A MECHANISM OF COMMITMENT TO MORE CREDIBLE CORPORATE GOVERNANCE PRACTICES 81 © Blackwell Publishing Ltd 2005. 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. Volume 13 Number 1 January 2005 Blackwell Publishing Ltd.Oxford, UK CORGCorporate Governance: An International Review0964-8410Blackwell Publishing Ltd. 2005 January 20051318191A MECHANISM OF COMMITMENT TO MORE CREDIBLE CORPORATE GOVERNANCE PRACTICES CORPORATE GOVERNANCE *Address for correspondence: Department of Financial and Management Studies, SOAS, University of London, Thorn- haugh Street, Russell Square, London WC1H 0XG, UK. Tel: +44-20-78984821, Fax: +44-20- 76377075; E-mail: Laixiang. Sun@soas.ac.uk International Listing as a Mechanism of Commitment to More Credible Corporate Governance Practices: the case of the Bank of China (Hong Kong) Laixiang Sun* and Damian Tobin This paper argues that the deeply rooted cause of poor corporate governance practices in China’s state-owned banks is the discretion enjoyed by policy makers to re-optimise their policy choices when they deem necessary and the consequent moral hazard leading to opportunistic behaviours of bank managers. By examining the case of Bank of China Hong Kong (BoCHK), the paper suggests that international listing can provide an effective mechanism to mitigate the consequence of discretionary policies and managerial opportunism at home because the company is now disciplined and regulated by a more developed capital market outside the home jurisdiction. It shows that BoCHK’s IPO preparation and first two years of listing on Hong Kong Stock Exchange (HKSE) have induced in-depth corporate restructuring and noticeable improvement in governance practices. Keywords: International listing, corporate governance reform, state-owned banks, Bank of China (Hong Kong), China Introduction ince the early 1990s, an increasing number of enterprises from transition economies have actively sought a public listing on developed stock markets and many have succeeded. This development raises two inter- esting questions: why are these enterprises willing to be monitored by more developed capital markets abroad and how do they man- age the entry and adaptation process? While there is an emerging body of literature that statistically analyses the practical benefits and costs of the international listing (Korczak and Bohl, 2003; Claessens et al., 2002; Steinfeld, 1998), in-depth investigation into the process of initiation, IPO preparation, and pre- and S post-IPO adaptation has been largely missing from the corporate governance literature. 1 This paper conducts such an in-depth investigation based on a case study of the Bank of China (Hong Kong) (BoCHK, hereafter), a large spun- off subsidiary of the Bank of China (BoC), which is the second largest state-owned bank in China, with a market share of 17 per cent in 2003. It examines how the process of preparing for and adapting to international listing has enabled a state-owned large banking firm to improve its corporate governance in an inno- vative manner despite the constraints of under- developed institutions at home. It shows how the process has transformed BoCHK from being a wholly state-owned bank with all the characteristics and limitations of China’s bank-