Doctor of Philosophy
School of Accounting and Finance
Liu, Qigui, The implications of disproportionate ownership in emerging markets: evidence from Chinese listed firms, Doctor of Philosophy thesis, School of Accounting and Finance, University of Wollongong, 2012. http://ro.uow.edu.au/theses/3747
Corporate ownership and control has been a major topic in corporate finance research area over the past decade, ever since the disproportionate ownership structure was documented. In these firms the agency conflict between controlling and minority shareholders begins to dominate (Claessens et al., 2002; Djankov et al., 2008; Faccio et al., 2010), rather than the classic agency conflict between managers and shareholders (Jensen and Meckling, 1976). In this new agency theory framework, the value destroying effect of disproportionate ownership has been widely documented in various countries and institutional settings. Like firms in other East Asian countries, most Chinese firms, especially those entrepreneurial firms have such a disproportionate ownership structure, function in an institutional environment characterised by a weak legal system, low quality government, and a prevalent relationship. This unique institutional setting enables us to explore the specific channels used by controlling shareholders to obtain resources to expropriate, and which eventually decrease firm value. On this basis this thesis mainly investigates the financial implications of disproportionate ownership that are prevalent in the Chinese market.
Thesis consists of the following four main research questions. First, this study examines the effect that a disproportionate ownership structure has on the leverage policy of Chinese entrepreneurial firms, using NTS reform as a natural experiment. The findings show that Chinese firms with disproportionate ownership structure adopt a high leverage policy in order to obtain more financial resources for expropriation rather than investment. I also provide evidence that both the high leverage and controlling shareholders’ expropriation reduced after the NTS reform when controlling shareholders’ incentive to expropriate is alleviated. Furthermore, such a reduction is expected and welcomed by minority shareholders so they are more likely to have a positive reaction to the announcement of related party transactions after the NTS reform.
Whereas the controlling shareholders of firms with disproportionate ownership structure are found to adopt a high leverage policy for expropriation, a further matter of concern is: what is the channel through which controlling shareholders are able to obtain and retain a high leverage policy? So I further examine the effect of political connections on the disproportionate ownership structure-leverage relationship. The empirical evidence indicates that political connections facilitate controlling shareholders’ expropriation by giving firms better access to debt financing. In addition, I find that a politically connected chairman plays a more important role in facilitating controlling shareholders’ expropriation under China’s institutional environment, and that better creditor protection weakens the positive relationship between disproportionate ownership and leverage, but this effect only exists in firms without political connections.
Given that controlling shareholders in Chinese entrepreneurial firms use political connections to obtain more resources from the private financial market (debt market) to expropriate, then how do they expropriate in the IPO market, and what is the channel through which they expropriate in the IPO market? In order to answer these questions, I further examine the implication of disproportionate ownership structure in the IPO market. I find that the controlling shareholders of firms with disproportionate ownership structure have a stronger incentive to push the firms go public, so they are more likely to manipulate the earnings and seek PE investors before IPO. While the involvement of PE investors does help those firms accessing the IPO market, PE-backed firms with disproportionate ownership structure also have a higher IPO fee, a lower initial return and a lower long term post-IPO performance. In other words, both controlling shareholders and PE investors are the winners while the minority shareholders are the only losers.
Finally, disproportionate ownership may also have an influence on stock market liquidity because this ownership structure is usually associated with an information asymmetry problem which impairs the quality of information disclosed in these firms. Therefore, this thesis also examines whether the disproportionate ownership structure influences stock market liquidity. The findings confirm that firms with disproportionate ownership structure have lower stock market liquidity than firms without. I further show that such a negative relationship between disproportionate ownership structure and market liquidity is strengthened when the agency problem is more severe, and is weakened after the NTS reform.
Overall, this thesis examines the implication of disproportionate ownership structure in the Chinese market, and how such an implication is influenced by institutional factors. The empirical evidence indicates that in emerging markets where the investor protection system is still weak, controlling shareholders of firms with disproportionate ownership structure usually have a strong incentive to expropriate the interests of both creditors and minority shareholders. And it is such expropriations that cause a firm with a disproportionate ownership structure to adopt a higher leverage policy, and higher IPO approval and lower market liquidity than a firm without. This thesis also provides evidence that due to the huge government intervention in the Chinese market, political connections provide an important channel through which controlling shareholders expropriate. While PE investors through their political connections play a conspiratorial role rather than monitoring role in the Chinese market: controlling shareholders seek PE investors to gain access to the IPO market, in return for which they secure benefits for the PE investors, while the interests of minority shareholders are actually destroyed. A disproportionate ownership structure also impairs stock market liquidity because it weakens the information asymmetry and results in poor disclosure of information in these firms. However, this thesis suggests that the process of privatisation in an emerging market, such as the NTS reform in the Chinese market, can alleviate the controlling shareholders’ incentive to expropriate.