shares (which can only be purchased by foreign investors in foreign currencies (Cao 2000). In addition, Chinese law classifies shares by reference to the status of the shareholders: state shares, legal person shares, and individual shares. State shares are purchased with state assets by governmental departments and usually constitute fifty percent or more of all issued shares, which means that the state is a majority shareholder in most instances. Legal person shares are owned by entities such as companies and institutions -- usually other state enterprises (Cao 2000).
By contrast, individual shares are held by employees or individual investors from the general public. Only individual shares of listed companies can be traded on the stock exchanges. State shares and legal person shares, on the other hand, are nontransferable, thus ensuring that the state and its agencies retain their respective dominance. For example, in 1996, when the Shanghai-listed Beijing Light Bus sold a twenty-five percent stake in non-transferable legal person shares to two Japanese companies, Isuzu Motors and Itochu, the government allowed the transaction only reluctantly and promptly decreed that no similar transactions would be permitted in the future (Cao 2000)
Likewise, when the board of directors of Harbin Pharmaceutical, a Shanghai-listed company, approved a transfer of fifty two million state shares to individual shareholders in 1993, the CSRC allowed the transfer only after it issued a stern warning and only after it determined that the company had recognized its mistake. Given the fact that state shares comprise the majority of a company's total shares -- Harbin's state shares, for instance, represented 74% of the company's total (Cao 2000). Consequently, the illiquidity of state-owned shares "makes it difficult for stock markets to exercise their function of adjusting state owned assets structurally, causing the market to be marked by excessive state domination" (Cao 2000, p. 13)
Although there remains a dearth of relevant research in this area, a seminal study of the role of institutional shareholders in the performance of publicly listed Chinese companies by Wang and Xu (1997) found that the effect of ownership concentration is greater for companies that are dominated by legal person shares than they are for those companies dominated by the state.
RESEARCH QUESTIONS and HYPOTHESES
The proposed study will be guided by the following research questions, together with any additional research questions that emerge during the research process:
What is the relationship of Chinese listed state-owned companies before and after the stock reform program of 1992?
How does the performance of these state-owned companies compare with respect to market performance by their peers?
The effects of managerial ownership on firm value have been of particular research interest in the corporate finance literature (Denis & McConnell 2003). It would seem that there is a growing consensus that managers' and shareholders' interests are not fully aligned. This conflict of interest produces agency problems that reduce firm value. Thus, an increase of managerial ownership helps to connect the interests of insiders and shareholders, and leads to better decision-making and higher firm value; however, when the equity owned by management reaches a certain level, further increase of managerial ownership may provide managers with sufficient shares to pursue their own benefit without concern for decreasing firm value. When managerial ownership approaches a considerably high level, the agency problem can be largely mitigated due to the full alignment between the interests of managers and shareholders. Therefore, it is hypothesized that among Chinese listed companies, managerial ownership and firm value have a nonlinear relationship that can be identified (Ruan, Tian & Ma 2011).
This hypothesis is congruent with the fact that while managerial ownership is one of the ways that Chinese companies adopt Western corporate governance, the proportion of managerial ownership is quite small among state-owned companies, with a mean value during 2002-2007 of just 0.0929 per cent; in contrast, the mean value of managerial ownership for civilian-run companies was 9.31 per cent. Compared to state-owned enterprises, civilian-run firms have much more autonomy and profit retention, and managers are more often appointed on merit and ability, rather than political patronage. Most civilian-run firms adopt a managerial-ownership governance approach, and their managers have more power to choose financial policies compared to those in many developed countries. This situation gives managers of civilian-run firms more discretion over funding, pricing and labor practices (Ruan et al. 2011). The specific hypotheses will that guide the proposed study are set forth below:
Hypothesis 1: The performance of Chinese firms having the state as a controlling shareholder is lower than that of other listed companies. Chinese companies have different classes of shareholders. The state remains the largest shareholder in most companies. It is hypothesized that the government bureaucrats as agents of the state-owned shares will be less proficient in the oversight of company operations.
Hypothesis 2: The performance of a company is negatively related to the relative shareholding of the largest shareholder. Hu and Hu (2004) and Su and Zhu (2003) find that the controlling shareholders of Chinese listed companies are no different from their overseas counterparts in the expropriation of minority shareholders. Yu and Xia (2003) discover that the market value of Chinese companies with a controlling shareholder is significantly lower than that without a controlling shareholder. This hypothesis will be tested to verify this negative relationship.
Hypothesis 3: There is a positive relationship between firm performance and the square of the relative percentage the shareholding of the largest shareholder. La Porta, Lopez-de-Silances, Shleifer and Vishny (1999) see expropriation of minority shareholders by controlling shareholders as agency problem around the world. However, as the largest shareholder's proportion increases and approaches 100 per cent, the incentive for expropriation will diminish as their interest will be more aligned with that of the minority shareholders. It is conceived that the relationship may not be a linear one. Therefore, the square has been taken to control the non-linearity.
Hypothesis 4: The performance of Chinese companies with foreign shareholders is better than that those without foreign shareholders. Huang and Song (2002) explains that foreign shareholders bring values to Chinese companies in terms of providing additional funds, demanding higher corporate governance standards, and contributing technical know-how and management expertise. A positivist research philosophy has been adopted in this study considering that the main purpose of this study is to study the correlations among variables using quantitative measures. Patton (1990) argues that a quantitative, positivist, mode will guide the researcher on a quest for certainty and absolute truth and an insistence of objectivity. The research lies on the scientific method, hypothesis testing, quantitative tests and standardized research tools (Burrell and Morgan, 1979).
Quantitative methods will be used in this research to test and verify the hypotheses under a positivist paradigm (Gephart, 1999; Pallant, 2001). Using pooled dated for Chinese listed companies, regressions of performance variables on concentration of ownership will be run. The financial indicators of Return on Assets (ROA) and Adjusted Return on Assets (CROA) are both used to measure performance. ROA is the ratio of net operating profit before tax to total assets. It is a much better measurement on accountability than ROE (Wu, 2004). CROA only uses operating profit from core operations in the calculations. Profit from non-core activities is excluded. This indicator can measure the performance of a company's core operations more objectively. This study utilizes regression to whether there are statistically significant differences of performance among groups of companies that have different ownership structure. The following is the general regression equation.
Performance = f (ownership variables, control variables)
Where performance is measured in ROA and CROA.
3.3 Construction of Data
As this study covers all the companies listed on the Shanghai Securities Exchange and the Shenzhen Stock Exchange, which had issued "A" shares during the period of 1999 to 2004, the research sample is all the listed companies. There is, therefore, no such problem as "selection of sampling techniques" in this study. This longitudinal study aims to investigate the relative performance of individual companies and also provides a more objective and precise assessment of the performance over time. Diggle, Liang and Zeger (1994) argue that the prime advantage of longitudinal data analysis is its effectiveness for studying change.
In the study of the relationship between firm performance and ownership structure of Indonesian listed companies, Lukviarman (2004) had covered all the listed companies in Indonesia. Wang (2003) and Bai et al. (2004) also included all listed companies in China in their study of a similar topic. This study covers the most recent 6-year period and provides an up-to-date and comprehensive assessment of the performance of China's listed companies.