Product market competition, state-ownership, corporate governance and firm performance

Li Liu (Department of Accounting, Deakin Business School, Deakin University, Burwood, Australia)
Wen Qu (Department of Accounting, Deakin Business School, Deakin University, Burwood, Australia)
Janto Haman (Department of Accounting, Monash Business School, Monash University, Caulfield East, Australia)

Asian Review of Accounting

ISSN: 1321-7348

Publication date: 5 February 2018

Abstract

Purpose

The purpose of this paper is to examine the association between firm performance and product market competition (PMC), and then examine the mitigation effect of corporate governance and/or state-ownership (SOEs) in the association between PMC and firm performance using Chinese listed firms.

Design/methodology/approach

The authors consider three determinants of the PMC that affect the nature of competition, and use market concentration, product substitutability and market size as proxies for PMC. The authors construct a corporate governance index which measures the extent of board independence, monitoring strength of supervisory board over board of directors, and monitoring strength of board of directors over CEO. The authors use Tobin’s Q as a proxy for firm performance. The authors use a sample of 20,706 firm-year observations listed on the Chinese stock market between 2001 and 2016 to empirically investigate the research questions proposed in the paper.

Findings

The authors find that higher PMC is associated with lower firm performance. The authors find that good corporate governance practices moderate the negative effect of higher PMC on firm performance. The association between higher PMC and lower performance is weaker for firms controlled by SOEs compared to non-SOEs. Further, the moderation effect of SOEs on the association between higher PMC and lower performance is more pronounced for firms with good corporate governance practices compared to firms with weak corporate governance practices.

Originality/value

Extant studies investigating the relationship between PMC and corporate governance suggest an either complementary or substitution relationship in developed economies. Our study highlights the interactive role played by SOEs and good corporate governance practices in firm performance in highly competitive product markets in an emerging economy. The findings provide insightful information to regulators of other emerging countries that SOEs with good corporate governance practices can play an important role in the economy by mitigating the negative effect of higher PMC on firm performance.

Keywords

Citation

Liu, L., Qu, W. and Haman, J. (2018), "Product market competition, state-ownership, corporate governance and firm performance", Asian Review of Accounting, Vol. 26 No. 1, pp. 62-83. https://doi.org/10.1108/ARA-05-2017-0080

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Publisher

:

Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited


1. Introduction

Debate on privatization or product market competition (PMC) in promoting firm efficiency has not reached conclusive results. A series of papers in public choice literature argue that increased competition in product markets plays a more important role than privatization in promoting allocative efficiency (Kay and Thompson, 1986; Millward, 1982; Wortzel and Wortzel, 1989). Borcherding et al. (1982, p. 136) state that “given sufficient competition between public and private producers, the differences in unit costs turn out to be insignificant.” On the other hand, a number of studies find that government shareholders are more likely to expropriate firm wealth, thus advocating the privatization of public enterprises to enhance firm performance (Bailey, 1986; Bishop and Kay, 1989; Kikeri et al., 1994). However, some studies argue that good corporate governance practices in public enterprises may lead to no inferior efficiency relative to private enterprises (e.g. Sun et al., 2003).

The objective of this study is to investigate the association between PMC and firm performance and how state-ownership (SOEs) and corporate governance practices affect firm performance when operating in markets with higher PMC. Hence, the study posits four research questions:

RQ1.

Does PMC affect firm performance?

RQ2.

Do corporate governance practices affect firm performance when operating in markets with higher PMC?

RQ3.

Does the association between PMC and firm performance for firms controlled by SOEs differ from firms controlled by non-SOEs?

RQ4.

Does the effect of SOEs on the association between PMC and firm performance differ for firms with good corporate governance practices from firms without good corporate governance practices?

China provides a distinctive setting of economic system for our investigation. Since the late 1970s, the Chinese Government has begun to restructure the Chinese economy from a centrally planned one to a market-oriented economy. The economic reforms are carried out mainly through the “Open Door Policy,” the permission for entrepreneurs to set up businesses and the partial privatization of state-owned enterprises through the establishment of the Chinese stock market (Zhang, 2005). After more than three decades of economic reforms, product markets in China have become increasingly competitive. Market forces of supply and demand have become an important determinant of price formation and economic behavior (Conway et al., 2010). In addition, the accession to the World Trade Organization in 2001 has become one of main impetuses to enhance the role of market mechanisms in allocating resources in China. The Chinese Government aims to improve the efficiency of state-owned enterprises through the transition to a socialist market economy with more competitive product markets.

SOEs remains widespread in Chinese listed firms (Tian and Estrin, 2008; Chalmers et al., 2014). Over the years, the role played by SOEs in listed Chinese firms has been described as either a “grabbing hand” (when SOEs facilitates the expropriation behavior through tunneling) (Chen et al., 2014) or a “helping hand” (when it provides listed firms priority for state-controlled resources thus assists firms to achieve better performance) (Qian, 2003; Tian and Estrin, 2008; Blanchard and Shleifer, 2001; You and Du, 2012). To protect minority shareholders’ interest and improve operating efficiency of Chinese listed firms, the government has launched a series of profound corporate governance reforms since early 2000s[1]. Corporate governance mechanisms such as board of directors and supervisory board are expected to bestow the responsibility of monitoring managerial actions, reducing management slack and strengthening firms’ sustainability in the increasingly competitive product market. Prior studies demonstrate that effective corporate governance has played a positive and significant role in improving firm performance in China (Cho and Rui, 2009; Su and He, 2012).

Based on a sample of 20,706 firm-year observations listed on the Chinese stock market between 2001 and 2016, we report the following findings. First, we find that higher PMC is associated with lower performance of Chinese firms listing on the Shanghai and Shenzhen stock exchanges. In other words, firms operating in markets with higher PMC have lower performance than firms operating in markets with lower PMC. Second, good corporate governance practices moderate the association between higher PMC and lower firm performance. Third, we find that SOEs does mitigate the negative effect of higher PMC on firm performance. The findings suggest that firms with SOEs enjoy higher performance relative to firms without SOEs when operating in markets with higher PMC. Finally and most importantly, we find that the moderation effect of SOEs on the association between higher PMC and lower firm performance is more pronounced for firms with good corporate governance practices relative to firms without good corporate governance practices.

Our findings are important in extending our understanding on the relationship between PMC and firm performance. Further, they provide insightful knowledge on the role of SOEs and good corporate governance practices in mitigating the negative effect of higher PMC on firm performance. Extant studies investigating the relationship between PMC and corporate governance assume the former as one of the external corporate governance mechanisms and suggest an either complementary or substitutive relationship between PMC and internal corporate governance in developed economies (Nickell, 1996; Schmidt, 1997; Giroud and Mueller, 2011; Huang and Peyer, 2012). However, extant studies have largely ignored the interactive role played by the strong presence of SOEs and good corporate governance practices on firm performance in highly competitive product markets in an emerging economy. Our study contributes to the corporate governance literature by identifying the combined role of SOEs and good corporate governance practices in improving performance when firms confronting intense PMC.

The findings suggest that in a market-oriented system where state-owned enterprises still dominate Chinese economy, the presence of SOEs benefits firms when operating in markets with higher PMC. The findings indicate to insiders of Chinese firms, investors, and regulators that the involvement of state-controlling shareholders in business enterprise can mitigate the negative effect of higher PMC on firm performance. Furthermore, the findings imply that with good corporate governance practices, the expropriation behavior of SOEs (“grabbing hand”) is minimized, leading to the benefits brought by the SOEs (“helping hand”). The study informs insiders of firms, investors and regulators of the benefits of good corporate governance practices combined with SOEs in increasing performance of Chinese listed firms when operating in markets with higher PMC. The findings provide insightful information to regulators of other emerging economies that SOEs with good corporate governance practices can play an important interactive role to enhance firm performance by mitigating the negative effect of higher PMC on firm performance.

The remainder of the paper is structured as follows. Section 2 presents the literature review and develops the hypotheses to be tested. Section 3 discusses the data and research methodology to test hypotheses. Results and analysis are presented in Section 4. Further analyses are discussed in Section 5. Section 6 concludes the study, noting limitations and avenues for future research.

2. Literature review and hypothesis development

2.1 PMC and firm performance

Economists argue that PMC promotes resource allocation efficiency. They have provided ample support for this notion by showing that PMC reduces the divergence between equilibrium prices and marginal production costs (Horn et al., 1994). For individual firms, vintense PMC is featured with additional competitors entering into the market, expansion of competitors’ market share and reduced product price overall (Porter, 1990). In a highly competitive product market, it is common to have cost reductions across all firms and this is accompanied by falling prices.

Extant studies in developed economies assert that a high PMC may decrease or increase firm performance. Schmidt (1997) suggests that increased PMC would increase the likelihood of a firm with high costs becomes less profitable therefore can negatively affect firm performance. On the other hand, Hart (1983) asserts that PMC reduces managerial slack. He contends that in a highly competitive product market, the selling prices of products or services are more likely to fall. Since managers are concerned with their economic interest which may be tied up with firm performance, they are more likely to work hard in order to increase productivity that is more likely to reduce costs and ultimately increase firm performance.

Chinese firms operate in an emerging market where market mechanisms are being developed comparable to those in developed economies. After more than three decades of establishing a socialist market economy, product markets across all China’s industrial sectors have become increasingly competitive. However, market for corporate control in China has not been well developed. In addition, the manager job market is typically less competitive and inefficient relative to developed economies (Ruan et al., 2011). Lack of sufficient competition and inefficiency in the manager job market suggests weak incentive for managers to enhance firm performance in a highly competitive market. Based on this notion, we develop the following hypothesis to address RQ1:

H1.

Higher PMC is associated with lower performance of Chinese firms.

2.2 Corporate governance attributes, SOEs, PMC and firm performance

The precedent discussions indicate that China differs from other developed economies in particular related to, the lack of an efficient manager job market and lower managerial ownership. In this type of setting, managers are more likely to have less incentive to enhance firm performance. On the other hand, there is an increasingly competitive product market. If a highly PMC does negatively affect firm performance, it is interesting to know whether SOEs and/or good corporate governance moderate this negative association in China. Good corporate governance has becoming an important attribute since the launch of corporate governance reform by the Chinese government in 2001. Furthermore, SOEs has been one of the unique institutional characteristics of listed firms in China; in particular the state still remains the majority shareholder in 31 percent of publicly listed firms (Tian and Estrin, 2008).

2.2.1 The moderating role of good corporate governance

The role of good corporate governance practices has become more important after the collapse of corporations such as WorldCom and Enron in the USA, and Chengdu Hongguang and Yinguangxia in China (Fu, 2010). There is a perception that lack of good corporate governance practices contributed to such corporate failures. It is well established that good corporate governance practices can generally increase firm performance (Fama and Jensen, 1983; Weisbach, 1988; Agrawal and Knoeber, 1996; Su and He, 2012). More specifically, well-governed firms have better operating performance because good corporate governance reduces control rights conferred by shareholders and creditors (Shleifer and Vishny, 1994). Lending further support to this argument, Gregory and Simms (1999) affirm that good corporate governance is important in attracting lower-cost investment capital through the increase in investors’ confidence.

Extant studies examine the effect of good corporate governance on the association between firm value and PMC suggesting two conflicting arguments (Januszewski et al., 2002; Grosfeld and Tressel, 2001; Karuna, 2010; Byun et al., 2011). The substitutive viewpoint asserts that PMC acts as a substitution for good corporate governance as competitive pressure forces managers to maximize firm value (Giroud and Mueller, 2011; Fracassi and Tate, 2012; Ammann et al., 2013). A highly competitive market reduces corporate profit and erodes market value of shares. This could attract for a corporate takeover, thereby putting pressures on managers to perform well (Roe, 2004). Thus, PMC acts as an external disciplinary governance mechanism to minimize agency costs. The complementary view, on the other hand, argues that PMC and good corporate governance practices complement each other in improving firm performance since PMC increases agency costs and hence increases the need for corporate governance mechanisms to closely monitor managers (Karuna, 2010; Byun et al., 2011).

Studies focusing on China reveal that PMC and corporate governance exhibit a complementary relationship (Jiang and Chen, 2007; Chen and Tao, 2013; Yu et al., 2017). Chen and Tao (2013) find that competitive product market environment reinforces internal control mechanism within Chinese listed firms; Jiang and Chen (2007) suggest that PMC contributes to more stringent monitoring over CEOs. Yu et al. (2017) document the complementarity between PMC and corporate governance, showing that good corporate governance in China significantly increases firm value in more competitive industries. Thus, in China, PMC is one of the impetuses for firms to establish a good corporate governance which in turn, has a positive impact on firm performance. We therefore expect that corporate governance can moderate the negative association between PMC and firm performance in China. Based on these notions, we address RQ2 by proposing the following hypothesis:

H2a.

Good corporate governance practices moderate the negative effect of higher PMC on performance of Chinese firms.

2.2.2 The moderating role of SOEs

SOEs among listed firms is one of the most distinctive institutional characteristics in China. The effect of SOEs on firm performance has been controversial. The “helping hand” view presents a variety of potential benefits that SOEs can bring to firms. For example, state-controlling shareholders could use their extensive government network to get preferential treatments with respect to equity funding and/or debt financing (Cull and Xu, 2005), reduced tax or fees (Adhikari et al., 2006), and expanded business (Lu, 2011). These benefits ultimately help to improve the performance of firms (Tian and Estrin, 2008; Blanchard and Shleifer, 2001; You and Du, 2012; Qian, 2003). You and Du (2012) find a significant positive relationship between firm performance and SOEs.

The competing view is that state-controlling shareholders in China pursue a variety of non-financial objectives through their social roles and responsibilities. For example, state-controlling shareholders assume extensive social responsibilities, including supporting the construction of social facilities and helping to merge loss-making state-owned enterprises with profitable firms (e.g. Bai and Xu, 2005). Extant studies find that state-controlling shareholders diverting firm resources for their own benefits at the expense of non-controlling shareholders. This “grabbing hand” behavior has been proven to negatively affect firm performance in both short-term and long run (Aharony et al., 2010; Cheung et al., 2005).

In a market with higher competition, state-controlling shareholders’ expropriation behavior is likely to be less severe. This is because higher PMC enables non-controlling shareholders to monitor firm performance by using information obtained from the rival firms as the benchmark. An increase in PMC therefore generates more information and promotes the flow of firm-specific information to all shareholders (e.g. Holmstrom, 1982; Nalebuff and Stiglitz, 1983). Hence, a higher PMC facilitates shareholders’ monitoring and enhances firm transparency. A more transparent environment is assumed to mitigate state-controlling shareholders’ expropriation behavior since the latter would attract higher additional costs including reputation loss and drop of share price.

Given that state-controlling shareholders are likely to restrain their expropriation behavior when firms facing a higher PMC, the role of “helping hand” offers more substantial benefits to firm performance. With the “helping hand” from government, firms with SOEs are more likely to perform better than firms without it when operating in markets with higher PMC. Using German data, Januszewski et al. (2002) find that state-owned firms operating in markets with higher competition enjoy higher productivity growth. Based on this notion, we address RQ3 by developing the following hypothesis:

H2b.

The association between higher PMC and lower performance of Chinese firms is weaker for firms with SOEs relative to firms without SOEs.

2.2.3 The interaction of SOEs and good corporate governance on PMC and firm performance

As discussed early in H2a and H2b, good corporate governance practices and SOEs are expected to moderate the negative effect of higher PMC on firm performance respectively. SOEs can have a negative effect on firm performance when it engages in expropriation behavior. However, extant studies find that good corporate governance practices can reduce this negative effect. Gao and Kling (2008) and Jiang et al. (2010) find that good corporate governance practices such as independent directors can curb state-controlling shareholders’ expropriation behavior.

With the good corporate governance practices, it is expected that expropriation behavior of state-controlling shareholders can be minimized, leading to the benefits which result in better performance and performance. Since SOEs is expected to increase firm performance when firms operate in markets with higher PMC (Januszewski et al., 2002; Koke and Renneboog, 2005), we conjecture that the benefits of SOEs is more pronounced in firms with good corporate governance practices relative to firms without good corporate governance practices. Based on this conjecture, we develop the following hypothesis to address RQ4:

H3.

The moderation effect of SOEs on the association between higher PMC and lower firm performance is more pronounced for firms with good corporate governance practices relative to firms without good corporate governance practices.

3. Research design

3.1 Sample selection

Our sample comprises all listed firms in the Chinese stock market in the period from 2001 to 2016. The selection of 2001 as the starting sample year is based on the following considerations. First, from 2001 Chinese listed firms are mandatorily required to disclose ownership structure along with the ultimate owners’ name in the annual financial reports. This enables us to classify firms into firms with SOEs and firms without SOEs (non-SOEs) based on the nature of the ultimate owners of the firm. Second, China Securities Regulatory Commission (CSRC) promulgates the “Guideline for Setting up the Independent Directors Mechanism in Listed Companies” in 2001 followed by the release of the “Code of Corporate Governance for Listed Companies.” These two regulations were regarded as the first comprehensive official guidelines that marked the commencement of the corporate governance reform in China.

We first exclude all firms in utility industry and financial institutions because of the inherent differences in regulatory and institutional structures for these two industry sectors. To match firms with industries, we require firms with non-missing CSRC top-level industry code in the Chinese Stock Market Accounting Research (CSMAR) database. We further delete firm-year observations that do not have adequate financial variables. After applying the above criteria, our final observations in the period from 2001 to 2016 are 20,706 firm-year observations.

3.2 Measurement of PMC

Our study uses three methods to measure PMC: market concentration, product substitutability, and market size. Most prior research relies on a single dimension, i.e. market concentration, as a proxy for PMC, but produces conflicting results. The inconclusive findings are arguably to be partly attributed to a lack of consideration of whether market structure is exogenous or endogenous, which could lead to market concentration capturing only a partial dimension of PMC (Raith, 2003). Recent theoretical studies in economics argue that concentration by itself may be a poor proxy for competition and suggest that PMC embodies several dimensions (Raith, 2003; Karuna, 2007). Therefore, following prior research (Leventis et al., 2011; Karuna, 2009), this study considers three determinants of competition: concentration, product substitutability, and market size. These three determinants are discussed as follows.

The first determinant of competition is market concentration. As a market becomes less concentrated, price and unit margins would decline, due to higher competition among existing market participants. Consistent with prior studies (e.g. Giroud and Mueller, 2011; Aggarwal and Samwick, 1999), we use Herfindahl-Hirschman index (denoted as HHI) as a measure of market concentration. HHI is calculated for CSRC top-level industries by summing the square of the individual firm market shares based on total sales of all available listed firms in the industry from the CSMAR database. A higher value of HHI indicates a lower competition.

The second determinant of competition is product substitutability. Product substitutability is defined as the extent to which a close substitute exists for a particular product in an industry. Where there are higher degrees of substitutability, the intensity of price competition is greater, thus product market is being deemed more competitive. Prior studies in the Industrial Organizations literature use the price-cost margin (denoted as SUB) as a measure of product substitutability, with low (high) levels of the SUB signifying high (low) levels of substitutability. Consistent with prior research (e.g. Nevo, 2001), we use SUB as a measure of product substitutability. SUB is calculated as total industry sales divided by total industry operating costs at top-level CSRC industry. The total industry sales and total industry operating costs are calculated based on all available listed firms in the industry from the CSMAR database. A higher value of SUB indicates a lower competition.

The third determinant of competition is market size. Market size refers to the consumers’ demand for a particular product in an industry. As the market demand for a product increases at a given price, sales of that product are more likely to increase accordingly. Attracted by the prospect of the product, more new firms enter into that industry, thus increasing PMC (Sutton, 1991). Following prior research (Karuna, 2009), we use total sales at the industry level (denoted as MKTSIZE) as a measure of market size. MKTSIZE is calculated as the logarithm of total industry sales at top-level CSRC industry based on all available listed firms in the industry from the CSMAR database. A higher value of MKTSIZE indicates a higher competition.

3.3 Measurement of good corporate governance practices

We manually construct an internal corporate governance index as a measure of corporate governance practices[2]. The index is based on the practice of the two-tier boards in Chinese listed firms because the “Guideline for Setting up the Independent Directors Mechanism in Listed Companies” and the “Code of Corporate Governance for Listed Companies” specifically address the importance of the two-tier boards in aligning interests of managers with shareholders and protecting minority shareholders’ interests. The index consists of three sub-indexes. The first sub-index is the board independence, measured by the ratio of the number of independent directors over the total number of board of directors. Higher ratio indicates higher independence of board of directors (denoted as indep). The second is the monitoring strength of supervisory board over board of directors, captured by the number of supervisory board divided by the number of board of directors[3]. Higher ratio is deemed more effective of the supervisory board overseeing board of directors (denoted as tbsize). The third sub-index is the monitoring strength of board of directors over CEO, proxied by the separation of the CEO and chairman-of-the-board position. The separation of the two positions indicates greater strength in monitoring CEOs (denoted as duality).

The information on corporate governance attributes is extracted from the CSMAR database. We calculate median values of indep and tbsize for each sample year. If the value of indep (tbsize) is above the median, the board independence sub-index (the monitoring strength of supervisory board sub-index) is set to 1 and zero otherwise. If a firm’s CEO is separated from the chairman position, the monitoring strength of board of director sub-index is set to 1 and zero otherwise. To compile a comprehensive corporate governance measure (CGI), we consider a firm having good corporate governance practices if at least two sub-indexes have values of 1. For firms having good corporate governance, CGI equals 1 and zero otherwise.

3.4 SOEs

Following Bortolotti and Faccio (2009) who argue that the identification of state control over business enterprises should take into account the indirect ownership by government, this study classifies the ultimate controlling shareholders into state-controlling shareholders and non-state-controlling shareholders based on the information of ownership structure disclosed by firms in their annual financial reports. Since 2001 Chinese listed firms are mandatorily required to disclose whether firms have ultimate controlling shareholders. This enables us to identify the names of ultimate controlling shareholders and define the nature of the ultimate controlling shareholders. If firms’ ultimate controlling shareholders are government agencies, they are classified as SOEs. If firms are ultimately controlled by private, they are classified as non-SOEs. The presence of state shareholders has been used by prior research investigating the impact of politician influence (e.g. Avendano and Santiso, 2010; Sun et al., 2003).

3.5 Measurement of firm performance

We use Tobin’s Q (Tobinq) as a market-based measure of firm performance. For the additional test, we employ return on assets (ROA) as an accounting-based measure of firm performance. Tobin’s Q is defined as the sum of the market value of equity and the book value of net debt, divided by total assets. Prior studies have extensively used Tobin’s Q as a proxy for firm performance. It has been shown robust to different time-periods and countries (Jain and Kini, 1994; Gompers et al., 2003; Moeller et al., 2004; Krishnan et al., 2011).

3.6 Empirical model

We employ multivariate analysis to test hypotheses. The regressions are estimated at the firm-year level. The firm-year level analysis allows us to control for the possible differences in the industry mix of sample firms over time which may affect the level of performance (Bushman et al., 2006). We estimate t-statistics correcting for heteroscedasticity.

We use the following regression specification to examine H1 whether higher PMC is associated with lower performance of Chinese listed firms:

(1) T O B I N Q i , t = α + β 1 H H H I j , t ( H S U B j , t , H M K T S I Z E j , t ) + β 2 S I Z E i , t + β 3 L E V i , t + β 4 C H S L S i , t + β 5 C G I i , t + β 6 S O E i , t + β 7 C L I S T i , t + δ Y e a r D u m i , t + ε i , t

We expand regression (1) by including the interaction between good corporate governance practices and PMC to test H2a – whether good corporate governance practices moderate the negative effect of higher PMC on performance of Chinese listed firms. The regression specification is as follows:

(2) T O B I N Q i , t = α + β 1 HHHI j , t ( HSUB j , t , HMKTSIZE j , t ) + β 2 HHHI j , t ( HSUB j , t , HMKTSIZE j , t ) × CGI i , t + β 3 CGI i , t + β 4 SOE i , t + β 5 SIZE i , t + β 6 LEV i , t + β 7 CHSLS i , t + β 8 CLIST i , t + δ YearDum i , t + ε i , t

To test H2b – whether the negative effect of higher PMC on performance of Chinese listed firms is weaker in SOEs compared to non-SOEs, we expand regression (1) by including the interaction between SOEs and PMC. The regression specification is as follows:

(3) TOBINQ i , t = α + β 1 HHHI j , t ( HSUB j , t , HMKTSIZE j , t ) + β 2 HHHI j , t ( HSUB j , t , HMKTSIZE j , t ) × SOE i , t + β 3 SOE i , t + β 4 CGI i , t + β 5 SIZE i , t + β 6 LEV i , t + β 7 CHSLS i , t + β 8 CLIST i , t + δ YearDum i , t + ε i , t

To test H3 we partition the total sample into two subsamples: one with good corporate governance practices, and the other without good corporate governance practices. We run regression (3) for the two subsamples and compare the coefficients on the variables of interest across two subsamples.

We investigate the relationship between corporate governance, SOEs and firm performance across industries with different degrees of PMC. We build two-quantile of the empirical distribution of each PMC measures and assign a dummy variable to each firm-year observation according to whether a firm is in the industry with the highest HHI (SUB, MKTSIZE), or the lowest HHI (SUB, MKTSIZE). This approach is similar to Ammann et al. (2013) and Gompers et al. (2003).

We include a number of commonly used control variables that prior literature finds to be associated with firm performance (e.g. Chen et al., 2009). Firm size (SIZE), measured by log of total assets, is used to control for economies of scale or the size effect. Leverage ratio (LEV) is included to control for influence of capital structure on firm performance. Change in Sales (CHSLS), measured by the increase or decrease in sales revenue over the past year, is to capture the ability of a firm to generate sales revenue. As indicated by prior research, larger firms and firms with higher leverage are expected to have lower performance. Firms with higher positive change in sales revenue are expected to achieve better performance. We further include a dummy variable indicating whether a firm is a SOE and a dummy variable indicating whether a firm has good corporate governance mechanism (CGI), because prior studies suggest that SOEs firms and well-governed firms are associated with better firm performance. In addition, we include CLIST controlling for difference in regulatory environment and requirements which may affect firm performance due to the cross-listing status. Table AI provides detailed explanation of variables.

4. Empirical results

4.1 Sample distribution

Table I presents the sample distributions over years and industry sectors, represented by the number of firms. It shows that the final sample comes from 12 industries, with the highest percentage of observations coming from the manufacturing sector, followed by firms from the information technology, while the communication industry has the lowest percentage.

4.2 Descriptive statistics

Table II, Panel A reports mean values of three proxies for PMC by year. It shows that the Chinese product market overall becomes more competitive across years. Panel B summarizes descriptive statistics for the dependent variable and control variables. To remove the potential impact of the outliers, all the control continuous variables are winsorized at 1 percent percentile. The average Tobinq is 2.522, similar to the statistics presented by Wu et al. (2012). Among the final sample, 88 percent are classified as having good corporate governance practices, 54.22 percent of observations are SOEs, and 7.36 percent are cross-listed overseas. Furthermore, Panel B reports the univariate tests of the differences between variables for subsamples with high vs low market competition using HHI as a measure of competition (HHHI). It shows that firms in a more competitive market are associated with lower firm performance, have smaller firm size and lower leverage, exhibit lower sales growth, establish weak corporate governance mechanisms, are less likely to be controlled by state, and less likely to be listed overseas. The univariate comparison remains similar when we use product substitutability and market size as measures of the market competition.

Table III presents the Pearson correlations of variables. The correlation coefficients among most variables are relatively low, suggesting collinearity problems are not a concern. Firm performance (Tobinq) is negatively associated with HHHI and HSUB, and positively related to HMKTSIZE. Consistent with prior research, firm performance (TOBINQ) is negatively related to firm size (SIZE), leverage ratio (LEV), and the nature of ultimate owner being government (SOE). The absolute value of correlation coefficients between HHHI and HMKTSIZE, and HSUB and HMKTSIZE are above 0.5, while the correlation between HHHI and HSUB is 0.417. The correlations among the measures of competition imply that our measures capture different dimensions of PMC.

4.3 Firm performance and PMC

Table IV Panel A presents the results of testing H1 using Equation (1). Column I reports regression results when market concentration (HHHI) is used as a measure of market competition. The coefficient on the variable of interest HHHI shows 0.181 (t-statistic=7.36) at the 1 percent level which is significantly and positively associated with firm performance (TOBINQ). Since dummy HHHI indicates lower PMC, the result suggests that lower product competition is associated with higher firm performance. Results are similar when PMC is measured by product substitutability (HSUB). Column III in Panel A presents the results from the regression where market size (HMKTSIZE) is included as the proxy for PMC. The coefficient on HMKTSIZE shows −0.126 (t-statistic −5.36). Since dummy HMKTSIZE indicates higher PMC, the result suggests that higher product competition is associated with lower firm performance. Collectively, the results in Panel A suggest that higher PMC is significantly associated with lower performance of Chinese listed firms. The results support H1.

The estimation results for control variables in regression (1) are generally consistent with those presented by prior studies (e.g. Chen et al., 2009). The negative coefficients on SIZE suggest that smaller firms have higher performance. Similarly, the negative coefficients on LEV indicate that highly leveraged firms are associated with lower firm performance. The positive coefficients on CHSLS suggest that positive changes in sales revenue reflect better firm performance. The coefficients for CLIST are significantly positive, suggesting that compared to firms listed only domestically, firms cross-listed overseas are valued higher. There is no statistical evidence supports those firms with good corporate governance achieve better performance. The significantly negative coefficients on SOE across the three columns indicate that firms controlled by state are associated with lower firm performance.

4.4 The impact of good corporate governance practices on the association between firm performance and PMC

Columns I- III in Panel B of Table IV present the regression results of testing H2a. Column I reports the results when we use market concentration (HHHI) as a measure of competition. The coefficient of HHHI is 0.304 (t-statistic=4.80), significantly and positively associated with firm performance at the one percent level. The result means that lower (higher) PMC is significantly associated with higher (lower) performance of firms without good corporate governance practices. On the other hand, the coefficient of the variable of interest, namely HHHI×CGI shows −0.14 (t-statistic=−2.11) significantly and negatively associated with firm performance at the five percent level. The negative coefficient of HHHI×CGI suggests that the association between higher PMC and lower firm performance is weaker for firms with good corporate governance practices relative to firms without good corporate governance practices. Column II and column III report similar results when we use product substitutability (HSUB) and market size (HMKTSIZE) as measures of competition. The coefficient on HSUB×CGI shows −0.132 (t-statistic=−1.93), significantly and negatively associated with firm performance at the five percent level, while the positive coefficient of HMKTSIZE×CGI suggests that the association between higher PMC and lower firm performance is weaker for firms with good corporate governance practices relative to firms without good corporate governance practices. Hence, the results in columns I, II and III in Panel B of Table IV support H2a. The results of the control variables across these three Columns are qualitatively similar to those reported in Panel A of Table IV.

4.5 SOEs and the relationship between PMC and firm performance

Columns IV- VI in Panel B of Table IV report the results of testing H2b – whether the negative effect of PMC on performance of Chinese listed firms is weaker in SOEs. Column IV presents the results when market concentration (HHHI) is used as a measure of competition. The coefficient of HHH1 shows 0.493 (t-statistic=14.37) and is significantly and positively associated with firm performance at the one percent level. Since higher HHHI indicates lower PMC, the result means that lower (higher) PMC is significantly associated with higher (lower) performance for non-SOEs. On the other hand, the coefficient of HHHI×SOE is negative and significant at the one percent level (−0.569 with t-statistic=−12.97) suggesting that the negative effect of PMC on firm performance is much weaker in SOEs compared to non-SOEs. The results are similar when product substitutability (HSUB) is a proxy for competition in Column V and market size (MKTSIZE) as a measure of competition in Column VI. In general, the results suggest that the presence of government shareholders moderates the association between higher PMC and lower performance in Chinese listed firms.

4.6 Endogeneity testing

The findings may potentially subject to the endogeneity problem. For example, it is possible that firms with weak corporate governance mechanisms make an unwise decision to enter into a fiercely competitive market or SOEs utilize its political flavor to be able to operate in industries with lower competition. To address this concern, we use the corporate governance index and whether a firm is SOE in the last year as instrumental variables and re-run two-stage least squares regressions (2SLS) for Panel B of Table IV. The estimation results are reported in Panel C of Table IV. As compared to Panel B of Table IV, the results are qualitatively unchanged except that when market size (HMKTSIZE) is used as a measure of PMC, the results are opposite to what have been presented in Panel B of Table IV.

4.7 The moderation effect of SOEs and good corporate governance practices

To test H3, we partition total sample into two subsamples: one having good governance practices and the other without good corporate governance practices, and re-run regression (3). The regression results are reported in Table V. Column I of Table V presents the results when market concentration (HHHI) is used as a measure of competition. The coefficient of the variable of interest, namely HHHI×SOE of firms with good corporate governance practices (CGI=1) shows −0.548 (t-statistic=−11.72), significantly and negatively associated with firm performance at the one percent level. When firms are not characterized with good corporate governance practices (CGI=0), we do not find that the coefficient of HHHI×SOE is statistically significant. The result demonstrates the moderation effect of SOE on the association between higher PMC and lower performance for firms with good corporate governance practices is more pronounced than for firms without good corporate governance practices.

When we use HSUB as a measure of competition, we find the coefficients of HSUB×SOE are statistically significant and negative for firms both with and without good corporate governance practices (see column II in Table V). The comparison of the two coefficients indicate that the moderation effect of SOE is more pronounced for firms with good corporate governance. When we use HMKTSIZE as a measure of competition, we find that the coefficients of HMKTSIZE×SOE for the sample firms with =1) and without good corporate governance practices (CGI=0) are both significantly positive. The comparison of the two coefficients suggests that the coefficient on HMKTSIZE×SOE for the sample firms with good corporate governance practices is significantly higher than the one of HMKTSIZE×SOE for the sample firms without good corporate governance practices. The results show that the moderation effect of SOEs on the association between higher PMC and lower performance is more pronounced for firms with good corporate governance relative to firms without good corporate governance practices. Collectively the results in Table V support H3.

5. Additional analyses

In this section, we perform a series of tests to examine the robustness of the main findings[4].

First, the empirical results above are built on the firm-level analysis while PMC is calculated at the industry level. To make the level of measurement consistent, we perform the regression analyses at the industry level. We transform the firm-level measures into industry level variables by taking the equal-weighted industry average of each firm’s variable of interest. As a result, binary variables are converted to continuous variables. The analyses on industry level suggest that the main findings are qualitatively similar to the main results.

Second, we construct the corporate governance measure as a continuous variable. Instead of classifying a firm having good corporate governance if at least two of the three sub-indexes (indep tbsize, duality) have a value of 1, we add up the value of sub-indexes and take the sum as the value of corporate governance (denoted as NCGI). Results from Equation (2) suggest when HHHI (HSUB) is used as a measure of competition, the coefficient on HHHI (HSUB) is 0.277 with t-statistic=5.07 (0.356 with t-statistic=6.09), and the coefficient for HHHI×NCGI (HSUB×NCGI) −0.109 with t-statistic=−1.98 (−0.110 with t-statistic=−1.85). When HMKTSZIE is a proxy for competition, the coefficient for HMKTSIZE shows −0.212 (t-statistic=−4.15) and the coefficient of HMKTSIZE×NCGI is 0.096 (t-statistic=1.89). The results suggest that good corporate governance moderates the negative effect of higher PMC on firm performance.

Third, we employ ROA as a measure for firm performance following Dybvig and Warachka (2012). Results from Equation (1) using ROA suggest coefficient on HHHI is significantly positive, and coefficient on HMKTSIZE is significantly negative, but the coefficients on HSUB are not significant. Results from Equation (2) suggest the coefficients on HHHI×CGI is significantly negative, but not significant on HSUB×CGI and HMKTSIZE×CGI. Results from Equation (3) show that the coefficient on HMKTSIZE×SOE is significantly positive. We do not find significant results consistent with H3 after we partition total sample into firms with good corporate governance practices and those without good corporate governance practices.

Fourth, the findings in this study could vary with the institutional development. Prior studies find that institutional factors influence firm performance, and are associated with corporate governance practices and the presence of SOEs in business enterprises. In China, there is a great heterogeneity in the degree of institutional development of its provinces (Allen et al., 2005). We use Fan and Wang’s (2001, 2002, 2003, 2004, 2006, 2007, 2008, 2009) index of the market development of Chinese provinces as a proxy for institutional development. To examine the influence of regional disparity, we locate the provinces sample firms are headquartered, and classify provinces as having high (low) institutional development when provincial market development index are above (below) the median value of the annual index. We re-run equations on the two subsamples; one with low and the other one with high intuitional development. The results suggest that our findings are not influenced by the intuitional development.

Fifth, politically connected managers could bring in various forms of government-related benefits, e.g. favorite bank loans. It is possible that managers’ political connections may influence the moderation effect of SOEs on firm performance when firms operating in markets with higher PMC. We therefore control for political connection by including a dummy variable (PC) equaling 1 if a firm’s Chairman of board of directors and/or CEO is politically connected. Wu et al. (2012) find that politically connected managers have different impact on firm performance depending on whether firms are controlled by state shareholders. We accordingly partition total sample into SOEs and non-SOEs. Results from Equation (3) show that the coefficient on HHHI×PC (HSUB×PC, HMKTSIZE×PC) is not significant in the SOEs subsample. For the non-SOEs subsample, estimation results from equation (3) show that the coefficient on HSUB×PC (HMKTSIZE×PC) is −0.156 (0.193) with associated t-statistics −2.49 (2.69), while the coefficient on HHHI×PC is not significant. The results suggest that our main findings remain robust after controlling for politically connected managers. In addition, the analysis indicates that non-SOEs having connection with politicians through appointment of political-connected managers are associated with higher firm performance in highly competitive industries.

Sixth, Chinese capital market has dropped considerably since 2007. The change in market-wide pricing parameter would affect Tobin’s Q. We therefore divide total sample into two subsamples with one subsample is from the period 2001 to 2006 and the other is from the period 2007 to 2016, and re-run equations. Results suggest that our findings are robust to different time-periods. Seventh, cross-listed firms are exposed to different regulatory environment from domestically listed firms. We therefore exclude cross-listed firms. The findings are qualitatively similar to the main results.

Finally, we exclude the board independence, and use the monitoring strength of supervisory board over board of directors and the monitoring strength of board of directors over CEO to construct our corporate governance index. The reason is that the “Guideline for Setting up the Independent Directors Mechanism in Listed Companies” regulates that listed companies should have at least one-third of independent directors. Therefore the board independence may not effectively capture good corporate governance in China. After applying this new measure of corporate governance, the findings are qualitatively similar to the main results.

6. Conclusion

This study investigates the influence of SOEs and good corporate governance practices on the performance of Chinese listed firms operating in markets with higher PMC. We construct a corporate governance index which measures the extent of board independence, monitoring strength of supervisory board over board of directors, and monitoring strength of board of directors over CEOs. We consider different dimensions of the PMC that affect the nature of competition, and use market concentration, product substitutability and market size as the proxies for PMC.

Our study provides empirical evidence that Chinese listed firms achieve lower performance when they are confronted with higher PMC. We also find that SOEs and/or good corporate governance practices can moderate the negative effect of higher PMC on firm performance. The findings suggest that in a transition economy where there is a strong presence of state-owned enterprises, SOEs benefits firms when operating in markets with higher PMC. The study informs insiders of firms, investors and regulators that the moderation effect of SOEs on the association between higher PMC and lower performance is more pronounced for firms with good corporate governance practices relative to firms without good corporate governance practices. The findings suggest that good corporate governance practices restrain state-controlling shareholders’ expropriation behavior (“grabbing hand”) and lead to the benefits brought by state-controlling shareholders (“helping hand”) to firms when operating in markets with higher PMC. The findings can be extended to other emerging countries that SOEs with good corporate governance practices can play an important role in the economy by mitigating the negative effect of higher PMC on firm performance.

Our study is subject to several limitations. First, corporate governance measurement of listed firms in China is not publicly available. In this study, we manually construct a corporate governance index which mainly measures the two-tier boards. Regulations require that supervisory board and board of directors in China play major roles in establishing and maintaining effective corporate governance mechanisms. Researchers also find the two-tier boards influence the effectiveness of corporate governance system. However, future research may explore a more comprehensive measurement of corporate governance practices. Second, the measures of PMC are computed from the CSMAR database, which includes only publicly listed firms rather than all Chinese firms. Even though Chinese listed firms serve as a good indicator of Chinese economy, future research exploring the market competition based on all Chinese firms may be warranted.

Sample distribution

Year A B C D E F G H J K L M
2001 3 4 50 8 0 3 9 12 17 10 2 4
2002 3 4 82 12 1 7 7 21 19 6 5 7
2003 5 6 131 21 2 12 9 28 27 13 5 7
2004 10 13 261 23 8 24 20 46 43 20 6 16
2005 17 26 467 46 18 32 45 67 71 24 13 37
2006 21 28 578 64 21 47 57 82 86 31 14 39
2007 23 33 650 64 26 56 63 86 92 32 13 42
2008 24 42 721 64 30 60 69 89 101 38 16 40
2009 26 48 766 65 32 60 76 90 108 40 17 41
2010 29 49 851 66 35 60 103 95 110 48 20 42
2011 38 56 1,096 68 41 69 143 109 110 62 28 42
2012 40 57 1,262 70 47 74 171 111 109 67 33 45
2013 43 64 1,364 70 53 76 191 117 113 74 37 48
2014 43 64 1,346 70 52 72 192 113 111 72 38 47
2015 41 64 1,332 71 51 73 185 116 108 71 37 43
2016 36 52 1,037 64 42 66 147 102 89 58 33 36
Total 402 610 11,994 846 459 791 1,487 1,284 1,314 666 317 536

Notes: Table I reports the number of firms within each industry group in each year over the period 2001-2016. The industry index is officially coded by the CSRC. The total sample is classified into each industry, based on the reported top-level CSRC industry code. The industry codes include – A: Agriculture, Forestry and Fishing; B: Mining; C: Manufacturing; D: Electricity, Gas, and Water Production and Supply; E: Construction; F: Transportation and Warehousing; G: Information Technology; H: Wholesale and Retail Trade; J: Real Estate; K: Services; L: Communication; M: Multi-industry

Descriptive statistics

Panel A: mean values of product market competition measures by year
Year HHI SUB MKTSIZE
2001 0.063 1.289 25.790
2002 0.055 1.288 26.185
2003 0.058 1.285 26.501
2004 0.058 1.262 26.885
2005 0.064 1.231 27.038
2006 0.060 1.240 27.243
2007 0.054 1.255 27.623
2008 0.059 1.232 27.804
2009 0.054 1.254 27.892
2010 0.052 1.261 28.263
2011 0.050 1.250 28.551
2012 0.049 1.241 28.668
2013 0.050 1.243 28.777
2014 0.048 1.253 28.839
2015 0.046 1.254 28.884
2016 0.045 1.264 28.974
Average 0.052 1.251 28.293
Panel B: descriptive statistics
Variable N Mean Min. Max. HHHI=0 HHHI=1 Mean difference*
Mean Mean
Tobinq 20,706 2.522 0.762 20.381 2.491 2.550 −0.05**
SIZE 20,706 21.857 19.063 26.046 21.726 21.971 −0.24***
LEV 20,706 0.465 0.026 0.935 0.442 0.485 −0.04***
CHSLS 20,706 0.227 −0.825 8.094 0.211 0.241 −0.03***
CGI 20,706 0.880 0 1 0.863 0.895 −0.031***
SOE 20,706 0.542 0 1 0.474 0.6 −0.125***
CLIST 20,706 0.073 0 1 0.069 0.077 −0.082**

Note: The variables are defined in Table AI. HHHI=1 (0) if Herfindahl-Hirschman index in a particular year is greater than (lower) the median value. *t-test for the difference of continuous variables and Z-test for the binomial variables. **,***Statistically significant at the 0.05 and 0.01 levels, respectively

Correlations

HHHI HSUB HMKTSIZE Tobinq SIZE LEV CHSLS CGI SOE CLIST
HHHI 1
HSUB 0.4174*** 1
HMKTSIZE −0.6969*** −0.5963*** 1
Tobinq −0.0150** −0.0442*** 0.0679*** 1
SIZE 0.0973*** 0.0669*** 0.0065 −0.3941*** 1
LEV 0.1016*** −0.0149** −0.0903*** −0.2933*** 0.3802*** 1
CHSLS 0.0226*** 0.0649*** −0.0426*** 0.0581*** 0.0362*** 0.0542*** 1
CGI 0.0492*** −0.0047 −0.0197*** −0.0059 0.0943*** 0.0936*** −0.0082 1
SOE 0.1261*** 0.0721*** −0.1671*** −0.2394*** 0.2758*** 0.2647*** −0.0443*** 0.1662*** 1
CLIST 0.0157** 0.0193*** −0.0161** −0.0964*** 0.2566*** 0.0945*** −0.0213*** 0.0335*** 0.1744*** 1

Notes: The variables are defined in Table AI. **,***Indicate statistical significance at 0.05 and 0.01 levels, respectively (two-tailed test)

Regression analysis results

Panel A: Coefficient estimate for the association between firm performance and product market competition
Variable Column I Column II Column III
HHHI 0.181*** (7.36)
HSUB 0.257*** (10.55)
HMKTSIZE −0.126*** (−5.36)
SIZE −0.681*** (−64.68) −0.680*** (−64.77) −0.677*** (−64.39)
LEV −1.015*** (−17.59) −0.973*** (−16.88) −1.011*** (−17.51)
CHSLS 0.211*** (13.21) 0.204*** (12.81) 0.211*** (13.22)
CGI 0.0362 (1.07) 0.0404 (1.2) 0.0394 (1.16)
SOE −0.190*** (−7.78) −0.189*** (−7.78) −0.186*** (−7.65)
CLIST 0.316*** (7.39) 0.309*** (7.23) 0.313*** (7.31)
Intercept 17.75*** (71.67) 17.57*** (70.98) 17.76*** (71.64)
Year dummy Yes Yes Yes
N 20,706 20,706 20,706
Adj. R2 0.377 0.379 0.376
Panel B: the results of testing the effect of good corporate governance practices and state-ownership on the association between PMC and performance
Variable Column I Column II Column III Column IV Column V Column VI
HHHI 0.304*** (4.8) 0.493*** (14.37)
HSUB 0.374*** (5.73) 0.514*** (14.61)
HMKTSIZE −0.298*** (−4.56) −0.381*** (−11.17)
HHHI×CGI −0.140** (−2.11)
HSUB×CGI −0.132* (−1.93)
HMKTSIZE×CGI 0.192*** (2.82)
HHHI×SOE −0.569*** ((−12.97)
HSUB×SOE −0.453*** (−10.10)
HMKTSIZE×SOE 0.461*** (10.31)
CGI 0.103** (2.22) 0.090** (2.12) −0.076 (−1.44) 0.021 (0.64) 0.035 (1.06) 0.026 (0.78)
SOE −0.190*** (−7.82) −0.190*** (−7.81) −0.189*** (−7.74) 0.108*** (3.24) −0.0219 (−0.75) −0.458*** (−12.77)
size −0.681*** (−64.65) −0.680*** (−64.75) −0.677*** (−64.37) −0.673*** (−64.06) −0.674*** (−64.31) −0.673*** (−64.18)
lev −1.017*** (−17.62) −0.975*** (−16.92) −1.014*** (−17.56) −1.067*** (−18.52) −1.001*** (−17.38) −1.054*** (−18.25)
chsls 0.211*** (13.2) 0.204*** (12.81) 0.211*** (13.22) 0.206*** (12.98) 0.200*** (12.58) 0.209*** (13.11)
CLIST 0.317*** (7.41) 0.310*** (7.25) 0.314*** (7.34) 0.314*** (7.36) 0.306*** (7.19) 0.310*** (7.26)
Intercept 17.68*** (70.75) 17.51*** (70.03) 17.83*** (71.59) 17.45*** (70.46) 17.45*** (70.59) 17.96*** (72.4)
Year dummy Yes Yes Yes Yes Yes Yes
N 20,706 20,706 20,706 20,706 20,706 20,706
Adj. R2 0.377 0.379 0.376 0.382 0.382 0.379
Panel C: Competition, firm performance, corporate governance and SOEs: 2SLS
Variable Column I Column II Column III Column IV Column V Column VI
HHHI 6.928*** (15.38) 2.868*** (27.46)
HSUB 0.249 (0.65) 0.785*** (6.52)
HMKTSIZE 6.610*** (12.84) 9.461*** (13.98)
HHHI×CGI −6.586*** (−14.62)
HSUB×CGI 0.0271 (0.07)
HMKTSIZE×CGI −6.470*** (−12.60)
HHHI×SOE −2.949*** (−26.58)
HSUB×SOE −0.706*** (−5.64)
HMKTSIZE×SOE −9.125*** (−13.42)
CGI 3.282*** (14.78) 0.12 (0.8) 4.183*** (12.84) 0.0196 (0.44) 0.121*** (2.87) 0.406*** (4.67)
SOE −0.597*** (−17.73) −0.483*** (−16.91) −0.265*** (−7.24) 0.973*** (15.52) −0.229*** (−4.41) 5.701*** (12.42)
SIZE −0.521*** (−37.93) −0.513*** (−43.56) −0.537*** (−38.30) −0.508*** (−40.76) −0.512*** (−43.38) −0.626*** (−24.95)
LEV −1.788*** (−21.72) −1.591*** (−22.65) −1.429*** (−17.04) −1.938*** (−25.82) −1.600*** (−22.77) −0.253 (−1.47)
CHSLS 0.216*** (8.94) 0.223*** (10.77) 0.263*** (10.81) 0.196*** (8.92) 0.210*** (10.02) 0.427*** (9.81)
CLIST 0.222*** (3.68) 0.143*** (2.77) 0.0799 (1.32) 0.206*** (3.77) 0.147** (2.85) 0.103 (0.99)
Intercept 11.65*** (33.5) 14.56*** (52.34) 10.84*** (26.84) 13.42*** (50.81) 14.36*** (58.1) 9.825*** (16.49)
N 17,796 17,796 17,796 17,796 17,796 17,796

Notes: The table reports the results from the estimation of the following regression:

T o b i n Q i , t = α + β 1 HHHI j , t ( HSUB j , t , HMKTSIZE j , t ) + β 2 size i , t + β 3 lev i , t + β 4 chsls i , t + β 5 CGI i , t + β 6 SOE i , t + β 7 CLIST i , t + δ YearDum i , t + ε i , t

The variables are defined in Appendix 1. For brevity, the coefficients on the year dummies are not reported; ***,**,*Indicate statistical significance at the 0.01, 0.05, and 0.1 levels, respectively, based on a two-tailed test; The table reports the results from the estimation of the following regression:

TobinQ i , t = α + β 1 HHHI j , t ( HSUB j , t , HMKTSIZE j , t ) + β 2 HHHI j , t ( HSUB j , t , HMKTSIZE j , t ) × CGI i , t + β 3 C G I i , t + β 4 SOE i , t + β 5 size i , t + β 6 lev i , t + β 7 CHSLS i , t + β 8 CLIST i , t + δ YearDum i , t + ε i , t

The table reports the results from the estimation of the following regression:

TobinQ i , t = α + β 1 HHHI j , t ( HSUB j , t , HMKTSIZE j , t ) + β 2 HHHI j , t ( HSUB j , t , HMKTSIZE j , t ) × SOE i , t + β 3 SOE i , t + β 4 CGI i , t + β 5 size i , t + β 6 lev i , t + β 7 CHSLS i , t + β 8 CLIST i , t + δ YearDum i , t + ε i , t

The varialbes are defined in Table AI. For brevity, the coefficient on the year dummies are not reported. ***,**,*Indicate statistical significance at 0.01, 0.05, and 0.1 levels, respectively (two-tailed test)

Coefficient estimate for the moderation effect of SOEs on the association between product market competition and firm performance for firms with good corporate governance compared to firms without good corporate governance

Column I Column II Column III
CGI=1 CGI=0 CGI=1 CGI=0 CGI=1 CGI=0
HHHI 0.484*** (12.92) 0.053*** (6.04)
HSUB 0.508*** (13.23) 0.539*** (6)
HMKTSIZE −0.358*** (−9.61) −0.491*** (−5.74)
HHHI×SOE −0.548*** (−11.72) −0.077 (−1.45)
HSUB×SOE −0.443*** (−9.23) −0.156* (−1.86)
HMKTSIZE×SOE 0.440*** (9.23) 0.204** (2.01)
gov 0.101*** (2.88) 0.158 (1.41) −0.023 (−0.78) −0.01 (−0.11) −0.443*** (−11.65) −0.574*** (−4.90)
SOE −0.665*** (−60.28) −0.753*** (−21.72) −0.667*** (−60.58) −0.745*** (−21.47) −0.665*** (−60.41) −0.751 (−21.64)
SIZE −1.117*** (−18.21) −0.732*** (−4.31) −1.051*** (−17.14) −0.685*** (−4.03) −1.104*** (−17.95) −0.739*** (−4.34)
LEV −0.209*** (−12.35) −0.200*** (−4.28) −0.203*** (−11.99) −0.190*** (−4.04) −0.212*** (−12.49) 0.199*** (−4.24)
CHSLS 0.283*** (6.38) 0.611*** (4.1) 0.276*** (6.21) 0.613*** (4.12) 0.279*** (6.27) 0.619*** (4.15)
CLIST 17.30*** (62.05) 19.02*** (26.45) 17.33*** (62.32) 18.84*** (26.01) 17.79*** (63.82) 19.54*** (26.96)
Year dummy Yes Yes Yes Yes Yes Yes
N 18,240 2,466 18,240 2,466 18,240 2,466
Adj. R2 0.382 0.374 0.382 0.372 0.38 0.371

Notes: The table reports the results from the estimation of the following regression:

TobinQ i , t = α + β 1 HHHI j , t ( HSUB j , t , HMKTSIZE j , t ) + β 2 HHHI j , t ( HSUB j , t , HMKTSIZE j , t ) × SOE i , t + β 3 SOE i , t + β 4 SIZE i , t + β 5 LEV i , t + β 6 CHSLS i , t + β 7 CLIST i , t + δ YearDum i , t + ε i , t

The varialbes are defined in Table IV. For brevity, the coefficient on the year dummies are not reported; The regression is run on two subsamples, one having god corporate governance (CGI=1), and the other without good corporate governance (CGI=0). *,**,***Indicate statistical significance at 0.1, 0.05 and 0.01 levels, respectively (two-tailed test)

Variable definition

Variable Definition of variables
Tobinqi,t = Market value of assets divided by book value of assets, where market value of assets is the sum of market value of equity and book value of debt
HHIj,t = Herfindahl-Hirschman index, which is calculated for CSRC top-level industries by summing the square of the individual firm market shares based on total sales of all available listed firms in the industry from CSMAR database. Higher HHI indicate low competition
HHHIj,t = Indicator variable if HHI in a particular year is greater than the median value
SUBj,t = Price-cost margin, which is calculated as total industry sales divided by total industry operating costs at top-level CSRC industry. The total industry sales and total industry operating costs are calculated based on all available listed firms in the industry from CSMAR database. Higher SUB indicate low competition
HSUBj,t = Indicator variable if SUB in a particular year is greater than the median value
MKTSIZEj,t = Market size, which is calculated as the logarithm of total industry sales at top-level CSRC industry based on all available listed firms in the industry from CSMAR database. A higher value of MKTSIZE indicates a higher competition
HMKTSIZEj,t = Indicator variable if MKTSIZE in a particular year is greater than the median value
SOEi,t = Indicator variable if the ultimate owner is a government agency and 0 otherwise
CGIi,t = Indicator variable if firms have good corporate governance practices and 0 otherwise
sizei,t = The natural logarithm of total assets
levi,t = The total debt divided by total assets
CHSLSi,t = The difference between firm sales revenue in year t and year t-1 divided firm sales in year t-1
CLISTi,t = Indicator variable if the firm is cross-listed overseas and 0 otherwise

Notes

1.

The corporate governance reform includes the issuance of the “Code of Corporate Governance for Listed Firms in China” and the “Guide Opinion on Establishing Independent Director System by Listed Firms.” Listed firms are required to establish a two-tier board structure (i.e. Board of Directors and Supervisory Board of Directors) and the board must be comprised of at least one-third independent directors (China Securities Regulatory Commission, 2001, 2002).

2.

Research undertaken in the USA and other countries typically rely on corporate governance rating index compiled by authorities (e.g. internal corporate governance index compiled by Korean Corporate Governance Services) or self-constructed indexes which have been widely accepted by researchers as proxies for corporate governance (e.g. G-index constructed by Gompers et al., 2003). In China, the Research Center of Corporate Governance compiles Chinese Company Governance Index (CCGINK) as a comprehensive measure for corporate governance of listed firms. However, the index is not publicly available.

3.

The supervisory board’s function, according to the PRC Company Law, is to oversee company directors, to examine firm’s financial affairs, e.g. it can question and propose board of directors’ resolution items as well as investigate when it discovers irregularities in how the firm is being managed (Article 55 and 119, The Company Law).

4.

For brevity, results for additional tests are not tabulated. They are available upon request from the authors.

Appendix 1

Table AI

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Corresponding author

Li Liu can be contacted at: li.liu@deakin.edu.au