The effects of ownership concentration and corporate debt on corporate divestitures in Chinese listed firms

This study examines how ownership concentration and corporate debt impact corporate divestitures in China. Corporate divestitures reduce the asset base of a company and the opportunity for expropriation by majority shareholders. In emerging economies, weak legal institutions, combined with equity ownership concentration and high corporate debt, allow majority shareholders to avoid such disciplines. Consequently, the relationship between these governance mechanisms and divestiture activity exhibits a pattern that is different from that in developed economies. Using archival data collected from 1,210 Chinese listed companies during 1999–2003, we found that ownership concentration by the largest shareholder depressed corporate divestitures both in state-controlled and in non-state-controlled firms. The negative effect of corporate debt on divestitures only existed for statecontrolled firms. Our finding provides corroborating evidence for principal–principal conflicts in emerging economies. It suggests that corporate strategy in these countries can be better explained by taking into account the unique agency problems that are prevalent in these economies. Asia Pac J Manag (2011) 28:95–114 DOI 10.1007/s10490-010-9208-6 Jianfeng Wu, Dean Xu, and Phillip H. Phan contributed equally. This research was partially supported by the Natural Science Foundation of China (grants no. 70502011 and 70532005), the Research Grants Council of Hong Kong (GRF no. 753608), and the Program for Innovative Research Team at UIBE. We thank Sam Park, Lixin Colin Xu, and seminar participants at the Samsung Economic Research Institute Beijing for their input. We also thank participants at the APJM/ Simon Fraser University Conference for their comments and suggestions. J. Wu (*) Business School, The University of International Business and Economics, Beijing, China 100029 e-mail: [email protected] D. Xu China Europe International Business School, 699 Hongfeng Road, Pudong, Shanghai, China 201206 e-mail: [email protected] P. H. Phan Carey Business School, Johns Hopkins University, Baltimore, MD 21201, USA e-mail: [email protected]