China's Capital Market and Corporate Governance: The Promotion of the External Governance Mechanism

MqJBL, Vol, 4 , 2007

20 Pages Posted: 7 Oct 2008

See all articles by Yuwa Wei

Yuwa Wei

Soochow University, China

Date Written: October 6, 2007

Abstract

Companies are fundamental cells of modern commercial society. Although people generally regard the rise and fall of companies as part of the natural circle of corporate development, the collapse of large corporations and the consequentially profound social and economic impact have caused great concern in the community, particularly when corporate failure has resulted from mismanagement. For this reason, issues of corporate governance have attracted enormous attention since the 1980s.

Securities markets and takeover activities are important mechanisms of corporate governance. The law and economics tradition recognises that the hostile takeover performs a desirable disciplinary function by placing management under the market's judgment. According to law and economics literature, the pressure of takeovers and the advantages of being listed on a stock exchange are effective stimuli of promoting good corporate governance. Furthermore, by having a wide and varied scope of owners, listed companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of their shareholders.

In the past two decades, interesting developments have occurred in this area, particularly in some emerging economies such as China. In China, the securities market and its regulation play essential roles in encouraging and advocating sound corporate governance practices. It is widely recognised for a while that the securities market is not only a place where companies raise funds, but also a means of assisting China's enterprise reforms and promoting good corporate governance. However, structural defects, corporate misconduct, and legal violations in the securities business, have undermined the efforts to reform China's financial sector and enterprise system. These problems have not only jeopardised the efforts to promote sound corporate governance in state-owned listed enterprises but also encumbered the development of the securities market.

The Chinese experience has once again proven that a well-functioning securities market and a sound system of corporate governance are mutually dependent: The development of the securities market provides an external monitoring mechanism of corporate governance, and good practice of corporate governance, in turn, ensures the orderly operation of the securities market.

This article attempts to explore the rationalities behind and the functions of securities markets and takeover activities. It analyses the relationship between securities regulation and corporate governance, and investigates the Chinese experience in fully exploiting the monitoring function of the stock market over listed companies. Furthermore, it examines the legal regimes governing securities markets and takeovers in some leading corporate economies including the US, Germany, Japan and the UK. This article will demonstrate that in a world of commercialisation and globalisation, securities markets and speculative activities in securities markets play an increasingly important role in disciplining listed companies.

Keywords: Corporate governance, China's capital market, securities markets

Suggested Citation

Wei, Yuwa, China's Capital Market and Corporate Governance: The Promotion of the External Governance Mechanism (October 6, 2007). MqJBL, Vol, 4 , 2007, Available at SSRN: https://ssrn.com/abstract=1279783

Yuwa Wei (Contact Author)

Soochow University, China ( email )

No. 1 Shizi Street
Suzhou City, Jiangsu 215006
China

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