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Qian Yingyi:supervision of the product market


I have three points: what did Professor Patrick Bolton say? What can we learn from this? And what should we continue to ponder and study towards this direction?


First of all, what is his presentation about? Previous speakers mentioned about relations between government by law, supervision and market from a broad perspective, which is quite right. But here I would like to be more specific. The so-called “modern companies” are mainly those companies in the US with extremely dispersed ownership rather than a majority shareholder. This is a very prominent phenomenon in the US; however, the opposite is the case in the rest of the world, e.g. Europe and Asia. The contrast is here. The mainstream explanations for this phenomenon are mostly found in LLSV’s works on law and finance. Simply speaking, supervisory laws on the capital market in the Anglo-American legal system provide very good protection for minority shareholders, but this is not true in other legal systems. Therefore, a simple inference is that companies with dispersed ownership emerge when minority shareholders are well protected legally; otherwise, there should be a majority shareholder to serve as the supervisor. This is the main point.


His presentation points out that this could explain the difference among countries, but not the situation in the US. Laws to protect minority shareholders were mostly formed in 1933 and 1934; previously, many American companies already faced with problems of ownership dispersion, including those in the power sector. The presentation chooses the power sector to clarify that it is supervision on the product market rather than the capital market that has something to do with ownership concentration or dispersion. His research questions are based on supervision of the product market rather than the capital market; in the product market, the power sector is under supervision, also in China. The content of the supervision includes pricing, market access, business scope and shareholder hierarchies. When there is no supervision, there could be multiple levels of shareholders, but only two levels are allowed with supervision in place, in order not to hamper other sectors. This is the key starting point of this presentation. What are the main discoveries? Deregulation occurred after 1992, in the product market. The change had a great impact on ownership structure. Before 1992, ownership of power companies was dispersed and largely in the hand of women and orphans, because they hated risks and expected to receive dividends timely. After 1992, however, majority shareholders appeared as deregulation emerged. So the first main discovery is that dispersed or concentrated ownership is not caused by legal supervision on the capital market but deregulation on the product market, in terms of the power sector. Therefore, allocation of ownership in the capital market is determined not only by supervision on the capital market, but also that on the product market, or other markets as well. This is the first thing we learn.


Secondly, it seems easy and well done if he just stopped here. But he didn't. What would a majority shareholder normally do? He is responsible for supervising the business operators. With supervision, operators improve their efficiency. This is what we commonly believe. However, he discovered something wrong from the data. These majority shareholders are mostly capital funds coming and going, and just hold for a short period of time to seek chances for profits or spread risks instead of really supervising the operators. Women and orphans withdraw because they do not like risks, so funds replace them for short-term speculation or risk sharing. Hence the analysis is pushed forward to shed some light on benefit and efficiency evaluation. However, a new problem appears: risks increase with deregulation. Strict supervision keeps the risk level low, even though the efficiency is low, either. Now the risks are high, and companies can engage in a broader business scope, e.g. Enron. There are other responses to deregulation, but supervision on business managers is still up in the air. Moreover, efficiency also suffers from losses with higher risks and thus higher cost. So we need to deepen our study to learn more.


His presentation is very inspiring. But we need a further look. For the power sector, the study goes on. The dynamic changes after deregulation is introduced, especially the influence of innovation, which is worth deeper studies. With deregulation in the power sector, market access is allowed, even though cases like Enron exist. In China, the power sector is still highly regulated. In recent years, new energies, e.g. wind power, have grown significantly; however, they are not allowed for grid access, because the supervised power companies do not allow other enterprises to enter, and then huge losses are caused. There will be further innovative development with deregulation in the power sector. So more in-depth studies are needed. Once again, the presentation is a great inspiration.

◆please indicate the source if authorized: National Economics Foundation

◆photo:National Economics Foundation