This study examines how ownership concentration and corporate debt impact corporate divestitures in China. Corporate divestitures reduce the asset base of a company and the opportunity for expropriation by majority shareholders. In emerging economies, weak legal institutions, combined with equity ownership concentration and high corporate debt, allow majority shareholders to avoid such disciplines. Consequently, the relationship between these governance mechanisms and divestiture activity exhibits a pattern that is different from that in developed economies. Using archival data collected from 1,210 Chinese listed companies during 1999-2003, we found that ownership concentration by the largest shareholder depressed corporate divestitures both in state-controlled and in non-state-controlled firms. The negative effect of corporate debt on divestitures only existed for state-controlled firms. Our finding provides corroborating evidence for principal-principal conflicts in emerging economies. It suggests that corporate strategy in these countries can be better explained by taking into account the unique agency problems that are prevalent in these economies.
- Corporate debt
- Corporate divestitures
- Ownership concentration
- Principal-principal conflicts
- State control