Using a natural experiment of the board reform of Chinese central state-owned enterprises (CSOEs), we establish a causal link between controlling shareholder board reform and subsidiary risk reduction. The risk reduction operates through three concurrent channels: curtailing agency costs, reinforcing internal controls, and improving investment efficiency especially curb over-investment at the subsidiary level. Furthermore, the effect is more significant when the parent’s board has higher independence or greater diversity. We also document that subsidiaries adopt more conservative financial policies following the reform, such as lower leverage, lower excess cash holdings and higher dividend payouts. Our findings highlight that robust governance at the ultimate controlling shareholder level is a critical determinant of subsidiary firm stability.
Qin et al. (Mon,) studied this question.