Collusion or governance? common ownership and corporate risk-taking

Abstract

Research Question Disputes over the corporate governance impacts of common ownership continue. Differentiating from existing studies, we focus on the Chinese stock market, exploiting the Top 10 Shareholding File, which includes various investors besides institutional investors, to study the impact of common ownership built through blockholders on corporate risk-taking behavior.

Research Findings We find that firms with higher common ownership are less likely to engage in corporate risk-taking, with concomitant decreases in future growth rates. Mechanism analysis shows that blockholders' common ownership exerts its influence through increasing market concentration, with concomitant lessening of market competition. Interestingly, further analyses indicate that, in contrast to blockholders, ownership connectedness built by mutual fund families significantly raises corporate risk-taking along with growth. However, individual investors' common ownership does not show the significant statistical relationship with corporate risk-taking.

Theoretical Implications We add to the debate on common ownership on corporate governance. Consistent with the anti-competition stream of literature, the risk-taking-reduction role we identify for blockholder common ownership supports the theory of anti-competition. Our results highlight the need to consider the heterogeneity of common ownership.

Policy Implications While blockholder common ownership is evidenced to have a negative effect on corporate risk-taking, with, by extension, a negative impact on economic development, our results also suggest that efficient monitoring mitigates these effects. We also document an interesting heterogeneity in investor types. Mutual fund common ownership, in contrast to blockholder common ownership, is associated with higher risk-taking and more robust firm growth. This suggests the positive role of institutions in corporate governance and the necessity of considering the heterogeneity of common ownership.