International Review of Economics and Finance 49 (2017) 370–385

Contents lists available at ScienceDirect

International Review of Economics and Finance

journal homepage: www.elsevier.com/locate/iref

Effects of the shareholder base on firm behavior and firm value

in China
MARK
⁎
Kenneth Yunga, , Yi Jianb
a
Old Dominion University, Strome College of Business, Norfolk, VA 23529, United States
b
University of Pittsburgh at Johnstown, Division of Business and Enterprise, 450 School House Road, Johnstown, PA 15904, United States

AR TI CLE I NF O AB S T R A CT

JEL classification: Contrary to the evidence based on US firms, we find that a large shareholder base does not benefit
G30 firms in China. Our results suggest that a large shareholder base in China implies elevated agency
G32 conflicts between individual investors and the controlling shareholders. We find that a larger
G34 shareholder base is associated with lower levels of capital expenditures, a lower standard
G35
deviation of return on assets, a lower standard deviation of return on equity, and no reduction in
Keywords: dividend payout. Our results imply that insiders increase the expropriation of outsiders as agency
Shareholder base conflicts escalate. The shareholder base is associated with a decrease in firm value in China.
Investor recognition
China
State-owned enterprises
Agency problems

1. Introduction

Most companies spend significant time and attention to managing their shareholder base out of the belief that significant stock
market benefits can be reaped if they can identify and attract the right shareholders. According to a recent survey by the National
Investor Relations Institute (NIRI) and the Rock Center for Corporate Governance at Stanford University, 91 percent of companies
discuss shareholder composition at the senior-executive level; 75 percent discuss this at the board level. The survey also finds that
CEOs spend 4.2 days per quarter managing their shareholder base and more than three-quarters of firms see significant stock market
benefits from managing their shareholder base.1 Consistent with the opinion of practitioners, many financial economists suggest that
the shareholder base is an important determinant of firm value and corporate policies (Lins & Warnock, 2004; Brav, Graham, Harvey,
& Michaely, 2005; Bodnaruk & Ostberg, 2013).
Despite the importance of the shareholder base, research on the topic has been scant. The benefits of a large shareholder base,
nevertheless, can be inferred from related evidence based on US firms that firm value is enhanced by improvements in investor
recognition, stock liquidity, and market disciplines (Merton, 1987; Bodnaruk & Ostberg, 2009; Green & Jame, 2013; Edmans, 2009;
Fang, Noe, & Tice, 2009). It is not clear, however, if the benefits of a large shareholder base prevail in developing economies.
Our goal in this study is to determine if the common belief held by business executives that a large shareholder base is beneficial
to the firm is true in a foreign setting. In doing so, we examine the effects of the shareholder base on firm behavior and firm value in
China. An investigation of the effects of the shareholder base is particularly important for China because there is widespread popular
belief that the tremendous stock market growth in China in recent years has attracted sentiment-driven investors mainly. Eun and

⁎
Corresponding author.
E-mail addresses: [email protected] (K. Yung), [email protected] (Y. Jian).
1
See page 1 of “Does the composition of a company's shareholder base really matter?” by Beyer et al. (2014).

http://dx.doi.org/10.1016/j.iref.2017.03.001
Received 14 June 2015; Received in revised form 7 January 2017; Accepted 2 March 2017
Available online 06 March 2017
1059-0560/ © 2017 Published by Elsevier Inc.
K. Yung, Y. Jian International Review of Economics and Finance 49 (2017) 370–385

Huang (2007) for instance cite the Wall Street Journal (August 22, 2001) comparing the stock markets of China to “casinos, driven by
fast money flows in and out of stocks with little regard for their underlying value.” More recently, the Economist (May 26, 2015)
describes China's stock market as a crazy casino. An examination of the shareholder base and its effects in China may provide
important insights into firm behavior in this burgeoning economy. In addition, firm ownership structure in China is quite different
from the ownership structure in western societies (Tam, 1995, 2000). In China, firms have concentrated ownership and are generally
controlled by the state, it is therefore unclear if the benefits associated with the shareholder base can prevail in China.
Several reasons motivate us to examine the shareholder base in China. First, there is some evidence that shareholders in China are
eager to protect their interests by monitoring firm behavior. Chen, Ke and Yang (2013) find evidence that after the passage of an
investor-friendly regulation in 2004 in China, firms that have a higher level of minority shareholders are more likely to veto value-
decreasing proposals while the firm management also submits fewer proposals that may decrease firm value. Accordingly, a larger
shareholder base may have some positive impacts on firm behavior and firm value in China. Yet, it is possible that the benefits of a
large shareholder base found in developed economies may not prevail in China. Tam (1995, 2000) finds that firms in China remain
significantly controlled directly or indirectly by the state despite the market reforms and an increasing number of individual
shareholders in recent years. According to Tam (1995), the objective of privatizing firms in China is to install better modus operandi
to break away the problems associated with a centrally planned economy while allowing the state to maintain its influence. Recent
studies also confirm that the influence of the state on firm behavior is significant in China (Liu, Uchida, & Yang, 2014; Su, Fung,
Huang, & Shen, 2014). In addition, Gao and Kling (2012) find evidence that shareholder rights are less relevant in enhancing the
quality of financial reporting of firms in China. The results of Tam and Gao and Kling suggest that a larger shareholder base may not
have significant benefits in China. Second, China presents an interesting case for examining the shareholder base because before the
Shanghai and Shenzhen Stock Exchanges were created in 1991, publicly traded firms and individual investors virtually did not exist.
According to the 2013 China Securities Depository and Clearing Statistical Yearbook, the number of A-share stock trading accounts
(each investor can only register for one trading account) increased from 58.5 million to 171.9 million between 2000 and 2013 at an
annual rate of eight percent; the number of B-share stock trading accounts increased from 0.025 million to 2.51 million over the same
period an annual rate of 117.7 percent. The statistics suggest that the shareholder base in China has been growing at a phenomenal
rate unseen in other countries and it presents an interesting opportunity for investigating the effect of the shareholder base that arises
primarily because investors are enthusiastic about stock ownership. Finally, an investigation of the shareholder base in China may
have important policy implications because the country is facing the challenging task of protecting minority shareholders’ interests as
it develops its domestic financial markets. Given China's poor record of investor protection and weak law enforcement, it is important
to determine the role of the shareholder base in its burgeoning capital markets. This is the first study to show how the shareholder
base affects the quality of corporate behavior for firms domiciled in weak investor protection countries. It is generally agreed that
when firms have concentrated ownership, individual shareholders suffer significant agency costs because the controlling shareholders
have incentives to maximize the benefits of control at the expense of small investors (Claessens, 2002; Demsetz, 1983). The extant
literature has provided evidence that firms in China suffer significant agency problems due to the presence of state ownership and/or
government related controlling shareholders. It would be of interest to know if an expanding shareholder base could promote the
monitoring of firm behavior as government-related ownership is diluted. Pagano and Roell (1998) argue that an optimal firm
ownership structure generally involves some measure of dispersion, to avoid excessive control by specific shareholders. This
hypothesis has not been tested yet in developing countries where firm ownership is concentrated; China provides an interesting
platform for investigating the hypothesis.
Using a sample of 20,125 firm-year observations of Chinese companies from 1998 to 2013, we find evidence suggesting that the
benefits of the shareholder base found in developed economies do not exist in China. Our results are consistent with the argument
that an expanding shareholder base in the presence of concentrated firm ownership is likely to have elevated agency problems
(Claessens, 2002; Demsetz, 1983). Specifically, our results show that Chinese firms with a larger shareholder base have lower levels of
capital expenditures, a lower standard deviation of return on assets (σ[ROA]), and a lower standard deviation of return on equity
(σ[ROE]). In addition, we find that firms a larger shareholder base are not associated with a reduction in dividend payouts in China.
Researchers have concluded that the high dividend payouts of firms in China are expropriations by insiders. Our results on firm risk-
taking behavior and dividend payout are thus consistent with the extensive evidence documented in prior studies that corporate
resources of firms in China are frequently expropriated to satisfy the private motives of insiders. We also find that the shareholder
base is negatively associated with firm value in China. The finding implies that investors are skeptical of the motives of insiders as the
conflict between insiders and outsiders escalates.
Our study adds to the scant literature on the shareholder base by examining the effects of the shareholder base on firm behavior
and firm value in China. Our results are in general consistent with the existing literature that outsiders are expropriated by insiders of
firms in China. Given that China is in the process of developing its capital markets, our findings may have significant policy
implications. Our results also add to the literature on investor protection by showing that in countries where investor protection is
poor and law enforcement is weak, expanding the shareholder base is unlikely to aid the development of the capital markets as
investors are skeptical of the motives of insiders. Our results show that an expanding shareholder base does not improve the
monitoring of firms where state ownership is significant and corporate governance is poor. In the case of China, our findings suggest
that regulations and governance practices must be improved before the shareholder base can have positive effects on firm policies
and firm value.
The rest of the paper is organized as follows. Section 2 reviews the literature and develop testable hypotheses. Section 3 describes
the sample and data. Section 4 presents analysis and results. Section 5 concludes the paper.

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2. Literature review and hypothesis development

Practitioners recognize that the shareholder base is important for many corporate decisions. For example, Wolfe Axelrod
Weinberger Associates LLC, an investor relations company, states in its company profile, “Our efforts culminate in a broader
shareholder base, increased liquidity, a lower future cost of capital, and a better valuation relative to the client's peer group.”2 Capital
Link, another investor relations consulting firm, stipulates on its website, “We assist our clients to position themselves properly in the
investment community, expand their shareholder base, secure analyst and media coverage and achieve a sustainable valuation.”3
Academic researchers also consider that the shareholder base is an important determinant of firm decisions (Brav, Graham, Harvey,
& Michaely, 2005; Bodnaruk & Ostberg, 2013; Beyer, Larcker, & Tayan, 2014). In spite of the apparent importance of the shareholder
base, direct evidence detailing the impact of the shareholder base on corporate decisions has been scant. Our goal in this study is to
determine if the common belief held by business executives that a large shareholder base is beneficial to the firm is true in a foreign
setting. To achieve our goal, we examine the effects of the shareholder base on firm behavior and firm value in China.

2.1. The shareholder base and firm risk-taking behavior

First of all, we investigate the relation between the shareholder base and firm risk-taking behavior in China. Theoretically, when
the shareholder base is small, firm ownership is likely concentrated and firm investment decisions are frequently influenced by a few
large shareholders. Large shareholders in general have incentives to influence the firm to pursue risky projects in order to maximize
firm profit (Amihud & Lev, 1981; Shleifer & Vishny, 1986). Laeven and Levine (2009) provide supporting evidence by documenting a
positive relation between risk-taking and ownership. Undiversified large shareholders, however, tend to prefer conservative projects
in order to protect their own interests (Faccio, Marchica, & Mura, 2011; John, Litov & Yeung, 2008). When the shareholder base is
broad and individual ownership becomes small, shareholders are likely neutral towards firm risk-taking behavior because the cost of
monitoring the firm is high and firm-specific risk can be diversified away efficiently (Pagano & Roell, 1998). However, Becker-Blease
and Paul (2006) find a positive relation between stock liquidity and firm capital expenditures as improved stock liquidity reduces the
cost of capital; their results imply that a larger shareholder base is likely to have a positive effect on the risk-taking behavior of firms.
Gadhoum and Ayadi (2003) examine Canadian firms and find a nonlinear relationship between ownership and risk; their results show
that risk-taking is high at low and high levels of ownership. Thus, the relation between the shareholder base and firm risk-taking is
less than straight forward.
Firm ownership is highly concentrated and controlled by the state in China. In 2013, the average state ownership of firms in China
reached almost 40%. The state exercises its influence on firm operations through state owned shares or state owned legal person
shares. According to Tam (2000), state shares and legal person shares account for over two thirds of the capitalization of China's
public companies. In a country where corporate governance is poor and legal enforcement is weak, a direct outcome of a large
ownership by the state is that corporate investment policies are likely to be conservative (John et al., 2008). Among the existing
studies on the impact of state ownership on firm investment activity in China, Tan (2001) find that managers of large state-owned
enterprises are less willing to assume risks than entrepreneurs of small privately-owned enterprises. Consistent with this view, Huang,
Shen, and Sun (2011) find that state ownership is associated with conservative corporate risk-taking behavior in China. A likely
reason is because bureaucrats and state agencies do not have incentives to maximize firm value; they prefer a conservative
investment approach that is consistent with the governmental emphasis on political and economic stability (Zou & Adams, 2008).
Accordingly, our first analysis is to examine whether a large shareholder base has positive impacts on the risk-taking behavior of
firms in China. There are two possible effects of an expanding shareholder base on firm risk-taking behavior in China. On one hand,
with the state ownership diluted by a larger shareholder base and the implementation of regulations to protect shareholder rights, a
large shareholder base implies that individual shareholders may exert influences that are opposite to the opinion of the state. This is a
possible outcome that is consistent with the results of Chen et al. (2013). Thus, a large shareholder base in China may have an
offsetting effect on the conservative impact of state ownership on firm investment activity. On the other hand, firms in China are still
heavily influenced by the state in spite of an expanding shareholder base. Consistent with the views of Demsetz (1983) and Claessens
(2002), a larger shareholder base may aggravate the extraction of benefits by the controlling shareholders as small investors are
unorganized and helpless in general. That is, the shareholder base has no restraining effects on the influence of state ownership on
firm investment activity. The mixed theoretical possibilities motivate our empirical investigation. To summarize this discussion, we
make the following null and alternative hypotheses:

Hypothesis 1a. : The shareholder base is positively related to the risk-taking behavior of firms in China.

Hypothesis 1b. : The shareholder base is negatively related to the risk-taking behavior of firms in China.

2.2. The shareholder base and dividend payout

The second part of our investigation is to examine the effect of the shareholder base on dividend payout in China. There are two
competing views in the literature on the relation between the shareholder base and dividend payout. On one hand, Rozeff (1982) find

2
See http://www.wolfeaxelrod.com/profile.htm
3
See http://www.capitallink.com/products_ & _services.html

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K. Yung, Y. Jian International Review of Economics and Finance 49 (2017) 370–385

a positive relation between dividend payout and the number of shareholders. He argues that firms dissipate free cash flows by paying
more dividends to control agency conflicts as the shareholder base becomes larger. Consistent with this view, many researchers find
that dividends are paid to disperse the free cash flow of a firm in order to mitigate agency problems (Jensen, 1986). This strand of
research implies that a larger shareholder base is associated with a higher dividend payout. On the other hand, Banerjee, Gatchev,
and Spindt (2007) find that firms that have a low stock liquidity pay more dividends in order to satisfy investors’ need for liquidity.
Their results imply a negative relation between dividend payout and the shareholder base.
Given the concentrated ownership of firms in China, researchers generally regard corporate dividend payout as a form of
expropriation by the controlling shareholders (Cheng, Fung, & Leung, 2009; Chen, Jian & Xu, 2009; Huang, Shen & Sun, 2011; Liu,
Uchida & Yang, 2014; Wei & Xiao, 2009). For example, Chen et al. (2009) find that Chinese firms with higher levels of concentrated
ownership pay more dividends to satisfy the tunneling needs of the controlling shareholders. Su et al. (2014) and Liu et al. (2014)
argue that the preference for cash dividends by the controlling shareholders in China is evidence of wealth expropriation given that
the shares held by the controlling shareholders are typically non-negotiable. The findings of these researchers are consistent with the
prediction of John et al. (2008) that firms with high insider holdings are likely to siphon off cash flows for private benefits. The effect
of a large shareholder base on the dividend payouts of firms in China, however, can be either positive or negative. If the minority
shareholders in China are strong enough to exert influences on the firm, as documented by Chen, Ke, and Yang (2013), then a larger
shareholder base can mitigate the expropriation by the controlling shareholders and result in a lower dividend payout. On the other
hand, if the minority shareholders are weak, a larger shareholder base may exacerbate the expropriation by the controlling
shareholders and result in a higher dividend payout. In a cross-country study, Faccio, Lang, and Young (2001) show that high
dividend payout alleviates the expropriation of outsiders by insiders in Europe but exacerbates it in Asia. We seek to find out if the
shareholder base mitigates or exacerbates expropriations by insiders through dividend payouts of firms in China. The preceding
discussion leads to the following null and alternative hypotheses:
Hypothesis 2a. The shareholder base is positively related to corporate dividend payouts in China.
Hypothesis 2b. The shareholder base is negatively related to corporate dividend payouts in China.

2.3. The shareholder base and firm value

As the shareholder base is likely an important determinant of corporate decisions, its effect on firm value cannot be ignored. Thus,
the last part of our investigation is to examine the relation between the shareholder base and firm value in China. One strand of
studies suggests that the size of the shareholder base has a positive impact on firm value. For example, Merton (1987) finds that firms
with a larger number of investors are better recognized in the stock market and tend to have higher valuation multiples. Related to
Merton's investor recognition hypothesis, some studies show that share prices of foreign stocks go up when their corresponding
American Depository Receipts are listed on US stock exchanges; researchers attribute this to the higher investor recognition and
liquidity, that is, a larger shareholder base, achieved by the listing effect (Foerster & Karolyi, 1999). On the other hand, another
strand of research that examines agency problems and firm value suggests that a large and dispersed ownership structure has a
negative effect on firm value as agency conflicts intensify when the shareholder base expands (Demsetz, 1983; Jensen, 1986; Konijn,
Kräussl, & Lucas, 2011). However, mixed results have been found in this strand of research (Demsetz & Lehn, 1985; Morck, Shleifer
and Vishny, 1988). Konijn et al. (2011) argue that the mixed results are caused by differences in regional and institutional
characteristics.
Existing studies overwhelmingly document a negative effect of state ownership on firm value in China (Lei & Song, 2013; Wei,
Xie, & Zhang, 2005; Xiao & Zhao, 2014). It is generally argued that because the controlling shareholders of firms in China have no
incentives to maximize firm value as the shares they own are non-tradable. Lei and Song (2011) find that firms with high levels of
state ownership are associated with higher levels of related party transactions, which are typical channels for the controlling
shareholders to tunnel firm resources for private benefits. Xiao and Zhao (2014) find that firms with excess control rights are
associated with higher levels of agency conflicts and have a lower firm value.
We investigate if a large shareholder base adds to firm value in China. Despite a larger shareholder base implies dispersed
ownership, Pagano and Roell (1998) argue that an optimal firm ownership structure generally involves some measure of dispersion in
order to avoid excessive control by specific shareholders. To the extent that firm value goes up when the excessive influence of the
controlling shareholders is mitigated and when investor recognition improves, a larger shareholder base may enhance firm value in
China. We develop the following set of null and alternative hypotheses:
Hypothesis 3a. The shareholder base has a positive effect on firm value in China.
Hypothesis 3b. The shareholder base has a negative effect on firm value in China.

3. Data

Our sample of 20,125 firm-year observations includes all the publicly traded non-financial firms in China between 1998 and 2013.
The source of the data is the China Center for Economic Research (CCER) Database, which provides yearly financial reports, equity
trading and corporate governance information on companies listed on the Shanghai and Shenzhen stock exchanges. Consistent with
previous studies, missing values of data are filled manually using internet available information from http://finance.sina.com.cn/. To
reduce the effect of outliers, we winsorize the financial variables with extreme values at the 1st and 99th percentiles.

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Table 1
Variables definition.

Variable Definition

Shareholder base Number of common shareholders of record (in 000 s)

Market cap Year-end equity market capitalization
Book-to-market (BM) Ratio of book value to market value of the firm
Leverage Ratio of total liabilities to total assets
Operating income Ratio of operating income to total assets
Cash Ratio of cash holdings to total assets
Dividend payout Ratio of cash dividends to sales
Earnings Ratio of earnings to total assets
Retained earnings Ratio of retained earnings to total assets
Stock liquidity Annual volume of shares traded divided by the number of shares outstanding at the end of the year
1-year stock return The change of closing price at the end of the year divided by the closing price at the end of previous year
Volatility Stock return volatility, computed as the standard deviation of daily stock returns for the year
Capital expenditures (CAPEX) Ratio of capital expenditures to total assets of the firm
Firm age Log (1+ firm age)
Firm size Log(market capitalization)
ROA Ratio of earnings to average assets
ROE Ratio of earnings to average equity
State A (0,1) dummy variable that has a value of one if state ownership is positive, and zero otherwise

*Data are obtained from the China Center for Economic Research (CCER) data files.

In Table 1, we provide definitions of the variables used in the study. Many of the firm-level variables are the same as those used in
Bodnaruk and Ostberg (2013) and Faccio et al. (2011).
Table 2 provides descriptive statistics of the sample. We included the mean, median, standard deviation, and 25th and 75th
percentiles in the table. The average firm in our sample has 50,752 shareholders of record (Shareholder Base); the median firm has
30,823 shareholders. The mean and median values of firm size, measured by market capitalization, are RMB 6.73 billion and RMB
2.93 billion, respectively. The mean (median) total assets is RMB 5.23 billion (1.87 billion). Sales volume has a mean (median) of
RMB 3.63 billion (1.03 billion). Capital expenditures to total assets ratio has a mean of 0.07 and a median of 0.05; these numbers are
comparable to recent US data (Bodnaruk & Ostberg, 2013). On average, firm cash holdings represent 20.17% of total assets, which is
in line with the findings of Opler, Pinkowitz, Stulz, and Williamson (1999) and Bodnaruk and Ostberg (2013) for firms in the United
States. Dividend payout ratio, computed as dividends divided by sales, has a mean of 5.96% and a median of 4.01%. Book-to-market
ratio has a mean (median) of 0.40 (0.35). Stock liquidity has a mean (median) of 2.87 (1.76). Stock liquidity is high relative to firms
in the U.S. (Bodnaruk & Ostberg, 2013), suggesting that investors in China have a keen interest in stock trading. Firms in the sample
are profitable operations with a mean (median) ROA of 5.72% (4.64%) and a mean (median) ROE of 8.93% (7.87%). The firms have
an average 1-year buy-and-hold stock return of 21.75%. On average, firm age is in excess of 10 years.

3.1. Measures of the shareholder base

We use two measures of the shareholder base in this study. The first measure is the raw shareholder base, computed as the natural
logarithmic value of the number of registered shareholders in order to control for the skewness in the distribution of the variable. The

Table 2
Descriptive statistics of the sample.

Variable N Mean Standard Deviation 25th Percentile 50th Percentile 75th Percentile

Shareholders(1,000) 20,125 50.75 74.38 16.49 30.82 59.01

Ln(shareholders) 20,125 10.36 0.94 9.71 10.34 10.99
ExShBase 16,087 0.00 0.59 −0.33 0.04 0.38
MktCap(million) 20,125 6,732 14,370 1,715 2,925 5,607
TA(million) 20,125 5,225 11,752 994 1,871 4,078
Sales(million) 20,125 3,630 9,035 446 1,034 2,601
Capex/TA 20,125 0.07 0.06 0.02 0.05 0.09
Cash/TA 20,125 0.20 0.15 0.09 0.16 0.27
Div/Sales 20,125 0.06 0.06 0.02 0.04 0.07
B/M 20,125 0.40 0.24 0.22 0.35 0.52
Stock liquidity 20,125 2.87 3.41 0.63 1.76 3.67
1-year return 20,125 0.22 0.75 −0.25 −0.02 0.44
Volatility 18,594 0.03 0.01 0.02 0.03 0.03
Firm Age 20,125 10.60 5.25 7.00 10.00 14.00
ROE (%) 20,125 8.93 6.22 4.43 7.87 11.81
ROA (%) 20,125 5.72 4.62 2.29 4.64 7.88
Growth 17,615 0.01 0.02 0.00 0.01 0.01

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Table 3
Estimation of the excess shareholder base.

log(Shareholder Base) Estimate St. Error t Value Pr > |t|

C −4.2064 0.1354 −31.07 < .0001

Ln(1+firm age) 0.2630 0.0118 22.31 < .0001
ROE −0.0079 0.0007 −11.1 < .0001
log(mkt cap) 0.6125 0.0056 110.31 < .0001
log(B/M) 0.4140 0.0108 38.51 < .0001
1/Share price 4.9138 0.0875 56.16 < .0001
Stock liquidity 0.0127 0.0020 6.39 < .0001
Past year return 0.0630 0.0087 7.25 < .0001
Volatility 1.7228 0.4273 4.03 < .0001
Industry dummies Yes
Exchange dummies Yes
Year dummies Yes
Adj. R2 0.5837
N 16,086

second measure is the excess shareholder base, computed using the model developed by Bodnaruk and Ostberg (2013). The
regression equation is as follows:
⎛B⎞
Ln (number of Shareholders )it = β0i + β1i log (1 + firm age ) it + β2i ROEit + β3i log (Market Cap ) it + β4i log ⎜ ⎟
⎝ M ⎠it
⎛ 1 ⎞
+ β5i ⎜ ⎟ it + β6i Stock Liquidityit + β7i Past year returnit + β8i Volatilityit
⎝ share price ⎠
+ Exchange dummies + Industry dummies + Year dummies + εit (1)

In this estimation model, the logarithmic value of the number of shareholders (LogSH) is the dependent variable. The independent
variables include firm age, return on equity, B/M ratio, market capitalization, 1/share price, stock liquidity, past year return, and
volatility. We define the regression residuals of Eq. (1) as Excess Shareholder Base (ExShBase). In the regression, we control for
market capitalization because larger firms are likely to have more shareholders due to higher levels of media coverage and investor
recognition. Stock liquidity controls for volume-based liquidity. In addition, 1/share price controls for the liquidity associated with
transaction costs. Firm age and volatility control for firm risk. Return on equity and past year return control for the impact of recent
performance on the number of shareholders. Book-to-market ratio controls for the effect of stock valuation on the shareholder base.
Table 3 presents the regression results of Eq. (1). The results are qualitatively similar to what Bodnaruk and Ostberg (2013) find.
The results show that large, value, and older firms have more shareholders. In addition, firms that have a high 1/share price and stock
liquidity also have more shareholders. The two measures of recent performance, return on equity and past year return, show
contradictory effects on the number of shareholders.
Following the methodology of Bodnaruk and Ostberg (2013), we analyze the shareholder base in China and confirm that it is
persistent and stable. That is, the shareholder base in China is likely to have systematic effects on firm decisions.

4. Analysis and results

4.1. The shareholder base and firm risk-taking behavior

To analyze the impact of the shareholder base on firm risk-taking behavior, we augment standard firm risk-taking regression
models by adding the shareholder base as the independent variable of interest.
Risk − taking activityit = β0i + β1i Shareholder Base it −1 + β2i Xit −1 + Industry dummies + Year dummies + εit (2)

where risk-taking activity is measured by capital expenditures divided by total assets (CapEx_TA), the standard deviation of ROA(t, t
+4), and the standard deviation of ROE(t, t+4), respectively. In addition, the dependent variable is measured by the raw, industry
mean-adjusted, and industry median-adjusted value, respectively. We abbreviate the standard deviation of ROA(t, t+4) by σ[ROA(t,t
+4)] and the standard deviation of ROE(t, t+4) by σ[ROE(t,t+4)] hereafter. The control variables, Xit, are firm age (measured by Ln
(1+firm age)), prior year buy-and-hold stock return, cash holdings (measured by Ln(Cash/TA)), earnings (measured as Ln(EBITDA/T
A)), growth opportunities (measured by Ln(B/M ratio)), leverage (measured by total liabilities/total assets), and firm size (measured
by log(market capitalization)). Also included is a (0,1) dummy variable that has a value of one if state ownership is positive, and is
zero otherwise. Lagged values of independent variables are used in the estimation in order to control for potential endogeneity
problems. We also control for industry fixed effects and year fixed effects in the model. Fixed effect models have the advantage of
controlling for omitted variables.
In Table 4, regression results using Eq. (2) with the dependent variable measured by CapEx_TA are reported. In columns (1) to (3),
results based on the raw shareholder base (LogSH) are reported. In columns (4) to (6), results based on the excess shareholder base

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Table 4
Effect of the shareholder base on capital expenditures.

(1) (2) (3) (4) (5) (6)

Raw capital Industry mean- Industry median- Raw capital Industry mean- Industry median-
expenditures adjusted capital adjusted capital expenditures adjusted capital adjusted capital
expenditures expenditures expenditures expenditures

Intercept 0.0126 −0.0599*** −0.0454*** 0.0196 −0.0515*** −0.0371

(0.3342) (0.0000) (0.0003) (0.1325) (0.0000) (0.0033)

Raw Sh base −0.0054*** −0.0057*** −0.0057***

(0.0000) (0.0000) (0.0000)
Excess Sh base −0.0015* −0.0018** −0.0017**
(0.0782) (0.0365) (0.0431)

Firm age −0.0082*** −0.0073*** −0.0074*** −0.0103*** −0.0094*** −0.0096***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

B/M 0.0028** 0.0041** 0.0039*** −0.0011 −0.0001 −0.0003

(0.0159) (0.0003) (0.0006) (0.2546) (0.9228) (0.7396)

1-year return 0.0004 0.0003 0.0003 0.0004 0.0004 0.0003

(0.6599) (0.6728) (0.7367) (0.6074) (0.6287) (0.6868)

Cash −0.0099** −0.0094** −0.0088** −0.0062 −0.0053 −0.0047

(0.0262) (0.0305) (0.0431) (0.1639) (0.2188) (0.2785)

EBITDA 0.0061*** 0.0059*** 0.0056*** 0.0064*** 0.0061*** 0.0059***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Growth rate 0.0870*** 0.0789*** 0.0799*** 0.1077*** 0.1003*** 0.1016***

(0.0005) (0.0015) (0.0013) (0.0000) (0.0000) (0.0000)

Leverage −0.0001*** −0.0001* −0.0001** −0.0001*** −0.0001* −0.0001**

(0.0040) (0.0660) (0.0229) (0.0037) (0.0506) (0.0168)

Firm size 0.0074*** 0.0072*** 0.0071*** 0.0046*** 0.0042*** 0.0041***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

State −0.0143*** −0.0144*** −0.0148*** −0.0148*** −0.0148*** −0.0153***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Industry Yes No No Yes No No
dummies
Year dummies Yes Yes Yes Yes Yes Yes
Adj. R2 0.1338 0.0387 0.0390 0.1305 0.0346 0.0349
N 13,059

P-values are in brackets. *, ** and *** denote significance at the 10%, 5% and 1% levels, respectively.

(ExShBase) are reported. As can be seen in Table 4, the coefficient on the raw shareholder base is negative and significant at the one
percent level in columns (1)–(3). The economic impact of the shareholder base on capital expenditures is considerable. For example,
in column (1), the coefficient on the raw shareholder base is −0.0054 with a p-value of 0.0000. Evaluating CapEx_TA at its mean
level, an increase in LogSH from the first to the third quartile of the distribution results in a 9.87% decrease in CapEx_TA. Similar
results can be found in columns (2) and (3). The results suggest that a larger shareholder base is associated with reduced capital
expenditures. The results are contradictory to the finding of Becker-Blease and Paul (2006) based on US data. For firms in China,
reductions in capital expenditures when the shareholder base expands may imply that insiders heighten the expropriation of outsiders
by diverting corporate resources from firm investment activity for private motives as the conflicts with outsiders escalate. This
interpretation is consistent with the extensive evidence on tunneling by insiders among firms in China (Gao and Kling, 2008; Chen
et al., 2009; Aharony, Wang and Yuan, 2010; Jiang, Lee, and Yue, 2010). The negative effect of the shareholder base on risk-taking by
firms in China is likely associated with the weak corporate governance of the country. In columns (4)–(6), the coefficient on the
excess shareholder base is also negative and significant. Thus, we have strong evidence in Table 4 that the shareholder base
negatively impacts risk-taking by firms in China.
Although it is not the main focus of this paper, Table 4 also provides information about other conventional determinants of risk-
taking activity. The regression coefficients on these determinants have signs that are largely consistent with those identified using
U.S. data. For example, firm size has an expected positive coefficient as larger firms are likely to invest more. The coefficient on
earnings (EBITDA/TA) is positive and significant at the one percent level in columns (1) to (6), suggesting that higher earnings
enable firms to invest more and assume more risk. Similar to prior studies, sales growth has a positive effect on capital expenditures

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Table 5
Effect of the shareholder base on the standard deviation of return on assets (σ[ROA(t,t+4)]).

(1) (2) (3) (4) (5) (6)

Raw Industry mean- Industry median- Raw Industry mean- Industry median-
σ[ROA(t,t+4)] adjusted adjusted σ[ROA(t,t+4)] adjusted adjusted
σ[ROA(t,t+4)] σ[ROA(t,t+4)] σ[ROA(t,t+4)] σ[ROA(t,t+4)]

Intercept 4.1321*** 4.8541*** 4.6970*** 4.3261*** 5.1563*** 5.0234***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Raw Sh base −0.1182** −0.1462*** −0.1589***

(0.0295) (0.0056) (0.0028)
Excess Sh base −0.0959 −0.1502** −0.1616***
(0.1096) (0.0103) (0.0061)

Firm age 0.1617 0.1303 0.1307 0.1119 0.0700 0.0651

(0.1120) (0.1826) (0.1849) (0.2603) (0.4639) (0.4988)

B/M −0.6033*** −0.5843*** −0.5671*** −0.6833*** −0.6728*** −0.6638***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

1-year return 0.0070 0.0278 0.0268 0.0111 0.0343 0.0338

(0.9043) (0.6241) (0.6391) (0.8485) (0.5450) (0.5540)

Cash 0.0776 0.0362 0.0304 0.0861* 0.0480 0.0433

(0.1091) (0.4415) (0.5211) (0.0747) (0.3053) (0.3595)

EBITDA 0.1070*** 0.0789** 0.0771** 0.1101*** 0.0806** 0.0790**

(0.0097) (0.0399) (0.0462) (0.0077) (0.0357) (0.0411)

Growth rate 0.0799 −0.5710 −0.5437 0.3451 −0.2879 −0.2347

(0.9639) (0.7412) (0.7550) (0.8445) (0.8673) (0.8925)

Leverage −0.0145*** −0.0147*** −0.0151*** −0.0146*** −0.0148*** −0.0152***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Firm size −0.0619 −0.0683 −0.0529 −0.1243*** −0.1475*** −0.1388***

(0.2049) (0.1510) (0.2702) (0.0021) (0.0002) (0.0004)

State −0.0929 −0.0035 0.0030 −0.1011 −0.0131 −0.0074

(0.4229) (0.9751) (0.9792) (0.3830) (0.9081) (0.9482)
Industry Yes No No Yes No No
dummies
Year dummies Yes Yes Yes Yes Yes Yes
Adj. R2 0.0378 0.0288 0.0291 0.0376 0.0287 0.0289
N 8,295

P-values are in brackets. *, ** and *** denote significance at the 10%, 5% and 1% levels, respectively.

(John et al., 2008). On the other hand, leverage has a significant negative effect on capital expenditures in columns (1)–(6). Firm age
also has a significant negative effect on CapEx_TA; a likely reason is that older firms have fewer growth opportunities. Consistent with
prior studies, state ownership has a negative effect on CapEx_TA. The result suggests firms that are controlled by the state are more
conservative regarding investment decisions.
The regression results of Eq. (2) with σ[ROA(t,t+4)] as the dependent variable are reported in Table 5. In columns (1) to (3),
results based on the raw shareholder base (LogSH) are reported. In columns (4) to (6), results based on the excess shareholder base
are reported. As can be seen in Table 5, the shareholder base has a strong negative effect on σ[ROA(t,t+4)]. The coefficient on the
shareholder base is negative and significant at the five percent level in column (1) and at the one percent level in columns (2) and (3);
it is significant at the five percent level in columns (5) and (6). The results are comparable to those observed in Table 4 where the
dependent variable is capital expenditures. The economic impact of the shareholder base on σ[ROA(t,t+4)] is considerable. For
example, in column (1) the coefficient on the raw shareholder base is −0.1182 with a p-value of 0.0295. Evaluating σ[ROA(t,t+4)]
at its mean value, an increase in LogSH from the first to the third quartile of the distribution results in a 22.71% decrease in the
standard deviation of ROA. Similar results can be observed in columns (5) and (6) where the excess shareholder base is used. Over all,
the results in Table 5 show that a larger shareholder base is associated with lower levels of σ[ROA(t,t+4)] for firms in China,
implying that firm resources may have been diverted from firm investment activity as the shareholder base expands. The results are
consistent with the views of Demsetz (1983) and Claessens (2002) that agency conflicts escalate as the shareholder base expands
in the presence of concentrated firm ownership, resulting in the diversion of resources to satisfy the private motives of insiders. The

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Table 6
Effect of the shareholder base on the standard deviation of return on equity (σ[ROE(t,t+4)]).

(1) (2) (3) (4) (5) (6)

Raw Industry mean- Industry median- Raw Industry mean- Industry median-
σ[ROE(t,t+4)] adjusted adjusted σ[ROE(t,t+4)] adjusted adjusted
σ[ROE(t,t+4)] σ[ROE(t,t+4)] σ[ROE(t,t+4)] σ[ROE(t,t+4)]

Intercept 4.7910*** 6.3611*** 6.2869*** 5.1231*** 6.8414*** 6.7631***

(0.0007) (0.0000) (0.0000) (0.0003) (0.0000) (0.0000)

Raw Sh base −0.1687** −0.1942*** −0.1977***

(0.0288) (0.0090) (0.0084)
Excess Sh base −0.1848** −0.2686*** −0.2624***
(0.0301) (0.0011) (0.0016)

Firm age 0.1052 0.1082 0.1281 0.0331 0.0269 0.0456

(0.4670) (0.4321) (0.3561) (0.8146) (0.8417) (0.7369)

B/M −0.8092*** −0.7781*** −0.7846*** −0.9052*** −0.8704*** −0.8825***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

1-year return 0.0405 0.0623 0.0572 0.0489 0.0744 0.0690

(0.6230) (0.4350) (0.4772) (0.5529) (0.3512) (0.3914)

Cash 0.1293* 0.0617 0.0684 0.1420** 0.0785 0.0854

(0.0604) (0.3510) (0.3048) (0.0388) (0.2338) (0.1991)

EBITDA 0.0559 0.0633 0.0604 0.0599 0.0650 0.0623

(0.3422) (0.2416) (0.2675) (0.3077) (0.2287) (0.2528)

Growth rate 1.6076 1.1846 1.2860 1.9403 1.4950 1.6124

(0.5219) (0.6265) (0.6003) (0.4378) (0.5376) (0.5097)

Leverage 0.0270*** 0.0260*** 0.0255*** 0.0269*** 0.0258*** 0.0253***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Firm size −0.0975 −0.1452** −0.1404** −0.1878*** −0.2521*** −0.2489***

(0.1602) (0.0301) (0.0376) (0.0011) (0.0000) (0.0000)

State 0.0207 0.0521 0.0794 0.0101 0.0405 0.0674

(0.9003) (0.7436) (0.6209) (0.9509) (0.7992) (0.6743)
Industry Yes No No Yes No No
dummies
Year dummies Yes Yes Yes Yes Yes Yes
Adj. R2 0.0395 0.0338 0.0336 0.0395 0.0343 0.0339
N 8,295

P-values are in brackets. *, ** and *** denote significance at the 10%, 5% and 1% levels, respectively.

results are also consistent with the existing literature that firms in China suffer from significant expropriations by insiders (Aharony,
Wang & Yuan, 2010; Jiang, Lee, & Yue, 2010).
In Table 6, regression results using Eq. (2) with the dependent variable measured by σ[ROE(t,t+4)] are reported. ROE is the
ratio of net income to shareholders’ equity. The standard deviation of ROE reflects both the riskiness of a firm's projects and the
additional risk associated with the use of leverage in the capital structure. The measure has been used in previous studies as an
indicator of firm riskiness (Faccio et al., 2011). As can be seen in Table 6, the coefficient on the raw shareholder base is negative
and significant at the five percent level in columns (1) to (3). The coefficient on the excess shareholder base is negative and
significant at the five percent level in column (4); it is significant at the one percent level in columns (5) and (6). The results imply
that lower levels of firm risk-taking are associated with a larger shareholder base. The results in Table 6 are similar to those in
Tables 5 and 6, that is, firms in China cut back risk-taking activities when the shareholder base expands. Since σ[ROE(t,t+4)] also
reflects the risk associated with firm leverage, a negative coefficient on the raw (excess) shareholder base implies that firms in
China also reduce leverage as the shareholder base expands. That is, firm leverage declines as the agency conflict between insiders
and outsiders escalates in China. As reported in Section 2.1, the average state ownership of firm in China remains at a relatively
high level of about 40% in 2013 in China despite an expanding shareholder base. Based on a sample of French firms, Bruslerie and
Latrous (2012) report that firm leverage declines when the ownership of the controlling shareholders exceeds 40%. The authors
argue that it is because the controlling shareholders want to avoid the monitoring effect of debt and deter potential financial
distress associated with a high leverage so that they could keep on expropriating outsiders undisturbed. The results in Table 6
support the view of Bruslerie and Latrous (2012).

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Table 7
Effect of the shareholder base on dividend payout.

(1) (2) (3) (4) (5) (6)

Dependent variable Raw dividend Industry mean- Industry median- Raw dividend Industry mean- Industry median-
payout ratio adjusted dividend adjusted dividend payout ratio adjusted dividend adjusted dividend
payout ratio payout ratio payout ratio payout ratio

Intercept −0.0070 −0.1061*** −0.0898*** −0.0083 −0.1070*** −0.0916***

(0.8303) (0.0008) (0.0046) (0.7984) (0.0007) (0.0038)

Raw shareholder 0.0013 0.0007 0.0015

base (0.4741) (0.7176) (0.4184)

Excess shareholder 0.0000 0.0001 0.0002

base (0.9940) (0.9583) (0.9313)

Firm age 0.0014 0.0002 0.0031 0.0019 0.0005 0.0037

(0.7067) (0.9539) (0.3788) (0.5962) (0.8952) (0.2888)

B/M 0.0075*** 0.0067** 0.0065** 0.0085*** 0.0072*** 0.0077***

(0.0082) (0.0164) (0.0191) (0.0006) (0.0030) (0.0016)

1-year return −0.0039* −0.0045** −0.0046** −0.0039* −0.0045** −0.0047**

(0.0529) (0.0247) (0.0218) (0.0502) (0.0244) (0.0208)

Cash 0.0020 0.0095 0.0109 0.0010 0.0090 0.0098

(0.8572) (0.3770) (0.3143) (0.9295) (0.3987) (0.3638)

EBITDA 0.0270*** 0.0242*** 0.0263*** 0.0269*** 0.0242*** 0.0262***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

RE −0.0091 −0.0091 −0.0084 −0.0090 −0.0091 −0.0083

(0.4182) (0.4181) (0.4587) (0.4233) (0.4198) (0.4629)

Leverage 0.0003*** 0.0002*** 0.0004*** 0.0003*** 0.0002*** 0.0004***

(0.0001) (0.0014) (0.0000) (0.0001) (0.0014) (0.0000)

Firm size 0.0076*** 0.0071*** 0.0065*** 0.0082*** 0.0074*** 0.0072***

(0.0000) (0.0000) (0.0001) (0.0000) (0.0000) (0.0000)

State −0.0032 −0.0035 −0.0073 −0.0031 −0.0035 −0.0072

(0.5462) (0.5088) (0.1732) (0.5635) (0.5158) (0.1813)
Industry dummies Yes No No Yes No No
Year dummies Yes Yes Yes Yes Yes Yes
Adj. R2 0.0893 0.0376 0.0424 0.0893 0.0376 0.0424
N 13,059

P-values are in brackets. *, ** and *** denote significance at the 10%, 5% and 1% levels, respectively.

Summarizing the results in Tables 4–6, we have strong evidence supporting Hypothesis 1b that a larger shareholder base is
associated with lower levels of risk-taking by firms in China.

4.2. The shareholder base and dividend payout

Bodnaruk and Ostberg (2013) find that firms with larger shareholder bases have higher payout levels. They attribute the positive
relation between the shareholder base and dividend payout to the lower cost of external financing faced by firms with a large
shareholder base. In this section, we examine the effect of the shareholder base on the dividend payouts of firms in China. Our
regression equation is

Dividend payout ratioit = β0i + β1iShareholder Base it −1 + β2iXit −1

+ Industry dummies + Year dummies + εit (3)

where dividend payout ratio is measured by cash dividends divided by sales. The control variables are same as those in Eq. (2). In
addition, retained earnings to total assets (RE/TA) is added to the independent variables in order to be consistent with the literature
(Chay & Suh, 2009).
Table 7 reports the regression results of Eq. (3). In columns (1)–(3), the raw shareholder base (LogSH) is used. In columns (4)–(6),
the excess shareholder base (ExShBase) is used. The coefficient on the shareholder base is positive, albeit insignificant, in columns (1)–
(6). Despite the positive relation between the shareholder base and dividend payouts of firms in China is consistent with the evidence on

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US firms reported by Bodnaruk and Ostberg (2013), the underlying motivation may be different for firms in China. As concluded by
many researchers, dividends represent expropriations by insiders of firms in China (Cheng et al., 2009; Chen et al., 2009; Huang et al.,
2011; Lin et al., 2010; Liu et al., 2014). Accordingly, the positive relation between the shareholder base and dividend payouts of firms in
China could imply that insiders continue their expropriations of the firm as agency conflicts between insiders and outsiders escalate in
the face of an expanding shareholder base. This interpretation is consistent with the results observed in Tables 4–6 on the effect of the
shareholder base on the risk-taking behavior of firms in China. In a cross-country study, Faccio et al. (2001) report that high dividend
payouts alleviate the expropriation of outsiders by insiders in Europe but exacerbate it in Asia. Thus, the results reported in Table 7 are
consistent with the view of Faccio et al. (2001). In addition, given the fact that the shareholder base does not have a negative and
significant coefficient in Table 7, the result is consistent with the implication that an expanding shareholder base is unable to impose
monitoring effects on dividend payout and mitigate the expropriation of individual investors by insiders in China.

4.3. The shareholder base and firm value

Given the observed effects of the shareholder base on firm policies, an investigation of the effect of the shareholder base on firm
value in China is warranted. We use the firm valuation model of Fama and French (1998) for the investigation. The model has been
shown to give robust results under different conditions. To take into consideration the effects of the shareholder base on firm
decisions, we also add a shareholder base interaction variable to the independent variables of the model. The shareholder base
interaction variable is computed as shareholder base*industry-adjusted CapEx/TA, shareholder base*industry-adjusted σ[ROA(t, t
+4)], shareholder base* industry-adjusted σ[ROE(t, t+4)], and shareholder base*industry-adjusted dividend payout ratio,
respectively. Our model has the following specification:

MarketValueit = β0i + β1ishareholderbaseit −1 + β2iShareholderbaseInteractionVariableit −1 + β3iXit −1 + Industrydummies

+ Yeardummies + εit (4)

The dependent variable, Market Valueit , is computed as market capitalization plus total debt to total assets (MV/TA) as in
Pinkowitz, Stulz and Williamson (2006) and Bates, Kahle and Stulz (2009). Xit represents the control variables used by Fama and
French (1998) in the regression. They include past changes, future changes and current levels of earnings, financial expenses,
dividends, as well as past and future changes in assets and future changes in market value, all scaled by the total assets of the firm. We
also control for industry and year fixed effects in the regression.
Regression results on the effect of the shareholder base on firm value using Eq. (5) are reported in Table 8. In columns (1) to
(4), the raw shareholder base is used. In columns (5) to (8), the excess shareholder base is used. The focus of attention in this
table is the coefficient on the shareholder base and the coefficient on the shareholder base interaction variable. The results show
that the shareholder base has a negative effect on firm value in China as the coefficient on the shareholder base in columns (1) to
(8) is negative and significant with a p-value of 0.0000. This finding is contradictory to the implication of the investor
recognition hypothesis of Merton (1988) that firm value increases as the number of shareholder goes up. The finding is also
contradictory to the evidence based on US firms that stock liquidity has a positive effect on firm value (Edmans, 2009; Fang,
Noe, & Tice, 2009). The results in Table 8 imply there is something unique about the firms in China that leads to a negative
relation between the shareholder base and firm value. A plausible reason is that a larger shareholder base in China implies
higher levels of agency conflicts and investors are concerned about the motives of the insiders. This explanation is consistent
with the views of Demsetz (1983) and Claessens (2002) that firms with concentrated ownership and a large number of small
investors are likely to have significant agency costs. The explanation is also supported by the results reported in Tables 4–7.
Despite a larger shareholder base in China also likely implies the presence of more institutional investors, a large body of
literature argues that institutional investors in emerging markets tend to herd and engage in sentiment-driven trading (Choe,
Kho & Stulz 1999; Kaminsky, Lyons & Schmukler 2004; Chen, Wang & Lin 2008). These findings suggest that the presence of
institutional investors in the expanding shareholder base of China is not necessarily beneficial to firm value. In addition, Fang,
Tian, and Tice (2014) find evidence based on US firms that a higher stock liquidity implies the higher presence of institutional
investors who do not monitor. Thus, the negative effect of the shareholder base on firm value in China is consistent with the
agency argument that firm value declines as the expropriation by insiders escalates. Regarding the interaction between the
shareholder base and firm activity, the coefficient on the shareholder base interaction variable is also negative in columns (1)–
(8) despite it is only significant in column (3). In column (3), the coefficient on the interaction variable shareholder base
*σ[ROA(t,t+4)] is −0.0038 with a p-value of 0.0000. Compared to the value of −0.3618 for the coefficient on the shareholder
base in this column, the interaction effect between the shareholder base and σ[ROA(t,t+4)] magnifies the negative effect of the
shareholder base on firm value by about ten percent. In sum, the results in Table 8 present strong evidence supporting
Hypothesis 3b that the shareholder base has a negative impact on firm value in China. The finding may have important policy
implications as China is in the process of developing its capital markets. The results suggest that regulations and corporate
governance practices in China must be improved before investors are attracted to the capital markets and are able to accept firm
ownership with confidence. Consistent with this view, Lins and Warnock (2004) find that shareholders are only attracted to
firms in emerging countries that have good governance practices.

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Table 8
Effect of the shareholder base on firm value.

Raw shareholder base Excess shareholder base

(1) (2) (3) (4) (5) (6) (7) (8)

Shareholder base −0.3541*** −0.3548*** −0.3618*** −0.3554*** −0.4498*** −0.4383*** −0.4420*** −0.4499***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

SH*industry-adjusted capex/ta −0.0648 −0.1485

(0.2372) (0.8780)

SH* industry-adjusted σ [ROA] 0.0007 −0.0139

(0.7581) (0.2128)

SH* industry-adjusted σ [ROE] −0.0038*** −0.0055

(0.0000) (0.4608)

SH*industry-adjusted dividend payout −0.1232 −0.3836

(0.5591) (0.5355)

Current Earnings 8.8061 8.0434 3.5851 8.6836 8.8388 8.7782 8.8132 8.8293
(0.0000) (0.0002) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Past changes in Earnings 0.0593 0.0588 0.0612 0.0594 0.0606 0.0617 0.0612 0.0609
(0.3416) (0.3456) (0.3257) (0.3413) (0.3320) (0.3228) (0.3270) (0.3291)

Future changes in Earnings 1.2860 1.3070 1.2053 1.3019 1.2848 1.2670 1.2790 1.2838
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Dividend payout ratio 0.0685 0.0601 0.0295 1.3849 −0.0167 −0.0120 −0.0129 0.0936
(0.7572) (0.7866) (0.8942) (0.5424) (0.9398) (0.9568) (0.9537) (0.7415)

Past changes in Div payout ratio −0.5154 −0.4530 −0.3986 −0.4876 −0.4633 −0.4894 −0.4784 −0.5333
(0.7394) (0.7702) (0.7968) (0.7530) (0.7651) (0.7523) (0.7577) (0.7315)

Future changes in Div payout ratio −2.6252 −2.6216 −2.4038 −2.5701 −2.8787 −2.8863 −2.8959 −2.8113
(0.1593) (0.1602) (0.1971) (0.1684) (0.1233) (0.1222) (0.1210) (0.1330)

Current financial expense −1.9922 −2.3234 −7.2312 −2.3146 −9.5300 −9.4273 −9.4318 −9.6294
(0.0097) (0.0078) (0.1284) (0.0078) (0.0395) (0.0416) (0.0416) (0.0376)

Past changes in financial expense −0.0294 −0.0148 −0.9077 −0.0323 −1.2200 −1.2222 −1.2430 −1.2172
(0.9944) (0.9972) (0.8275) (0.9938) (0.7698) (0.7694) (0.7656) (0.7703)

Future changes in financial expense −0.8406 −1.7825 −0.4372 −1.7141 −1.4845 −1.4404 −1.4641 −1.6544
(0.0124) (0.0059) (0.0147) (0.0061) (0.0072) (0.0075) (0.0073) (0.0065)

Past changes in Assets −0.0056 −0.0056 −0.0057 −0.0056 −0.0060 −0.0061 −0.0061 −0.0061
(0.0974) (0.0978) (0.0904) (0.0968) (0.0726) (0.0697) (0.0710) (0.0717)

Future changes in Assets −0.0703 −0.0721 −0.0648 −0.0718 −0.0609 −0.0594 −0.0604 −0.0606
(0.0159) (0.0134) (0.0262) (0.0137) (0.0367) (0.0417) (0.0382) (0.0376)

Future changes in Market Value −0.2066 −0.2066 −0.2063 −0.2066 −0.2066 −0.2066 −0.2066 −0.2066
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
2
R 0.2564 0.2563 0.2579 0.2564 0.2549 0.2550 0.2549 0.2549
N 10038

4.4. Robustness tests

4.4.1. The effect of foreign owners

In our first robustness test, we want to determine if the presence of foreign owners could mitigate the agency costs associated with
an expanding shareholder base in China. It is likely that foreign owners are more interested in maximizing the value of their
investments than aligning their objectives with those of the state officials. Thus, the presence of foreign owners may provide a
monitoring function on firm behavior in China. Accordingly, we expect the effect of an expanding shareholder base in heightening
agency problems to be less significant when foreign owners are present.
In Panel A of Table 9, we report only the regression coefficient on the shareholder base for brevity sake. We divide the sample into
two groups, those with foreign owners and those without foreign owners. As can be seen in Panel A, the negative effect of the raw

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Table 9
Effect of the shareholder base in the presence of foreign owners.

Panel A. Effects of the shareholder base on firm risk-taking behavior and dividend payout

With foreign owners Without foreign owners

Raw shareholder base Excess shareholder base Raw shareholder base Excess shareholder base

Estimate Pr > |t| Estimate Pr > |t| Estimate Pr > |t| Estimate Pr > |t|

Capex raw −0.0037 (0.1250) 0.0001 (0.7066) −0.0053*** (0.0000) −0.0015 (0.1018)
Capex-mean-adj −0.0043* (0.0631) −0.0005 (0.8498) −0.0058*** (0.0000) −0.0019** (0.0389)
Capex-median-adj −0.0046** (0.0487) −0.0007 (0.7576) −0.0058*** (0.0000) −0.0017* (0.0525)
Stdroa(t,t+4) 0.0224 (0.8405) 0.0647 (0.5954) −0.0981* (0.0973) −0.0674 (0.3082)
Stdroa-mean-adj(t,t+4) −0.032 (0.7525) −0.1004 (0.3567) −0.1307** (0.0230) −0.1186* (0.0663)
Stdroa-median-adj(t,t+4) −0.0542 (0.6029) −0.1221 (0.2748) −0.1408** (0.0150) −0.127* (0.0510)
Stdroe(t,t+4) −0.02 (0.9194) −0.2185 (0.3137) −0.1399* (0.0935) −0.1237 −0.1849
Stdroe-mean-adj(t,t+4) −0.0551 (0.7597) −0.3859** (0.0454) −0.1844** (0.0217) −0.2185** (0.0155)
Stdroe-median-adj(t,t+4) −0.0999 (0.5863) −0.4023be** (0.0409) −0.1839** (0.0231) −0.2094** (0.0213)
Div raw −0.0142** (0.0001) −0.0173** (0.0000) 0.0032 (0.1074) 0.0018 (0.4368)
Div-mean-adj −0.0169*** (0.0000) −0.018*** (0.0000) 0.0025 (0.1983) 0.0018 (0.4176)
Div-median-adj −0.0128*** (0.0003) −0.0144*** (0.0001) 0.0031 (0.1175) 0.0016 (0.4808)

Panel B. Effect of the shareholder base on firm value

Raw Shareholder Base

With foreign owners Without foreign owners

Ln(shareholder base) −0.3013*** −0.2993*** −0.3038*** −0.3078*** −0.4161*** −0.4172*** −0.4301*** −0.4166***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
SH*industry-adjusted capex/ta −0.1054 −0.0613***
(0.2149) (0.0013)
SH* industry-adjusted Std dev of ROA −0.0078** −0.0025***
(0.0292) (0.0013)
SH* industry-adjusted Std dev of ROE −0.0031*** −0.0054***
(0.0024) (0.0000)
SH*industry-adjusted dividend payout 0.0555 −0.0766
ratio (0.8247) (0.3083)

Excess Shareholder Base

With foreign owners Without foreign owners

Excess shareholder base −0.55*** −0.5358*** −0.5534*** −0.5184*** −0.2783*** −0.2602*** −0.2633*** −0.2803***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
SH*industry-adjusted capex/ta 1.0431 −0.486
(0.3739) (0.1732)
SH* industry-adjusted Std dev of ROA 0.0000 −0.0228***
(0.9979) (0.0000)
SH* industry-adjusted Std dev of ROE 0.0086 −0.0109***
(0.3658) (0.0001)
SH*industry-adjusted dividend payout −0.6441 −0.3206
ratio (0.3473) (0.2151)

P-values are in brackets. *, ** and *** denote significance at the 10%, 5% and 1% levels, respectively.

shareholder base on CapEx/TA is insignificant for firms with foreign owners whereas the negative effect of the raw shareholder base
on CapEx/TA is highly significant for firms without foreign owners. Similarly, the effect of the raw shareholder base on σ[ROA(t,t
+4)] and σ[ROE(t,t+4)]) is insignificant for firms with foreign owners whereas the effect of the raw shareholder base on σ[ROA(t,t
+4)] and σ[ROE(t,t+4)]) is negative and significant for firms without foreign owners. The results are consistent with our earlier
findings that insiders expropriate small investors in China. In a major departure from the result in Table 7, the raw shareholder base
has a significant negative effect on dividend payout among firms with foreign owners. That is, foreign owners help the shareholder
base perform monitoring functions on dividend payout. The effect of the shareholder base is, however, insignificant among firms
without foreigners. In sum, the results based on the raw shareholder base support our view that an expanding shareholder base in
China is likely associated with escalating agency conflicts between the controlling shareholders and small investors. Specifically, a
large shareholder base is not beneficial to firms in China. The results based on the excess shareholder base is slightly stronger. For
example, the coefficient on the excess shareholder base in the CapEx regressions is negative and significant for firms without foreign
owners. The results of the σ[ROA(t,t+4)] and σ[ROE(t,t+4)]) regressions provide strong support that the effect of the shareholder

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Table 10
Effect of the shareholder base in the presence of institutional investors.

Panel A. Effects of the shareholder base on risk-taking behavior and dividend payout

DV Low institutional ownership High institutional ownership

raw excess raw excess

Estimate Pr > |t| Estimate Pr > |t| Estimate Pr > |t| Estimate Pr > |t|

Capex raw −0.0056*** (0.0000) −0.0016 (0.2106) −0.0041*** (0.0007) −0.0009*** (0.5147)
Capex-mean-adj −0.0055*** (0.0000) −0.0014 (0.2717) −0.0046*** (0.0001) −0.0013 (0.3272)
Capex-median-adj −0.0057*** (0.0000) −0.0016 (0.2302) −0.0046*** (0.0001) −0.0012 (0.3817)
Stdroa(t,t+4) −0.1714* (0.0581) −0.1106 (0.2615) −0.0715 (0.6227) −0.0669 (0.6778)
Stdroa-mean-adj(t,t+4) −0.2124** (0.0163) −0.1681* (0.0805) −0.0948 (0.5049) −0.1214 (0.4459)
stdroa-median-adj(t,t+4) −0.2257** (0.0111) −0.1693* (0.0797) −0.1028 (0.4726) −0.1356 (0.3976)
Stdroe(t,t+4) −0.1609 (0.2138) −0.1968 (0.1626) −0.0956 (0.6243) −0.0404 (0.8519)
stdroe-mean-adj(t,t+4) −0.2316* (0.0650) −0.3238** (0.0176) −0.0771 (0.6856) −0.0921 (0.6661)
stdroe-median-adj(t,t+4) −0.2341* (0.0638) −0.3043** (0.0267) −0.0838 (0.6616) −0.0879 (0.6818)
Div raw 0.0002 (0.9627) −0.0002 (0.9666) 0.0018 (0.3111) −0.0009 (0.6705)
Div-mean-adj 0.0004 (0.9114) 0.0005 (0.9014) 0.0008 (0.6448) −0.0007 (0.7365)
Div-median-adj 0.0011 (0.7771) 0.0005 (0.9025) 0.0016 (0.3498) −0.0009 (0.6715)

Panel B. Effect of the shareholder base on firm value among firms with low and high institutional ownership

Low High

Ln(shareholder base) −0.2154*** −0.2229*** −0.2423*** −0.217*** −0.2967*** −0.2933*** −0.2888*** −0.2965***
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
SH*industry-adjusted capex/ta −0.1065*** −0.0561
(0.00) (0.12)
SH* industry-adjusted Std dev of ROA −0.0058*** −0.0037**
(0.00) (0.01)
SH* industry-adjusted Std dev of ROE −0.0055*** −0.004**
(0.00) (0.00)
SH*industry-adjusted dividend payout 0.0471 −0.388*
ratio (0.64) (0.09)

Low High

Excess shareholder base −0.124*** −0.1255*** −0.1264*** −0.1207*** −0.2013*** −0.0943** −0.1325*** −0.1941***
(0.00) (0.00) (0.00) (0.00) (0.00) (0.02) (0.00) (0.00)
SH*industry-adjusted capex/ta −0.89 0.0589
(0.12) (0.92)
SH* industry-adjusted Std dev of ROA −0.0179** −0.0422***
(0.02) (0.00)
SH* industry-adjusted Std dev of ROE −0.0104** −0.0165***
(0.04) (0.00)
SH*industry-adjusted dividend payout −0.4247 −1.1094**
ratio (0.20) (0.02)

P-values are in brackets. *, ** and *** denote significance at the 10%, 5% and 1% levels, respectively.

base is mitigated by the presence of foreign owners. For example, the coefficient on the excess shareholder base is insignificant in four
of the six σ[ROA(t,t+4)] and σ[ROE(t,t+4)]) regressions for firms with foreign owners whereas the coefficient is negative and
significant in four of the six σ[ROA(t,t+4)] and σ[ROE(t,t+4)]) regressions for firm without foreign owners. That is, without the
presence of foreign owners, firms with an excess shareholder base are less willing to pursue risk-taking activities. This is consistent
with the main results reported earlier in Tables 4–6. Regarding dividend payout, the coefficient on the excess shareholder base is
significantly negative for firms with foreign owners but is insignificant for firms without foreign owners.
In Panel B of Table 9, the negative effect of the raw shareholder base on firm value in China is smaller for firms with foreign
owners. Surprisingly, the opposite is found when the excess shareholder base is used in the equation. Overall, we have strong results
on the effects of the shareholder base on firm risk-taking behavior and dividend payout but mixed results on the effect on firm value
in Table 9 when the presence of foreign owners is taken into consideration.

4.4.2. The effect of institutional owners

As suggested earlier, the expanding shareholder base in China may include an increasing number of institutional investors that are
not related to the state. These institutional investors include mutual funds, insurance companies, and block holders of tradable shares.
A priori, we expect the presence of institutional owners to have mitigating effects on the agency conflicts between small investors and
the controlling shareholders. We examine this in the second robustness test.

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In Panel A of Table 10, we report only the regression coefficient on the shareholder base for brevity sake. We divide the sample
into two groups, those with low institutional ownership (the bottom quintile) and those with high institutional ownership (the top
quintile). As expected, it can be seen in Panel A of Table 10 that the negative effect of the raw shareholder base on σ[ROA(t,t+4)]
and σ[ROE(t,t+4)]) is insignificant for firms with high institutional ownership. The observation confirms that non-state related
institutional investors have mitigating effects on the agency problems of the shareholder base in China. However, the results in Panel
A do not show any moderating effect of institutional ownership on dividend payout. That is, institutional investors are unable to
mitigate the expropriation of firms by insiders by producing a negative effect on dividend payout. A likely reason for the conflicting
results in Panel A is that some of the institutional investors are domestic firms that can be influenced by the state. In addition, many
researchers suggest that institutional investors in emerging markets are more interested in short-term trading profits than monitoring
(Choe et al., 1999; Fang et al., 2014; Chen, Wang & Lin, 2008). Thus, the weak and conflicting results in Panel A of Table 10 suggest
that institutional investors are likely not very effective in mitigating the agency problems associated with an expanding shareholder
base in China where firms are subject to the influence of the state.
In Panel B of Table 10, we examine the effect of the shareholder base on firm value. In this panel, the inability of institutional
investors in alleviating the agency problems of an expanding shareholder base in China is clearly observed. For firms with high
institutional ownership, the coefficient on the raw shareholder base and the coefficient on the excess shareholder base are negative
and significant in all the regressions. Similar to the firms with low institutional ownership, the coefficient on the interaction between
the shareholder base and risk-taking for firms with high institutional ownership remains negative and significant. Furthermore, the
negative coefficient on the interaction between the shareholder base and dividend payout for firms with high institutional ownership
suggests that the concern regarding the motives of insiders overwhelms any positive monitoring effect that institutional investors may
have. The results suggest that investors are concerned about the agency conflicts between small shareholders and the controlling
shareholders despite the presence of institutional investors. In short, the results strongly support our view that an expanding
shareholder base in China is likely associated with escalating agency conflicts between the controlling shareholders and small
investors. Specifically, a large shareholder base is not beneficial to firms in China.

5. Conclusion

Business executives popularly believe that managing the shareholder base of a firm can lead to significant stock market benefits
for the company. Although researchers concur that the shareholder base is an important determinant of corporate decisions, research
on the shareholder base has been scant.
This study examines the effects of the shareholder base on firm behavior and firm value in China. Using a sample of 20,125 firm-
year observations of publicly traded nonfinancial companies from 1998 to 2013, we find that a large shareholder base is associated
with reduced capital expenditures, a lower standard deviation of the return on assets and a lower standard deviation of the return on
equity. Firms with a larger shareholder base are not associated with a reduction in dividend payouts. In addition, the shareholder
base is negatively associated with firm value in China. Our results are consistent with the implication that an expanding shareholder
base is not beneficial to firms in China as long as the firms are significantly controlled by the state. When the shareholder base
expands, agency conflicts escalate and insiders increase their expropriations by directing (tunneling) firm resources for private
motives. In sum, given the concentrated ownership of firms in China and the significant influence of the state, the benefits associated
with the shareholder base in developed economies do not exist in China. Investor protection must be improved before the shareholder
base can have positive effects on firms in China.

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