The non‐monotonic governance effects of large shareholdings in Chinese listed companies: an overinvestment perspective

The purpose of this paper is to explore the effects of large shareholdings from the agency problem perspective of overinvestment, and re‐test the role of board independence in the context of concentrated ownership.

Using a five‐year panel data of Chinese non‐financial listed companies between 2001 and 2005, the paper estimates both a fixed‐effects model and a random‐effects model.

The paper finds evidence of a significant non‐monotonic relationship between large shareholdings and firm level overinvestment. It also finds that state‐owned firms and firms with more independent directors experience lower level of overinvestment. However, firms with more frequent meetings experience a higher level of overinvestment.

The paper's findings indicate that concentrated ownership is not always a bad thing. The crux of the matter is how to induce large shareholders' incentive to monitor managers' opportunistic behaviors and restrict their motivation to expropriate minority shareholders.

In the context of concentrated ownership, the key to improve corporate governance is to strengthen board independence.

The paper provides useful information on non‐monotonic governance effects of large shareholdings in Chinese listed companies and overinvestment.