FIRM PERFORMANCE AND TYPES OF STATE-SHARE HOLDERS This chapter provides the empirical tests and results on the relationship between the identity of state-share holders and firm performance (H1a to H1c). 5.1. Measurements of variables Dependent variable: firm performance

5.1. Measurements of variables Dependent variable: firm performance Both accounting and market measures of firm performance are used to investigate the relationship between forms of shareholders and firm performance. The most common accounting profitability measure is return on assets. 23 Considering discretionary accounting measures that are the common critique for accounting data, core operating income before tax and interest is introduced to calculate the accounting profitability. China’s standardized income statement separates the operating results into (1) “profit or loss from core operating activities” and (2) “profit or loss from non-core operating activities”. Chen and Yuan (2002) find that non-core profits could be a convenient means of earnings management for China’s listed companies. Thus, the core operating profitability measure (CROAI) is used to mitigate the possible effects of earnings management through non-core transactions. Industry effects are adjusted by subtracting their industry medians. The market measure of firm performance (MARET) is the annually market-adjusted stock returns estimated as the stock return minus the market index return. I use the Shanghai A-share Composite Index and Shenzhen A-share Composite Index to proxy for the market returns, e.g., if a company is listed in SHSE, its return is adjusted by