**H3.** *Ownership concentration moderates the agency–performance relationship*.

## 3.2.4. Ownership Type, Agency Cost, and Firm Performance

Although ownership concentration has a significant effect on alleviating the agency problem, different studies have shown that it depends upon the type of majority shareholder. The objective of the government is to provide employment and social solidity in the economy. In this way, a conflict of interest arises between state-owned enterprises and shareholders (Chong-En et al. 2002). As illustrated by Gunasekarage et al. (2007), the performance of firms decreases if the ultimate shareholder is the state. State-owned companies have substantial market power, easy access to finance, and less monitoring, which makes them difficult to default (Li et al. 2008). Keeping in view the agency perspective, many researchers have found a negative relationship between state ownership and firm performance (Chen 2001; Jia et al. 2005; Wei and Varela 2003; Xu and Wang 1999).

Clarke (2003), in his article "Corporate Governance in China: An Overview", demarcated the objectives of state-owned firms as the generation of employment, direct control over strategic industries, and politically motivating employment. This results in state-owned firms having a suboptimal level of performance and higher agency costs. According to Xu and Wang (1999), the ownership concentration in Chinese listed companies is positively related to firm performance. Additionally, state-owned firms have an adverse effect on firm performance and labor productivity. Similarly, Chen et al. (2016), in their study, investigated the impact of free cash flows and corporate governance characteristics on a firm's investment decisions, using data from 865 Chinese listed firms. The results showed that state ownership concentration boosted over-/underinvestment, while firms with good governance attributes mitigated the over-/underinvestment. On a similar note, Huang et al. (2011) examined the effect of agency cost on the relationship between top executives' overconfidence and investment–cash flow sensitivity. Their results showed that investment–cashflow sensitivity was higher in state-owned companies.

Furthermore, they constructed an agency cost proxy and concluded that the agency cost was higher in state-owned companies. A comparative study between state and non-state firms and their effect on earnings management was carried out by Ding et al. (2007). They analyzed 273 privately owned and state-owned companies. They concluded that the privately owned companies tended to maximize their earnings more than the state-owned companies, despite the reported discretionary accruals reported in non-state companies exceeding those of the state-owned companies.

In summary, state-owned firms in China are characterized by having higher agency costs. Hiring in Chinese firms is based on political connections (Jonge 2014). The performance of non-state firms is better than that of state-owned firms (Hess et al. 2010). The effect of state ownership on agency cost and firm performance will be different from that of non-state ownership.

Accordingly, our next hypothesis would be as follows:

**H4.** *State (non-state) ownership negatively (positively) moderates the agency–performance relationship*.
