Shareholding Structure, Depoliticization, and Firm Performance: Lessons from China’s Listed Firms

In this study we use a data set that provides information on Chinese Communist Party grassroots organizations’ political control over decision-making in China’s listed firms. Specifically, we examine how different types of shareholders affect (1) the party’s level of decision-making power and (2) the performance implications of party control for firm performance. We obtain two major results. First, we find that the proportion of shares held by domestic individual shareholders is negatively related to the party’s level of decision-making power. Second, we find that the existence of large institutional investors tends to mitigate the negative performance effect of party control. Our results suggest that both the exit and the voice channel are effective at depoliticizing China’s listed firms and improving their performance. This study both addresses an important corporate governance issue relevant to China’s listed firms and offers interesting information in terms of comparative studies of corporate governance and reform strategies in transitional economies.