Financial Distress, Capital Structure, and Corporate Governance: Evidence from Chinese State-Owned Enterprises
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China's state-owned enterprises are the main participants in the Chinese national economy, so understanding the uniqueness of these enterprises is crucial. Since state-owned enterprises differ in their characteristics from private enterprises, the analysis of state-owned enterprises is very important for understanding the Chinese economy. These state-owned enterprises have been subject to a series of reforms, and although the operating efficiency has improved, the enterprises still experience significant losses and a high debt ratio from financial difficulties. This paper analyzes the effects of the governance of state-owned enterprises on financial distress costs using the listed financial data. We, first, construct indicators for the financial distress for firms. We adopt the proportion of senior executives' shareholding for measuring corporate governance of the firms, because firms with larger shares held by the senior executives are less likely to be monitored by other shareholders. Then, we run regressions of the corporate governance variables on the constructed financial distress measures. We find that the firms with the larger shares held by senior executives are associated with higher financial distress costs. Our analysis results imply that corporate governance of the Chinese state owned firms is critical in financial distress costs.
Abstract
China's state-owned enterprises are the main participants in the Chinese national economy, so understanding the uniqueness of these enterprises is crucial. Since state-owned enterprises differ in their characteristics from private enterprises, the analysis of state-owned enterprises is very important for understanding the Chinese economy. These state-owned enterprises have been subject to a series of reforms, and although the operating efficiency has improved, the enterprises still experience significant losses and a high debt ratio from financial difficulties. This paper analyzes the effects of the governance of state-owned enterprises on financial distress costs using the listed financial data. We, first, construct indicators for the financial distress for firms. We adopt the proportion of senior executives' shareholding for measuring corporate governance of the firms, because firms with larger shares held by the senior executives are less likely to be monitored by other shareholders. Then, we run regressions of the corporate governance variables on the constructed financial distress measures. We find that the firms with the larger shares held by senior executives are associated with higher financial distress costs. Our analysis results imply that corporate governance of the Chinese state owned firms is critical in financial distress costs.
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