The Product Market Competition and the Effectiveness of Corporate Governance：A Theoretical and Empirical Study
|School||Shanghai Jiaotong University|
|Keywords||product market competition corporate governance effectiveness incentive monitor firm performance|
Corporate governance, viewed as the mechanism, which deals with the separation of ownership and control, has recently become an important issue in the world. The literature, based mainly on the conflicts between company’s shareholders and managers, concentrates on the market for corporate control, the board of directors, executive compensation, concentrated holdings and monitoring by financial institutions, and the debt.However, the practice confirms that the standard corporate governance mechanisms being the focus of much of the literature do not appear to work effectively.Competition is an important economics concept. It is widely regarded as an important instrument to promote social wealth and company efficiency. With the development of the research on corporate governance, many economists have shared the conjecture that product markets competition would help to mitigate the agency problem within the firm. Product market competition is the one of the best ways to solve the agent problem between owners and managers, and fierce competition can improve corporate governance efficiently. Especially in the 1980s, it is difficult for the standard mechanisms being the focus of much of the literature to interpret the economic phenomena due to changes of economic environment. In fact, there are many firms which compete in markets effectively and their shareholders have historically received high rates of return. Since then, some literature about the effects of product market competition on managerial behaviors had been found. However, the literature of product market competition as it relates to corporate governance has a rather limited focus and the results from them are divarications. The dissertation will explore on corporate governance and the effects of governance according to the feature of product market competition at the Chinese transitional stage, not only disclosing the essential of the mutual relationship between product market competition and corporate governance but also put forward theoretical direction to corporate governance in Chine. In a word, the dissertation has important theoretical and realism meanings.The technical route of the dissertation is as followings:Firstly, the dissertation reviews and analyses a great deal of literature about the relationships between product market competition and corporate governance in order to obtain the basement and the premise of our further research. In fact, our research will be developed within these outlines, and the related theory assumption being obtained by them as well. Thereinto, the main theory reviews are related to two different streams of research: one is the history of development and changes of the industry organization theory and corporate governance theory; the other is the dynamical mechanism and conduct mechanism which product market competition affects corporate governance. They are very important for the dissertation, because the former provides it with premise, while the latter injecting a theory clue and soul into our research. Thus, the paper contains not only theoretical innovation but also evidential studies innovation. At the least, the research can provide with a theoretical framework and valuable outcomes to corporate governance theory in Chinese transit stage.After the review, the disseration explores the effects of product market competition on the agency problem by exploring the mutual relationships between product market competition and managerial incentive, product market competition and monitor, product market competition and agency costs, the mutual relationships between product market competition and controlling shareholder’s tunneling, as well as the relationship between product market competition maneuvers and firm performance, and so on. Next, we test the effects of product market competition on corporate governance by evidence from Chinese listed companies.Before empirical research, we have reviewed approximately the reformation about the economic systems, product market competition and corporate governance in China so that we can capture the objects and main contents we want to research on, and provide with a basic technic background to our analyses.After testing and analysising, it is clear that it time to put forward some policy implications. At present, one of the most important policy implications will be anti-monopoly. Summarily, we try our best to build a clear framework with definited route, puttingforward theoretics model step by step, analysing data and drawing conclusions.The research method is as following:Applying game theory, information economics theory and industry organization theory, the dissertation combines theoretical research with empirical research. They are involved in the competition and cooperation theory in industry organization, agency theory in information economics, econometrics and statistics theory, system economics theory, as well as mathematics methods.The dissertation obtains the following research results: Firstly, after reviewing the developing courses related to product market competition and corporate governance, the dissertation points out that it is necessary to combine the industry organization theory and corporate governance theory due to the development and prosperity of firm contract theory, strategy management theory and beyond property-right theory. Moreover, it is proposed that the study on Chinese transmit stage can be enrich and developed the theory about product market competition effects on corporate governance. Secondly, the dissertation combines theoretical research with empirical research to obtain the following results:(1)The dissertation finds that in more competitive environments managers are unambiguously given stronger incentives and monitored more closely so that they will improve their effort level. Product market competition can improve firm performance. Moreover, there is an existence of complementarities between product market competition and corporate governance mechanism: the more competitive environments are, the greater marginal efficiency from improvement of corporate governance is.(2)The effects of product market competition on firm’s operating performance depend on the property-right’s feature and corporate governance structures. The effects on the state-owned enterprises(SOEs)are greater than these on the non state-owned enterprises(non-SOEs) due to the arrangement of property-right, incentive, the agency problem, and so on.(3)Product market competition is one the important factor to reduce agency costs and improve agency performance. By analysing the relationship among product market competition、agency costs and agency performance .It is shown that product market competition obviously induces the agency costs, improves the firm’s operating performance,especially to the firms under the incomplete informaton condition.(4)It is demonstrated that when competition is price competition, the optimal contract compensates the manager positively on both own- and rival-firm performance. The ratio of compensation based on own-firm performance to that based on rival-firm performance is decreasing in the degree of competition in the industry. Relative performance evaluation, the natural consequence of the principal-agent framework, greater returns to shareholders. When competition is capability competition, the optimal contract compensates the manager positively on own firm performance and negatively on rival-firm performance. This contract intensifies competition and lowers profits for both firms. Naturally, compared with capablity competition, the effects of product market competition on firm performance can be greater in price competition firms which have taken the usage of CEO incentive. On the other hand, the returns are higher for the price competition firms which have took the usage of CEO incentive.(5)The paper analyses the relationship between product market competition and the controlling shareholder’s tunneling. The results show that product market competition can improve the controlling shareholder’s tunneling. It is also found that product market competition and internal governance structures affect the controlling shareholder’s tunneling complementally.In a word, we identify that: firm performance mainly depends on product market competition, managerial incentive, monitoring, as well as the interactions between them.Main innovations are as followings:On the research field:Firstly, althought previous literature confirm that the effects of product market competition on corporate governance, these researches are not systematization. There is not a whole summary about the effects of product market competition on corporate governance, too. While our research, based on the review of the effects of product market competition on corporate governance, induce and summarize the dynamical mechanism and conduct mechanism which product market competition affects corporate governance.It provides with a new view to the further researchers.On the research methods:Different from the previous models such as the standard Cournot model, Bertrand model or Salop model, we adopt the Hotelling model to investigate the effects of product market competition on corporate governance, which combines CEO incentive with monitor efficiently. In additional, the monitor in Hotelling model is different from that in standard principal-agent model. The former is endogen tic while the latter is exogenous. Therefore, we follow the roads of Demsetz and Alchian, not that of standard principal-agent. Moreover, the research tests the following questions by evidence from Chinese listed companies in 2004—2005, such as product market competition and agency costs, product market competition and executive compensation, product market competition and monitoring behavior of shareholders, product market competition and the controlling shareholder’s tunneling, and so on. In addition, the research uses different measures of competition to test the effects of product market competition on corporate governance.On the research results:The paper conclude that product market competition, executive compensation and monitoring level can improve the firm’s operating performance, and an existence of complementarities between product market competition and executive compensation and monitoring level; product market competition obviously decreases the agency costs and controlling shareholder’s tunneling, improving the firm’s operating efficiency, especially to the firms with price competition or the state-owned enterprises(SOEs), and so on. In a word, the dissertation confirms the important implications of product market competition mechanism and anti-monopoly policy from the angle of corporate governance.