An Empirical Study on Chinese Listed Firms' Corporate Governance
Chong-En Bai a, b Qiao Liu a Joe Lu a Frank M. Song a Junxi Zhang a (a. Faculty of Business and Economics, The University of Hong Kong, Hong Kong; b. School of Economics and Management, Tsinghua University, Beijing 100084, P. R. China)
Are there any relations between Chinese listed firms' market value and their corporate governance? How much a premium are Chinese investors willing to pay for well-governed firms? Through a comprehensive and systematic empirical study on these two issues, this paper aims at understanding corporate governance practices among the Chinese listed firms and providing best corporate governance practices that fit Chinese firms well. In light of China's institutional background, we carefully examine various internal and external corporate governance mechanisms. We identify a set of eight variables that fully captures Chinese listed firms' corporate governance practices. Applying the principal component analysis method (PCA) to these variables, we compile a single composite index (G-Index) to rank Chinese listed firms' corporate governance levels. Our main empirical findings are: (1) firms with higher governance levels (higher G-Index scores) have higher market valuations; (2) investors in China are willing to pay a considerable amount of premium for well-governance firms.