Share Merger Reform, Corporate Governance and Firm Value in China

In this paper, we examine the relationship between corporate governance and compensation scheme in the share merger reform in China and the share merger reform's effects on firm performance. Consistent with the agency theory, we find that the compensation ratio is negatively correlated with corporate governance, indicating that the well-governed firms have less severe problem of expropriation by their non-tradable (controlling) shareholders and that their tradable shareholders are willing to accept lower compensation ratios. We further examine the influence of institutional investors in the process of share merger reform and find that the compensation ratio is negatively correlated with the concentration of shareholding in the hands of institutional investors. This indicates the possible collusion between institutional investors and non-tradable shareholders in the negotiation of compensation scheme. This negative effect of collusion on compensation scheme cannot be mitigated by corporate governance. We find that there are significant improvement in both corporate governance and firm performance after the share merger reform. The share merger reform causes some structural change on the relationship between corporate governance and firm performance