Governance role of secondary shareholders: A study of Chinese outward foreign direct investment

Lin Cui
EABER Working Paper Series, No 77
This study examines the effects of institutional and foreign ownership on the outward foreign direct investment (FDI) of Chinese firms. Based on agency theory and the resource-based view, we argue that secondary shareholders, i.e., institutional and foreign shareholders, are active and effective governance forces in Chinese firms. They promote and support Chinese firms to engage in outward FDI through their monitoring and resource roles. Their governance effect, however, may be hindered by the power of CEOs as a result of principalprincipal conflicts. Our empirical study of 224 Chinese listed firms revealed that institutional and foreign ownership is positively associated with the outward FDI propensity of Chinese firms. The positive relationship between institutional ownership and outward FDI propensity weakens when CEO power increases. There was, however, no support for the moderating effect of CEO power on the relationship between foreign ownership and outward FDI propensity.