Identity of multiple large shareholders and corporate governance: are state-owned entities efficient MLS?

This paper empirically investigates how the identity of multiple large shareholders (MLS) affects principal-agent and principal-principal conflicts of interests in Chinese listed privately controlled firms during 2006-2017, by distinguishing between state-owned and non-state-owned MLS. We find that the presence of non-state-owned MLS significantly mitigates the principal-agent conflict of interests as manifested in a lower selling, general, and administrative expenses scaled by total sales (SG&A ratio) of Chinese listed privately controlled firms. However, this effect is not observed when state-owned entities serve as MLS. Although we do not observe a strong impact of non-state-owned MLS in reducing principal-principal conflict of interests, i.e., a lower ratio of related-party transactions (RPT), the presence of financial non-state-owned MLS helps to alleviate RPT in Chinese listed privately controlled firms. Conversely, state-owned MLS do not mitigate principal-principal conflict of interests but worsen it, as evidenced by a higher ratio of RPT. Additionally, the presence of state-owned MLS is associated with a large magnitude of overinvestment by and increased government subsidies to Chinese listed privately controlled firms. Finally, the entry of non-state-owned MLS enhances the performance of these firms, while the presence of state-owned MLS does not engender a performance-enhancement effect.