*5.4. Moderating E*ff*ects of Ownership Types*

The effect of ownership type on the relationship between agency cost and firm performance is reported in Table 8 State ownership is taken as a primary independent variable. A firm is described as state-owned if more than 50 percent of shares are held by the government and its affiliates. The results of the table report the adverse effect of state ownership on firm performance for both the fixed-effect model and GMM. These two sets of results are in line with the studies conducted in the Chinese context by Wei and Varela (2003) and Wei et al. (2005). According to these authors, the agency cost in state enterprises is higher, and this negatively affects the firm value. To test our third hypothesis, we introduced two interaction terms for agency costs with the state ownership variable to measure the effect on firm performance. All the interaction terms (SO × AC1, SO × FCF-AC) report negative coefficients, showing that state enterprises are significantly motivated by political motives; therefore, they focus less on performance.





percent, and 10 percent, respectively.

The effect of non-state ownership on the relationship between agency cost and firm performance is shown in Table 9. Non-state ownership has a positive impact on both performance measures, as depicted in the fixed-effect model and GMM. We introduced two interaction terms to specifically explore the effect of non-state ownership on agency–performance relationships. The interaction terms show a positive and significant moderating effect on firm performance in the fixed effect model as well as GMM. Looking at the ROA model, NSO × AC1 and NSO × AC2 have coefficients of 0.0381 and 0.0027 in the fixed-effect model, and of 0.068 and 0.0026 in GMM. The EPS model also shows positive coefficients with both fixed-effect models (FE: β = 0.019, *p* < 0.01; GMM: β = 0.005, *p* < 0.01) and GMM (FE: β = 0.597, *p* < 0.05; GMM: β = 0.028, *p* < 0.1). These results are in alignment with the study conducted by Ding et al. (2007), who found better performance by non-state enterprises as compared to state-owned ones. Based on the above analysis, we support our third hypothesis, that state ownership has an adverse effect on the agency–performance relationship. In contrast, non-state ownership positively moderates the agency–performance relationship.

#### *5.5. Additional Analyses*

## Alternative Measures of Agency Costs

Tables 10 and 11 display the alternative measures of agency cost incorporated into our analysis. We have taken three variables, namely, earnings management using the absolute value of discretionary accruals as a proxy denoted by EM; research and development expenditures, denoted by R&D-AC; and the first principle component, obtained through principal component analysis using four agency cost proxies used in this paper, denoted by PC-AC. The results show the positive moderating effect of alternative measures of agency cost and corporate governance (R&D-AC × CGQ, EM × CGQ, and PCA-AC × CGQ) on ROA and EPS for both the fixed-effect model and the system GMM approach. These results again strengthen our hypothesis that corporate governance positively moderates the agency–performance relationship.

Tables 10 and 11 also explore the moderating effect of ownership concentration on the agency– performance relationship. Again, from the results, we can accept our alternative hypothesis that the ownership concentration has a positive influence on the agency–performance relationship. Ownership structure has a negative moderating effect on the agency–performance association when the firms are state-owned. On the contrary, we witness a positive moderating effect when the ownership rests in the hand of non-state entities. These results support our third hypothesis that SOE has a negative impact on the agency–performance relationship, while NSOE has a positive moderating effect.



percent, and 10 percent, respectively.


Baseline models with alternative measure of agency

costs.

**Table**

**10.**



Note:percent, and 10 percent, respectively.


**11.**Results of baseline models with alternative measure of agency costs.

**Table**



 Table 11 reports the regression results from estimating Equations (1) and (2), respectively. Variable definitions are provided in Table 2. \*, \*\*, signify *p*-values at 1 percent, 5 percent, and 10 percent, respectively.

#### **6. Summary and Conclusions**

Emerging markets with weak investor protection have much-execrated agency problems as compared to developed markets. The sources and types of agency cost differ in emerging economies. The purpose of this study was to investigate the effect of corporate governance quality and ownership concentration on the relationship between agency cost and firm performance. A-share listed firms in China were taken as a sample. Both the fixed-effect model and dynamic panel generalized method of moment estimation were employed in order to cater for the unobserved endogeneity problem. The results show that agency cost is negatively related to firm performance, while corporate governance and ownership concentration enhance firm performance. When corporate governance and ownership concentration were taken as moderating variables, we found a positive impact on the agency–performance relationship.

We also studied the effect of ownership type on the association between agency cost and firm performance. Non-state ownership positively moderated the relationship between agency cost and firm performance, while the agency cost kept its negative sign when the state ownership was taken as a moderating variable. Alternative measures of independent variables were also considered for the robustness of our results, such as the absolute value of discretionary accruals, denoted as (EM), research and development expenditures (R&D-AC), and first principle component (PCA-AC) generated through the principal component analysis of agency cost.

This study adds to the literature on corporate governance, specifically with respect to emerging economies. China is one of the largest emerging economies, and possesses a unique corporate governance system. Most of the companies are state owned, and are characterized by political influence and corporate expropriation. By incorporating effective corporate governance mechanisms, Chinese listed firms can enhance their financial performance. The theoretical evidence on ownership structures postulates that concentrated ownership can help firms to reduce agency problems. The results of this study show that concentrated ownership aligns the interests of managers and shareholders, hence increasing the overall performance of firms. Our study divides the ownership structure of Chinese listed firms into state and non-state. Studies on emerging economies have shown that non-state firms can effectively curtail agency costs (Ding et al. 2007). The results of this study show that the performance of Chinese listed firms is enhanced when they are owned by non-state entities. State ownership has a negative impact on the agency–performance relationship.

This study supports the literature in concluding that agency cost and firm performance are negatively related in Chinese listed firms. Investors should keep in mind the proxies of agency cost when choosing a specific stock. Secondly, the abuse of managerial appropriation is higher in state-held firms compared to non-state firms. Policymakers can use these results to devise the investor protection rules so that managerial appropriation can be minimized.

In summary, our results support all of our hypotheses, indicating a positive moderating effect of corporate governance quality (H1) and ownership concentration (H2) on the relationship between agency cost and firm performance. Additionally, non-state (state) ownership of companies positively (negatively) moderates the agency–performance relationship (H3).

Our study does have certain limitations. First, in constructing the corporate governance index, we tried to take account of all of the agency-mitigating governance variables. However, due to data unavailability, we dropped several governance variables, such as CEO compensation (instead, we used top three compensation), stock options, independent director dissent report (although this data is present on CSMAR, it lacks the data of financial statements), and audit committee (CSMAR contains the total committee data, but does not further elaborate), to name several.

**Author Contributions:** Conceptualization and data curation, H.u.R.K.; formal analysis and original draft, W.B.K.; validation, O.A.H.; writing—review and editing, N.M. and K.S. All authors have read and agreed to the published version of the manuscript.

**Funding:** This research received no external funding.

**Acknowledgments:** The authors are grateful to anonymous MDPI referees and editors.

**Conflicts of Interest:** The authors declare no conflict of interest.





