Aligning the Interests of Multiple Principals: Ownership Concentration and Profitability in China's Publicly-Traded Firms

Abstract

Across the social sciences, agency theory has become one of the basic frameworks through which to analyze the organizational problem of aligning interests between owners (principals) and those who carry out the work of the corporation (agents). Less often analyzed within this framework is the problem of multiple principals with different incentives and agendas. In today's global economy, this is a problem that institutional investors from around the world encounter on a regular basis. We argue that ownership concentration holds the key to dealing with the collective action problems that emerge in these circumstances. To provide empirical insight into these issues, we analyze the impact of ownership concentration in multiple-principal firms that have been listed on the Shanghai and Shenzhen stock exchanges over the last decade. Through these data, we show that the strongest factor shaping performance among this population of firms is ownership concentration: the higher a firm's ownership concentration, the better it performs, both in terms of profitability and in terms of efficiency. Further, as markets in this context have become more competitive over the last decade, overall profitability has declined, but the effect of ownership concentration has increased, suggesting that ownership concentration becomes even more important for achieving corporate goals as markets become more competitive.