1. ¹Department of Economics and Finance, City University of Hong Kong, Hong Kong, China
2. ²School of Business and Economics, Swansea University, Wales, UK

Correspondence: H Zou, Department of Economics and Finance, City University of Hong Kong, 83 Tat Chee Avenue, Kowloon Tong, Kowloon, Hong Kong, China. Tel: +852 2194 2439; Fax: +852 2788 8842; E-mail: hongzou@cityu.edu.hk

Received 25 October 2005; Revised 8 November 2006; Accepted 18 July 2007; Published online 22 May 2008.

Abstract

A large body of literature has examined how managerial ownership affects corporate strategy and risk-taking. The present study extends this literature by investigating the effect of other forms of corporate ownership on a firm's equity risk (measured as the volatility of a company's stock returns) and stock returns in the People's Republic of China (PRC) – an important emerging economy that is rich in various forms of corporate ownership. We find that the various types of corporate ownership appear to have important but different impacts on equity risk and returns. In particular, companies with more state ownership tend to have higher stock volatility and lower stock returns; in contrast, companies with more legal-person ownership tend to have lower stock volatility and higher stock returns. Foreign and managerial ownership are found to have little effect on firms' equity risk and returns. These findings support the predictions of agency theory – for example, that state ownership increases agency conflicts in companies because bureaucrats and state agencies do not have the same economic incentives to maximize the value of firms. We believe that our study contributes to the international business literature on investment strategy and risk assessment in developing markets such as China, and as a result our findings could have important implications for international investors.