The roles of regulations on corporate governance, firm value and resources allocation efficiency: evidence from China

Law, finance and economic growth studies have provided evidence that better legal protection, institutions and financial development have substantial effects on economic growth and firm growth. Meanwhile, with an underdeveloped legal or financial system, whether such legal protection, regulations and financial development still work effectively and how these factors drive the growth of firms in emerging markets have been important questions. In an attempt to add some evidence to these questions based on the unique institutional environment of China, this thesis consists of three essays on the roles of regulations on corporate governance, firm value and resources allocation efficiency.

Firstly, this thesis examines how director attendance regulation disciplines director behavior, by exploiting differences in the director attendance requirements enacted by the Shanghai Stock Exchange (SHSE) and Shenzhen Stock Exchange (SZSE) in China. The thesis documents that the attendance rate of independent directors who serve firms listed on the SHSE (SHIDs) is significantly increased after the enforcement of attendance regulation in the SHSE. This positive effect is more pronounced for independent directors with a legal background or firms located in provinces with a better legal environment. The attendance regulation, furthermore, increases the dissent behavior of independent directors and leads to better accounting performance and higher firm value. In addition, independent directors are more likely to depart from firms listed on the SHSE and to transfer their directorship to firms listed on the SZSE which has a less restrained attendance requirement. The findings provide evidence on how external regulation shapes director attendance and voting behavior in emerging markets and enrich research on how regulation affects the effectiveness of corporate governance mechanisms from the perspective of director behavior.

Secondly, taking advantage of the enforcement of the Labor Contract Law (LCL) in 2008 in China, this thesis studies the impact of labor protection on total factor productivity, employee welfare and shareholder return at the firm level. Measuring human capital intensity by employees’ educational background and professional composition data, the thesis finds that the enforcement of the LCL significantly increases the total factor productivity in human capital-intensive firms. The effects are more pronounced in firms located in provinces with higher judicial efficiency. In addition, these effects work through the mechanism that stricter labor protection significantly increases the specific human capital investment in human capital-intensive firms. Further analysis suggests that, after the enforcement of the LCL, there are improvements in both the shareholder values and welfare of employees in human capital-intensive firms. The thesis highlights that labor protection increases the total factor productivity and contributes to a “win-win” situation between labor and capital in human capital-intensive firms.

Finally, the thesis studies how informal finance affects resource allocation efficiency in an emerging market with an underdeveloped formal financial system. The thesis uses data on Chinese industrial enterprises from 1999 to 2011 as the sample and measures the level of regional informal finance development with the data on private lending from the Chinese Private Enterprises Survey. The results show that a higher level of regional informal finance development leads to a significant increase in capital and employment growth in firms with higher productivity, and that the effect is more pronounced in non-SOEs and high-growth enterprises. Further tests find that the development of informal finance can help to promote regional economic growth. In addition, informal finance mainly improves the efficiency of capital and labor allocation through the information mechanism and supervision mechanism. The thesis provides new empirical evidence on how financial development affects resources allocation in an emerging market from the perspective of informal finance, and adds an explanation to address the question of why China has been a counterexample to findings in the law, institutions, finance and economic growth literature mentioned by Allen et al. (2005).