An empirical examination of endogenous ownership in Chinese private enterprises

ABSTRACT

The relationship between ownership structure and firm performance in small and medium enterprises (SMEs) in developing and transition countries has been largely ignored. Drawing on endogenous ownership theory, this paper seeks to understand the relationship between ownership structure and firm performance in SMEs in China, which represents an embryonic market environment. Using survey data collected from 189 private firms in Shantou City, China, we find that ownership variables do not have a statistically significant relationship with firm performance. We examine the determinants of changing ownership shares and find that firm size and business instability are related to changes in ownership shares. Our findings provide empirical support for the central tenets of endogenous ownership theory. As such, the results can be interpreted as meaning that even in a developing market environment, such as China, market forces are strong enough to dominate ownership structure change or that the market mechanism is functioning well in some areas of emerging markets.

Keywords:

• Endogenous ownership
• corporate governance
• China

JEL classification:

• L16
• O12

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. There are 256,031 industrial enterprises whose annual sales from their core business are above 5 million RMB (around 735,000 USD based on an exchange rate US$1=6.8RMB) in 2009 (NBS 2010).

2. A business that hires less than eight employees is classified as an individual business, while businesses that employ eight or more people are classified as private enterprises.

3. The profit rate is a better measure of firm performance than the market value measured by Tobin's Q because market value cannot be easily obtained for most Chinese private enterprises.

Additional information

Notes on contributors

Zhong Qin

Zhong Qin is an associate professor in the School of Business, Shantou University, China. His research focuses on evolution of private enterprise in China. This paper was completed while he was visiting Monash University.

Vinod Mishra

Vinod Mishra is a senior lecturer in the Department of Economics, Monash Business School, Monash University, Australia. He has published widely on various aspects of Asian economies, particularly China and India.

Russell Smyth

Russell Smyth is a professor in the Department of Economics, Monash Business School, Monash University, Australia. His research interests include energy economics, labour economics, subjective well-being, empirical legal studies and most aspects of the Chinese economy.