Investor Protection and Corporate Valuation

We present a model of the effects of legal protection of minority shareholders and of cash-flow ownership by a controlling shareholder on the valuation of firms. We then test this model using a sample of 539 large firms from 27 wealthy economies. Consistent with the model, we find evidence of higher valuation of firms in countries with better protection of minority shareholders and in firms with higher cash-flow ownership by the controlling shareholder.     

Does cross-listing facilitate changes in corporate ownership and control?

This paper examines whether controlling shareholders of foreign firms use a US cross-listing to facilitate changes in ownership and control. Prior to listing, about three quarters of the firms in our sample have a controlling shareholder. After listing, about half of the controlling shareholders’ voting rights decrease, with an average decrease of 24% points that differs significantly from that of the controlling shareholders of benchmark firms that do not cross-list. Large decreases in voting rights are associated with controlling shareholder characteristics, domestic market constraints, and better stock market performance and liquidity. In addition, there is control change in 22% of the firms. Controlling shareholders are more likely to sell control, and are more likely to do so to a foreign buyer, than controlling shareholders of benchmark firms. The results suggest that controlling shareholders who want to sell shares or their control stake can use a US cross-listing to decrease the cost of transferring ownership.     

Controlling shareholder,expropriations and firm's leverage decision: Evidence from Chinese Non-tradable share reform

This paper examines the effect of excess control rights on the leverage decisions made by Chinese non-SOEs before and after the Non-tradable share reform (NTS reform). We find that firms with excess control rights have more excess leverage and their controlling shareholders use the resources for tunneling rather than investing in positive NPV projects. We also find that excess leverage in firms with excess control rights decreases and the market reaction to announcements of related party transactions are more positive after NTS reform. This confirms that tunneling by the controlling shareholders actually reduced. We argue that in emerging markets where legal protection for creditors and shareholders is weak, controlling shareholders borrow excess debt to tunnel through inter-corporate loans and related party transactions. Furthermore the privatization of these economies can reduce the controlling shareholders' tunneling activities and associated excess leverage which destroys firm value.     

Tunneling and propping up: An analysis of related party transactions by Chinese listed companies

We examine a sample of related party transactions between Chinese publicly listed firms and their controlling shareholders during 2001–2002. Minority shareholders in these firms seem to be subject to expropriation through tunneling but also gain from propping up. On balance, there seems to be more tunneling than propping up. Both types of firms have larger state ownership compared to the rest of the Chinese market but firms that are propped up are larger and have larger state ownership than firms subject to tunneling. Propped up firms are more likely to have foreign shareholders and to be cross-listed abroad compared to firms that are subject to tunneling. Propped up firms also tend to have worse operating performance in the fiscal year preceding the announcement of the related party transaction. Finally, we find that related party transactions representing tunneling are accompanied by significantly less information disclosure compared to related party transactions representing propping.     

Ownership Structure, Corporate Governance, and Firm Value: Evidence from the East Asian Financial Crisis

We use a sample of 800 firms in eight East Asian countries to study the effect of ownership structure on value during the region's financial crisis. The crisis negatively impacted firms' investment opportunities, raising the incentives of controlling shareholders to expropriate minority investors. Crisis period stock returns of firms in which managers have high levels of control rights, but have separated their control and cash flow ownership, are 10–20 percentage points lower than those of other firms. The evidence is consistent with the view that ownership structure plays an important role in determining whether insiders expropriate minority shareholders.     

Product Market Competition and the Ownership Choice of Business Groups: Evidence from Korean Chaebols

This study investigates the effect of product market competition on the ownership choice of controlling shareholders in the Korean business groups known as chaebols. We find that member firms in more competitive markets have less disparity between the control and cash flow rights of controlling shareholders. The adjustment in ownership due to product market competition is implemented mainly through an adjustment in the ownership of affiliates rather than in the direct ownership of controlling shareholders. The disciplinary effect of product market competition is observed only in member firms with lower market power in their own industries. The result implies that product market competition works as a disciplinary mechanism that reduces the incentive of chaebols’ controlling shareholders to pursue the private benefits of control.     

Ownership structure and real earnings management: Evidence from China

Although ownership structure is fundamental to corporate accounting behaviors, the current literature provides scarce evidence about the governance effect of ownership structure on real earnings management (REM). We seek to address this issue by using a sample of Chinese listed firms which are likely to engage in earnings management during 2003–2014. We find that Chinese firms with more influential largest shareholders are more prone to REM; and that firms with state control and managerial ownership are less likely to engage in REM. We further find that there exists a joint and sequential relationship between REM and accrual-based earnings management in China. Our findings are robust to different variable measurements, samples and regression models. Our study contributes to the research on the relationship between ownership structure and earnings management and contributes to the understanding of REM in emerging economies. Our findings have significant implications for shareholders, analysts and regulators, and are important and relevant given that MSCI decides to include China mainland stocks in its indexes starting 2018.     

Controlling shareholders,board structure,and firm performance: Evidence from India

We examine the prevalence and performance impact of controlling shareholders and study corporate board structures and ownership structures in 1796 Indian firms. Families (founders) are present on the boards in 63.2 (65.5) percent of the sample firms. On average, founders own over 50% of outstanding shares. In contrast to the findings of Anderson and Reeb (2003) in the U.S. context, we find that controlling shareholder board membership in Indian firms has a statistically significant negative association with Tobin's Q. Higher proportion of independent directors, higher institutional ownership or larger firm size does not appear to mitigate this relationship. Overall, board membership of controlling shareholders appears to be costly for minority shareholders.     

The effects of trading rights and ownership structures on the informativeness of accounting earnings: Evidence from China’ split share structure reform

This paper examines how the removal of trading restrictions and ownership structures affect earnings informativeness by investigating the changes in the earnings-return relation around China’s split share structure reform. I find the reform has a negative impact on the relationship between controlling shareholders’ ownership and earnings informativeness, which is consistent with the idea that the removal of trading restrictions gives controlling shareholders incentives to influence the stock price through managing earnings. I also find that earnings informativeness decreases with the reduction in controlling shareholders’ ownership. This dilution effect is more significant for firms with non-state controlling shareholders or with controlling shareholders that are not monitored by other large shareholders. The results are consistent with the notion that controlling shareholders provide less informative earnings in response to the dilution of their ownership to avoid the constraints arising from the increased monitoring by outside investors.     

Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia

In emerging markets, the agency conflicts between controlling owners and the minority shareholders are difficult to mitigate through conventional corporate control mechanisms such as boards of directors and takeovers. We examine whether external independent auditors are employed as monitors or as bonding mechanisms, or both, to alleviate the agency problems. Using a broad sample from eight East Asian economies, we document that firms with agency problems embedded in the ownership structures are more likely to employ Big 5 auditors. This relation is evident among firms that raise equity capital frequently. Consistently, firms hiring Big 5 auditors receive smaller share price discounts associated with the agency conflicts. Also, we find that Big 5 auditors take into consideration their clients' agency problems when making audit fee and audit report decisions. Taken together, these results suggest that Big 5 auditors do have a corporate governance role in emerging markets.     

Founders,heirs, and corporate opacity in the United States

We argue that information about firm activities can vary substantially in the presence of founder or heir ownership, thereby influencing the risks borne by minority investors. We explore two hypotheses with regard to these controlling shareholders and corporate transparency, focusing on their role as monitor in-place and their potential to exploit firm opacity to accrue private benefits of control. To test these notions, we create an opacity index that ranks the relative transparency of the two thousand largest industrial US firms and find founder and heir ownership in 22% and 25% of these firms, respectively. Our analysis indicates that, in large, publicly traded companies, both founder and heir firms are significantly more opaque than diffuse shareholder firms. We also find that founder and heir-controlled firms exhibit a negative relation to performance in all but the most transparent firms. Surprisingly, additional tests reveal that concerns about divergences in ownership versus control (management type, dual class shares, and board influence) appear to be substantially less important than corporate opacity in explaining the performance impacts of founder and heir control. Finally, we decompose corporate opacity into disclosure and market scrutiny components, finding that the disclosure quality component appears to be of greater importance to investors. However, irrespective of whether these controlling shareholders create or stay in the firm because of corporate opacity, our analysis suggests that founders and heirs in large, publicly traded firms exploit opacity to extract private benefits at the expense of minority investors.     

Ownership structure and debt leverage: Empirical test of a trade-off hypothesis on French firms

Debt may help to manage type II corporate agency conflicts because it is easier for controlling shareholders to modify the leverage ratio than to modify their share of capital. A sample of 112 firms listed on the French stock market over the period 1998–2009 is empirically tested. It supports an inverted U-shape relationship between shareholders’ ownership and leverage. At low levels of ownership, controlling shareholders use more debt in order to inflate their stake in capital and to resist unfriendly takeovers attempts. When ownership reaches a certain point, controlling shareholders’ objectives further converge with those of outside shareholders. Moreover, financial distress will prompt controlling shareholders to reduce the firm's leverage ratio. Empirically, it is shown that the inflection point where the sign of the relationship between ownership and debt changes is around 40%. Debts may help in curbing private appropriation and appears also as a governance variable.     

Propping by controlling shareholders,wealth transfer and firm performance: Evidence from Chinese listed companies

Propping acts by controlling shareholders are common in Chinese listed firms. In this paper, we use data on related-party transactions of all listed Chinese firms from 2002 to 2008 to investigate the motivation behind controlling shareholders’ propping acts and subsequent wealth-transfer behavior and how both affect firm performance. We find that such institutional motivators as the maintenance of shell resources and qualification for refinancing have a significant effect on the propping behavior of controlling shareholders of Chinese listed firms and that such behavior is often followed by more serious tunneling when shareholders are driven by these motivators. Compared with non-state-owned firms, state-owned firms with the motivation to qualify for refinancing exhibit more severe tunneling after engaging in propping behavior. We also find that while propping by controlling shareholders improves a firm’s current operating performance, in firms whose controlling shareholders’ are motivated by the desire to maintain shell resources or obtain a refinancing qualification their performance declines in the following year because of subsequent tunneling. The results presented in this paper provide us with a better understanding of the relationship between propping and tunneling, controlling shareholders’ engagement in both and the consequences of that behavior.     

Are founding families special blockholders? An investigation of controlling shareholder influence on firm performance

This paper examines how family and non-family ownership affects the performance of Swiss listed firms from 2003 to 2010. We distinguish between these two types of controlling shareholders since they have different objectives. We hypothesise that only family shareholders have a real incentive to reduce agency costs whereas non-family blockholders are similar to widely held companies. Our results show that family firms are more profitable than companies that are widely held or have a non-family blockholder. For market valuations we find that the family stake plays a critical role and document a concave relationship between family ownership and Tobin’s Q. We also investigate the impact of different features of family firms on performance, and document that the generation of the family and the active involvement of the family play an important role for market valuation.     

Shareholders' control rights,family ownership and the firm's leverage decisions

We investigate the association between controlling shareholders' ownership (CS_Own) and firms' leverage decisions in the Singaporean context. We examine whether the impact of ownership concentration on leverage differs across excess and lower control. We report that shareholders with excess control prefer leverage financing for an optimal capital structure and focus on value maximisation rather using leverage as a tool of minority shareholders' expropriation. Our analysis shows that firms capital structure significantly influences by the coalition of shareholders particularly decisions about leverage financing in addition to the firms' specific characteristics and institutional arrangements. Our empirical evidence shows that controlling shareholders with a lower fraction of equity are more concerned about limited holding thus prefer leverage over equity financing to inflate their equity stake to protect them from the potential takeovers and mergers. We report that capital structure decisions in Singapore are linked with the trade-off between the controlling shareholders' target of mitigating firm risk and their non-dilution entrenchment needs. Further, we found an inverted U-shaped association between control ownership and leverage financing. In terms of moderating effect of family-controlled ownership, our findings exhibit that leverage financing is less pronounced for family firms in Singapore due to the under-diversified investment portfolio.     

Large controlling shareholders and stock price synchronicity

This paper examines the effect of controlling shareholders on stock price synchronicity by focusing on two salient corporate governance features in a concentrated ownership setting, namely, ultimate cash flow rights and the separation of voting and cash flow rights (i.e., excess control). Using a unique dataset of 654 French listed firms spanning 1998–2007, this study provides evidence that stock price synchronicity increases with excess control, supporting the argument that controlling shareholders tend to disclose less firm-specific information to conceal opportunistic practices. Additionally, this study shows that firms with substantial excess control are more likely to experience stock price crashes, consistent with the conjecture that controlling shareholders are more likely to hoard bad information when their control rights exceed their cash flow rights. Another important finding is that firms’ stock prices are less synchronous and less likely to crash when controlling shareholders own a large fraction of cash flow rights. This is consistent with the argument that controlling shareholders have less incentive to adopt poor disclosure policies and to accumulate bad news, since high cash flow ownership aligns their interests with those of minority investors.     

Corporate Governance and Asset Sales: The Effect of Internal and External Control Mechanisms

We investigate firms that sell assets to determine whether corporate governance mechanisms are effective at controlling agency problems. Our evidence shows that these firms have lower managerial ownership and are more likely to make unrelated acquisitions, suggesting weak internal controls. Analysis of insider trading activity shows that, on average, net buying increases before the asset sale and shareholders benefit more when this occurs. Results suggest that how managers reach a given level of ownership provides more information about incentive alignment than just the level of ownership. Our results also highlight the dynamic nature of corporate restructuring as firms acquire and then sell assets.     

Firm performance when ownership is very concentrated: Evidence from a semiparametric panel

We consider the effect on performance of very large controlling shareholders, who are mostly organized in voting blocks and business groups, in a sample of Belgian listed firms from 1991 to 2006. Since the shape of the relation between ownership and firm value is a controversial issue in corporate finance, we use semiparametric local-linear kernel-based panel models. These models allow us not to impose a priori functional restrictions on the relation between ownership and performance. Our semiparametric analysis shows that the effect on performance varies depending on the size of ownership stakes and that there are departures from linearity, especially in family firms. Our results suggest that this non-linearity in family firms is related to whether or not the CEO is a family member.     

Internal Funds Allocation and the Ownership Structure: Evidence from Korean Business Groups

We examine the relationship between the controlling shareholder’s cash flow rights and the funds transfer in the internal capital market within Korean business groups (chaebols) during the period from 1998 to 2001. We find that the funds allocation in the firms where controlling shareholders have high cash flow rights is better aligned with the investment opportunities and therefore, more efficient than in the firms where they have low cash flow rights. This effect is stronger when they have controlling powers large enough to expropriate minority shareholders. However, during the financial crisis period, funds simply move toward the firms where controlling shareholders have high cash flow rights. The results evidence the tunneling behavior in the internal capital market within a chaebol that the ownership structure distorts the allocation of internal funds in such a way as to benefit the controlling shareholders.JEL Classification: G31, G30     

Ownership concentration and executive compensation in closely held firms: Evidence from Hong Kong

Controlling shareholders, who often manage the firms they control, can expropriate minority shareholders in many ways, which are usually referred to as “tunneling”. One of these ways is for owners–managers to set the level of their own compensation. We test the relationship between ownership concentration and executive compensation, using panel data for a sample of 412 Hong Kong firms during 1995–1998. We find a positive relationship between managerial ownership and cash emoluments for levels of ownership of up to 35% in small and in family controlled firms, and for up to 10% in large firms. Our tests show that the observed relationships do not result from compensation serving as a proxy for managerial effort. We interpret these findings as suggesting that in the presence of information asymmetry between entrenched managers and outside investors the former may use their ownership rights to extract higher salaries for themselves. There is also weaker evidence that top executives with larger shareholdings may be using dividends as a way of supplementing their cash salaries.