Corporate governance matters: How do reduced state-owned shares lower firms’ market power in a developing country?

Corporate governance refers to certain approaches by which a company's stakeholders can receive a return on investment, one of which is to solve the agency problems that can arise from the separation of ownership and control. However, the basis for effective corporate governance is that the country has a mature modern corporate institution. The question of whether corporate governance can be effectively applied in firms in developing countries remains unclear. This study explores the influence of corporate governance in developing countries in the early stage of establishing a modern corporate institution. We use incremental job loss cost and agency cost reduction to represent the two consequences of corporate governance. Our estimates confirm a negative relationship between reduced state-owned shares and state-owned enterprises' (SOEs) market power and reveal the mediating effect of corporate governance on this negative relationship. Reduced state-owned shares can influence corporate governance and reduce agency costs. We also provide novel findings indicating that what really makes SOEs' market power decrease is the cost of job loss; however, we determine that the decline of market power is not necessarily a negative consequence as reduced state-owned shares can significantly promote the performance of SOEs by reducing market power. Our conclusions remain robust following a series of endogeneity tests. The study sheds new light on corporate governance by examining the relationship between corporate governance, SOE reform and employee welfare costs for the first time.