Do multiple large shareholders reduce agency problems in state-controlled listed firms? Evidence from China

In this article, we investigate how the emergence of an ownership structure with multiple large shareholders (MLS) affects principal-agent as well as principal-principal conflicts of interests in Chinese listed firms having the government as controlling shareholder. Thereby, we account for the source of MLS entry by distinguishing between a non-state investor buying shares when the government divests vs. retains its ownership stake. We find that MLS entry alleviates principal-agent problems, as evidenced by a lower managerial perk consumption and a higher pay-for-performance sensitivity of managerial compensation, as well as principal-principal problems, as reflected by a smaller ratio of related-party transactions and a lower labor redundancy. Interestingly, and except for the reduction in excess personnel, we find that the above effects arise only when the newly entered non-state investor accumulated a stake without corresponding government divestment. In contrast, the curtailing effect of MLS entry on labor redundancy only occurs when the government was willing to give up a non-trivial part of its ownership. In line with the above findings, we show that MLS entry significantly enhances the firm's stock market valuation, with this effect predominantly arising from the anticipated reduction in excess personnel.