FOR Prof.Dan only

Corporate efficiency in China

Introduction

Corporate efficiency is a big topic in economics and financial area. It means the corporate should do their best to use certain resources and get maximize outputs. By improving the efficiency of the company, both of companies and the public can get benefits from it. For companies, they can maximize their profits as they can increase production while keep the cost fixed. For the public, resources can be allocated better to ensure a long-term development. To make the corporate more efficiency, it should find what factors influence corporate efficiency and how they influence the corporate efficiency.

To achieve the aim that improving the efficiency of the corporate, I choose the Chinese market and study what factors determine and how factors influence corporate efficiency in China. Most empirical researches on corporate efficiency focus on the European market by analysing the size, competition, capital structure and ownership structure of the corporate (Jan, 2015). However, researches about Chinese market only focus on the state-owned enterprises (SOEs) which play an important role in each industry in China. The reasons why I choose this direction are obviously. First, companies in Europe and China are exactly different from polity, economics and culture. Though China is a developing country, it still plays a significant part in global economics. The corporate efficiency research in China can benefit many Chinese companies. Second, the company structure in China changes a lot. Especially in recent years, the number of non-SOEs increases a lot (Economic Daily, 2014). The previous researches about this topic had less reference value as the market changes. Thus, the objective of this research is to show new empirical evidence on this topic by studying whether and to what extent size, competition, debt, ownership structure, and the strength of the external corporate governance affect corporate efficiency with a large sample of China’s SEOs and non SOEs listed on Shenzhen, Shanghai stock exchanges from 2000 to 2014. Except for the parametric analysis, in the dissertation, it would also analysis the topic from technical efficiency by using stochastic production possibility frontier approach (SFA) instead of accounting ratios.

Literature Review

In empirical researches, it is difficult to measure the performance of the corporate though there are different ways such as financial ratios and technical efficiency. The reason is that there are many factors determining the efficiency of the corporate. The performance of the corporate always related to the ownership concentration and ownership structure in most researches. For instance, Claessens et al. (2000) and Pedersen and Thomsen (2000) indicate that the relationship between corporate performance, shareholder interests, and ownership concentration is positive. But, some researchers have believed that there is a non-liner relationship between ownership and performance. Moreover, some researchers such as Thomsen et al. (2006) find a negative relationship between corporate performance and blocking ownership with a limited sample in Europe market. Finally, Villalonga and Demsetz (2011), Holderness and Sheehan (1988) and Lehn and Demsetz (1985) investigated that the corporate efficiency and ownership structure have no statistic relationship in their researches. Therefore, the empirical researches about factors determining the corporate performance are diversified and inconclusive. Accounting ratios is the traditional way to measure the corporate efficiency such as the profitability ratio and return on capital employs. It is easy to measure factors influencing the performance of the corporate such as tax or other factors especially in countries having weak law and in small and medium companies in some researches (Schulze et al., 2001; Vargas and Durand, 2003). Compared with the financial ratios, the technical efficiency should needs professional analysis method to calculate and test. However, Technical efficiency as another way to measure the corporate efficiency ignored by many researchers. Dilling-Hansen et al. (2003) reports that no link between ownership concentration and corporate efficiency. But for Nanka-Bruce (2006), they indicate that the relationship between ownership concentration and corporate efficiency is positive. Further researches also show the importance of the ownership type. For instance, Goldar et al. (2003), Sembenelli (2004) and Hanousek et al. (2012) report a higher proportion of foreign ownership would make the company more efficient. Moreover, manager-controlled companies would be less efficient than owner-controlled companies, which found by Durand and Vargas (2003).

For ownership structure, state ownership and private ownership are widely investigated in developing countries (Denis and McConnell, 2003). The reason is that privatization is the primary step by improving the managerial incentives to improve efficiency and increase profits. Shleifer (1998) and Malatesta and Dewenter (2001) report that it is necessary to change the ownership in SOEs to improve the performance of corporates because controllers appointed by governments are not professional to govern the corporate. Tian and Estrin (2008) find a U-shape relation between the performance of corporate and government ownership. However, Yarrow and Vickers (1991) and Dahya et al. (2008) indicated no effective methods such as governance reform and employing professional managers can substitute to privatization. Djankov and Murrell (2002) and Netter and Megginson (2001) report that private ownership is related to corporate efficiency and better corporate performance than state ownership. Moreover, the literature on corporate efficiency in China is increasing. In Qian’s (1996) view, China is a typical developing country with imperfect capital market, weak law performance on interest protection of market participants, lack of regulation in market and politicians involving in management. Shiu (2002) reports a negative relationship between state ownership and corporate performance. Lin (2004) also states that the performance of SOEs are worse than that of non-SOEs. Fan et al. (2007) indicates companies whose controllers are ex-or current government bureaucrats have poorer performance with the analysis in Chinese latest privatized corporates. The literature above shows that when analyzing Chinese market, it is necessary to investigate how the state ownership determines the corporate efficiency.

Many empirical researches also focus on the relationship between capital structures and corporate performance (Jensen, 1986; Stulz, 1990; Margaritis and Psillaki, 2007; Weill, 2008). By free-cash flow hypothesis (Jensen, 1986; Jan, 2015), it states that higher debt can mislead managers. Because the higher debt can reduce the free cash flow and increase the risk of stakeholders. Besides, the capital structure can influence the corporate performance by changing the amount of debts in the company as well. The reason is that debt is an alternative or substitute instrument to change the ownership structure. Margaritis and Psillaki (2007), Sena (2006), and Weill (2008) report that the link between capital structure and its performance is positive through technical efficiency method. However, higher debt also can result in a conflict of interest with debtholders and shareholders. Therefore, in this situation, there is a negative link between corporate performance and debt (Jensen and Meckling, 1976; Myers, 1977; Harris and Raviv, 1991). In conclusion, higher leverage can reduce the corporate efficiency (Weill, 2008).

Empirical researches have investigated in the relationship among corporate performance, ownership structure and capital structure in recent years. For instance, some researches find concentrated ownership positively influences the capital structure and corporate performance (Short et al., 2002; Brailsford et al., 2002; King and Santor, 2008). But some researches indicate foreign ownership in corporates negatively influences the performance of the corporate and positively influences the capital structure of the corporate (Duc Nam and Thi Phuong Vy, 2008). Moreover, some researches also show that this is no relationship between corporate performance and two factors (Anderson and Reeb, 2003). The literature above shows that it is necessary to do more investigation in this part.

Except the factors reviewed in literature above, there are still other theoretical arguments from different factors which determine the efficiency of the corporate. First, the agency theory is one of the basic arguments of corporate efficiency (Jensen and Meckling, 1976; Alchian and Demsetz, 1972; Fama and Jensen, 1983a, b) which indicates that the separation of control and ownership would cause poor performance of the company. As the size of the company grows, the agency problem would be more serious. Second, when a corporate stays in a competitive environment, it can work more efficiency (Raith, 2003; Aghion et al., 1999).

Research method

To identify what determine efficiency of the corporate, in my dissertation, I would investigate this question in two parts which using stochastic frontier analysis (SFA). In the first part, it is the detail analysis about how to measure the corporate efficiency by using stochastic production possibility frontier. Then, I will analysis how factors which discussed in the literature influence the corporate efficiency by involving in the technical efficiency of a corporate. Factors will be used in this part include corporate size, competition environment, capital structure, and ownership structure. Therefore, there are two equations in my dissertation. With a large scale of data, it is difficult to identify variables and consumptions of two equations are complicated. Thus, I will divide the data into some short panels accounting to industries, years and others. In this way, it reduces the estimation bias as much as possible and potential problems which the dissertation not covers. The model introduced in my dissertation designed by Battese and Coelli (1995) firstly, which use the one-stage procedure. Besides, my dissertation structure refers to Jan et al. (2015) as benchmark.

In the dissertation, I need to collect the unbalanced panel data during 2001-2014 form Tomson One database. Specifically, I need to collect the balance sheet data and ownership data of companies who listed in Shanghai and Shenzhen Stock Exchange in China from that database.

Meeusen and van den Broeck (1977) and Aigner et al. (1977) give a guide on how the do SFA, and Khumbhakar (1990), Greene (2005) develop the method by using panel data. The key reason that I choose this method is that SFA can be analyzed by hypothesis test compared with the data envelopment analysis introduced by Fried et al. (1993). The analyses of stochastic starts with the production function where is input and is output. Inputs and output are two key factors determining the efficient of corporate. In general, corporates always face inefficiency to some extent and the function is. In this modified function, because it assumes the output of the corporate is positive (Jan et al., 2015). should distribute in the interval (0, 1]. The meaning of =1 is that the total input can get maximum output. Then, two assumptions raised. The first one is that variables which are stochastic related to efficiency in different corporates have same distribution. In this situation, the efficiency is, and as . The second one is that the output of a corporate can be influenced by different random events such as financial crises and can be written as . Then the production function is . Finally, it gets after taking log in two sides of the equation.

Second, in this part, it is about what factors which introduced in literature part drive the efficient of corporate. Besides, the relationship between ownership structure and corporate efficiency would be discussed in more detail. In most empirical researches, the model in this part is

(Jan et al., 2015).

Where is the firm number; is time index; is about market concentration index; and stand for the ownership categories. In this equation, the Size parameter stands for the relation between it and corporate efficiency. According to the agency theory (Jensen and Meckling, 1976; Alchian and Demsetz, 1972; Fama and Jensen, 1983a, b), larger corporates have more agency cost which leads to inefficiency in larger corporates. For capital structure, it is denoted as Debt which is the D/E ratio. According to empirical researches, the relation between debt and corporate efficiency is positive. For the degree of competition, it measured by the market concentration. In general, protective environment can reduce the competitiveness of corporates in it. Thus, the efficient of the corporate reduces as well in x-inefficiency theory (Leibenstein, 1966). In the equation, it also distinguish corporates which have business around the world denoted as or only have business in local market denoted as . For the parameter , it only a time node as the data is large and the global financial crisis which has introduced above. For the parameter , it means in year every corporate has an ownership structure . Besides, after financial crisis in 2008, most corporates face ownership structure adjusting.

Besides, in the test process, I also need to do several hypotheses to help analysis. First, the null hypothesis is that corporate characteristics do not effects the efficient of corporate. Because the lack of literature in the alternative hypotheses. Here, I only discuss the null hypothesis. Second, the null hypothesis is ownership structure and ownership-controlling don not affect the efficient of the corporate. Third, the null hypothesis is that government ownership does not have effect on the efficient of corporate. Above analysis is a brief introduction about equations that I will use in my dissertation.

Time Table

1. By the end of June, I plan to finish the Literature Review, and Methodology part and meet tutor for the first time.

2. By the end of July, I plan to finish the data part and get all test result. And meeting the tutor for the second time.

3. By the end of August, I should finish the final dissertation. On 20th August, I prepare to meet the tutor for the last time to ask questions about Dissertation writing.

Conclusion

Corporate efficiency is an important topic in economic and financial areas. Because the resources in earth is limited. Corporates should do their best to us the limited resources and produce more products. However, empirical research in this area is limited. Most of empirical researches only focus on certain industry or European countries. There are also some researches study Chinese market. But most of them focus on the SOEs which take up the majority proportion of profits in total Chinese companies. Therefore, the research on corporate efficiency about China is limited. In detail, the research on how different factors affect the corporate efficiency in China from 2001 to 2014 is limited. Above are reasons why I choose this topic to do my dissertation. In my dissertation, I will discusses how corporate size, degree of competition, capital structure, and ownership structure influence the efficient of corporate more specially. The literature review gives me the result of empirical researches on single item and help me to find reasons if the result of me is different. For the data, I use the unbalance panel data from the Tomson One database. It includes the balance sheet data and ownership data of Chinese companies listed in Shanghai and Shenzhen Stock Exchange from 2001 to 2014. For the method, I study this problem in two steps. First, I analysis the relationship of corporate efficiency and the stochastic production possibility frontier. Second, it is how the technical efficiency related to different factors introduced in literature review influence the corporate efficiency. There also several hypotheses relates to the methodology. Besides, it should mentioned that my dissertation might change some parts compared with the proposal.

Reference

Jan, H, Enzen, K, Anastasiya, S., (2015). Corporate efficiency in Europe, Journal of Corporate Finance, 32(2015): pp24-40.

Dongwei, S.and Xingxing, HE, (2011). Ownership structure, corporate governance and productive fficiency in China, Journal of Productivity Analysis, 38(2012): pp303-318