theproportionofmanagerialownershipisquitesmallamongstate-ownedcompanies,withameanvalueduring2002–2007ofjust0.0929percent;incontrast,themeanvalueofmanagerialownershipforcivilian-runcompanieswas9.31per4See:(inChinese).Ruan,Tian&Ma:ManagerialOwnership,CapitalStructure&FirmValue75cent.Comparedtostate-ownedenterprises,civilian-runfirmshavemuchmoreautonomyandprofitretention,andmanagersaremoreoftenappointedonmeritandability,ratherthanpoliticalpatronage.Mostcivilian-runfirmsadoptamanagerial-ownershipgovernanceapproach,andtheirmanagershavemorepowertochoosefinancialpoliciescomparedtothoseinmanydevelopedcountries.Thissituationgivesmanagersofcivilian-runfirmsmorediscretionoverfunding,pricingandlaborpractices(Firth,Fung&Rui2006).Thus,ourstudyoftheChinesemarketmayshedlighton