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Ownership, related party transactions and performance in China

Leon Wong (School of Accounting, University of New South Wales, Sydney, Australia)

Accounting Research Journal

ISSN: 1030-9616

Article publication date: 7 September 2015

1892

Abstract

Purpose

The purpose of this paper is to investigate the relative performance of state-owned enterprises (SOEs) and privately controlled firms in China, and whether related party transactions (RPTs) add to or subtract from their relative performance, measured by return on assets (ROA).

Design/methodology/approach

Univariate and multivariate analyses of a sample of 90 firms that were listed in China between 2007 and 2009 (comprising 45 SOEs and 45 privately controlled firms matched on industry and size).

Findings

The authors find that SOEs engage in more tunneling, but find no evidence that privately controlled firms engage to a greater degree in either tunneling or propping. During this period, SOEs outperformed privately controlled firms by almost 4.5 per cent in terms of ROA (unadjusted for RPTs), but their performance advantage was completely offset by tunneling by about 6 per cent of ROA such that they underperformed privately controlled firms by a net 1.5 per cent of ROA.

Research limitations/implications

The research is limited by a relatively small sample size, and in measuring the value of RPTs as the total value of the transactions (which is observable) instead of the difference between the transaction prices and arms-length prices (which would be preferable but is not observable).

Practical implications

The economics of investing in Chinese firms with different controlling interests and RPTs may be of interest not only to investors and other stakeholders in Chinese firms listed domestically, but also to international investors in overseas and cross-listed Chinese firms.

Originality/value

This paper synthesizes research from ownership on performance and RPTs on performance, to disentangling the relative effects of ownership control and RPTs on the performance of Chinese publicly listed firms.

Keywords

Acknowledgements

The authors appreciate the comments of Hwee Cheng Tan, Liping Xu and participants of the China Journal of Accounting Research Symposium 2012 Guangzhou, and Asian Academic Accounting Association 2012 Kyoto. The authors are especially grateful to Philip Brown for his support and comments as co-supervisor of Yezhen Wan’s Honors thesis, from which this paper is derived.

Citation

Wan, Y. and Wong, L. (2015), "Ownership, related party transactions and performance in China", Accounting Research Journal, Vol. 28 No. 2, pp. 143-159. https://doi.org/10.1108/ARJ-08-2013-0053

Publisher

:

Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

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