chapter  5
22 Pages

Corporate Governance and Business Growth

Evidence From China
WithJia Liu, Dimitrios Stafylas, Junjie Wu, Christopher Muganhu

The implementation of an effective system of corporate governance is now of critical importance to China’s drive for economic growth. In this chapter, we evaluate the Chinese government’s policy and practice in this area and discuss the fundamental issues, including ownership structure and the establishment of corporate governance, and how the latter interacts with the internal and external institutional environments. Further, we perform an empirical analysis of its role in business growth by examining mergers and acquisitions taking place in China, presenting evidence to show how its practice has influenced value creation and company growth, providing significant insights into the problems and prospects of corporate governance in China today. Overall, our study highlights the need for the government to accelerate the reform of the ownership structure, so as to give managers incentives to maximise company value. Ultimately, it is imperative to install and maintain an effective corporate governance mechanism, under which board independence is real and not merely decorative, and directors’ decision-making is guided and constrained by sound and transparently applied principles.

Our findings clearly indicate the extent to which China’s system of corporate governance has so far failed to achieve its objectives, and in what ways it must be reformed and developed in order to enhance market credibility, enterprise competitiveness and economic growth. Our evidence will be of value to China in policy development and practice, as well as to other economies that have pursued, or will pursue, similar trajectories. Moreover, in a world where corporate mismanagement in major economies can have a critical effect on global financial stability, this is not an issue that can be safely ignored.