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Ownership Structure， Corporate Governance Patterns and Improving Effectiveness of the Corporate Governance of China’s Listed Companies

Author: WenHongZhang
Tutor: ChenYongSheng
School: Southwestern University of Finance and Economics
Course: Finance
Keywords: Ownership Structure Principal-Agent Problem Pattern of Corporate Governance Governance of listed companies
CLC: F276.7
Type: Master's thesis
Year: 2003
Downloads: 543
Quote: 2
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Abstract


Corporate governance is different from business management. The major goal of corporate governance is to lower the cost resulting from the separation of ownership and control and maximize corporate value through a series of internal and external institutional arrangements to discipline and stimulate the manager. The effectiveness of corporate governance not only affects the corporate competitiveness， but also plays an important role in determining a nation’s economic health. Corporate governance in China has many problems; the establishment of an effective corporate governance pattern in our country is of great importance. From the prospective of principal-agent theory， this article discusses the relationship between ownership structure and corporate governance patterns， and the international experiences in this respect, and explores the ways to improve the effectiveness of corporate governance in China. Different ownership structure has different agency problems. Under the dispersed ownership， the major principal-agent problems in a corporation are those between the owner of a corporation and its manager， and the so-called "free-riders" problems when owners collectively monitor their manager. But under a concentrated ownership structure， besides the agency problems between the owner and the manager， there are also agency problems between small shareholders and large shareholders when it comes to monitoring the manager. Therefore，different mechanisms for corporate governance are needed<WP=8>under different ownership structure. There exists corresponding relationship between ownership structures and corporate governance patterns; the characteristics of ownership structure are the fundamental factors in determining patterns of corporate governance. Under a dispersed ownership structure， shareholders are unable to effectively monitor the manager directly through an internal organizational structure because of the "free-riders" problem and the high cost to reach an agreement among a huge number of investors. External mechanisms that are used to deal with corporate agency problem are therefore needed. The major weapon is the take-over market by which investor can "vote by foot". Competitive product market，manager market，harmonization of conflicting interest between investors and the manager are the major auxiliary measures. In order to achieve an effective governance through external mechanism， there must exist rigorous institutional conditions， of which a security market that must be liquid and efficient is crucial. Under a concentrated ownership structure， the controlling shareholders are motivated and capable enough to effectively monitor the manager through internal organizational structures that comprise at least a shareholders’ congress and a board of directors. For large investors to effectively monitor the manager， large investors themselves must have full property right over their investment， which means there is no principal-agent problem in large investors themselves. Laws and government regulations are the major tools to guard the interests of small investors against being expropriated by large investors. Empirical studies show that the concentration level of corporate ownership varies greatly among different countries. We’ve seen a highly dispersed ownership structure in the US and UK， but rather concentrated structure in the rest of world. What caused the level of ownership concentration to vary is the different level of protection provided to small investors by different legal systems. The stronger a legal system protects<WP=9>the interests of small investors， the more dispersed ownership structures are noticed, vice versa. Two major patterns of corporate governance are followed around the developed world: market-based external pattern which is now practiced in the US and UK， and large shareholder-oriented internal pattern which is dominant in Germany and Japan. Both patterns are relatively effective because they are both efficient adaptations to their unique institution

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CLC: > Economic > Economic planning and management > Enterprise economy > A variety of enterprise and economic > Multinational
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