Ultimate Ownership Structure, Agency Problems And Firm Performance

After financial crisis in East Asia the scholars owed this crisis to the faultiness of corporate governance mechanism, the last 15 years saw an upsurge of interest in the field of corporate governance. Nowadays, with the prevail of corporate governance,the item "corporate governance " is becoming hot words for common people to talk about. Apparently, citizens and scholars focus on the different point although they have the same passion to discuss the problem of corporate governance. As ordinary investor, who concern the most is how to assure they can get a return in their investment. In their opinion, the structure of corporate governance constituted by board of directors and board of supervisors would be a feasible way to guard their money in firms. While, it is far enough to understand internal governance mechanism for researchers, what they also have to undertake is studying external governance mechanism like products market, labor market and reputation, even find out the intricate relationships between governance mechanism and capital structure, agency problems and firm performance. Theoretically, ultimate ownership structure, agency problems and firm performance should be closely related for the reasons as follow. Firstly, figuring out agency problems has been always viewed as the core target of corporate governance. Secondly,(ultimate) ownership structure is not only the starting point of corporate governance, but also a crucial governance mechanism. Lastly, the effects of solving agency problems and corporate governance are all reflected by firm performance. Here are some questions: whether or not the relationships discussed above can be tested and verified by empirical data? Does ultimate ownership really affect agency problems? Are agency problems and ultimate ownership reflexes of corporate performance? Further on, are there only sample and unidirectional relation between ultimate structure, agency problems and corporate performance? Realistically, as bond between agriculture and capital market, agricultural listed firms shoulder the responsibility of achieving agriculture industrialization and agricultural modernization, influence whether three dimensional rural issues would or not be solved properly. Therefore, the performance of agricultural listed firms means much to China’s economy. Unfortunately, there are some problems about this kind of firms, such as irrational shareholding structure, small-scale and non-independence of board of directors and supervisors, CEO duality, deviating from primary business, and miserable performance. The reasons for this plight, actually, may root in ignoring agency problems, lacking the proper ways to alleviate them and unsuitable ownership structure.So this dissertation aims at clarifying ultimate ownership structure, finding out different agency problems, measuring the severity and the cost of these agency problems, understanding well the complex relationship between ultimate ownership structure, agency problems and firms performance, and finally providing some useful advice on promoting standard of existing agricultural corporate governance in China. The thesis is based on the principal-agent theory which is classic theory in corporate governance, and the theory of ultimate ownership structure which is becoming international mainstream. In terms of selecting sample, according to the study on “pan-agricultural listed firms” leaded by China Agricultural University,the author collect 118 firms during 2004-2013 to construct a balanced-panel database concluding 1180 observations in total. Generally speaking, there are lots of specific econometric methods adopted in this thesis. To begin with, I differentiate the whole sample and sub-sample sorted by industry, zone and period. On this base, I use the basic methods like mean, standard deviation and quartile to analyze ultimate ownership structure in the different samples, finally I find there are dramatic difference between the ultimate ownership structure in the whole sample, sub-sample and simple firms in the former study. Next, factor analysis method and multiple regression method are employed successively to measure severity of two different kinds of agency problems and costs of these agency problems. It is demonstrated that the degrees of severity of two agency problems are varied greatly in whole sample and the sub-samples. Besides, this dissertation analyzes the influence that two agency problems severity on firm performance, and how ultimate ownership structure affect firm performance by constructing fix effect model for panel-data. Not surprisingly, severity of two types of agency problem act on performance dis-similarly, and the nature of ultimate shareholder, cash flow rights(CFR), control rights(CR), degree of deviation between CFR and CR, pyramidal structure have the different degree effects on firms performance. At last, there-stage least square method is used to model the complicate relationship between ultimate ownership, severity of agency problems and firms performance. And the relationship is not unidirectional as former hypotheses without considering endogeneity problems. In summary, the thesis try to answer “there questions” pointed out at the beginning by adopting some reliable econometric method.Finally, it is drew that some safely conclusions provided by the process of analyzing.In terms of ultimate ownership structure in the whole sample of agricultural listed firms, as one of the most important ultimate shareholder, the state controls more than 70% sample firms; the degree of CFR-CR deviation is quite high; ultimate shareholders usually build pyramidal structure with more than two layers. In the sub-sample, the state and its affiliates dominate more than two-thirds of traditional agriculture, forestry, animal husbandry and fishery industry, food and beverage industry, chemical fertilizer and pesticide industry, in which industries the ultimate shareholder’s CFR-CR deviation, layers and links of pyramidal structure are almost same as corresponding values in the whole sample. As for samples in the different zones, listed firms in the west are lower than that in the midland when speaking to ultimate shareholder’s CFR-CR deviation. While the eastern listed firms have the highest degree of CFR-CR deviation and the most complex pyramidal structure.As for the severity of two types of agency problems, the outcomes are as follows. Agency problem among shareholders and managers(namely first agency problem) is quite serious in two-fifths firms, and nearly half of firms with severe agency problem between ultimate controlling shareholders and minority shareholders(namely second agency problem). Concretely, in forestry, animal husbandry and fishery industry, the severity of second agency problem exceeds that of first agency problem; while the second agency problem is much more serious than the first agency problem in traditional agriculture; both types of agency problems are most serious in eastern listed firms, followed by the firms in west, the severity of two types of agency problem are weakest in listed firms in the midland.Meanwhile, the outcomes of agency costs tell us that we should pay more attention on agency costs. Firstly, the holding ratio in hands of biggest shareholder is negative to the first type agency costs. On the contrary, the degree of holding concentration keeps a positive relation with the first type costs. Then, the second agency costs in the firms with pyramids are lower than that in the non-pyramid firms. When the ultimate controlling shareholders are natural person and their families, these firms ordinarily suffer greater second agency costs than other firms do.At last but not least, there-stage least square model obtains following empirical results. The first outcome is about the mutual relationship between two types of agency problems and ultimate ownership structure. It is dedicated that ultimate ownership structure has remarkable negative influence on the severity of first type agency cost, and is very remarkable positive to the severity of second type agency cost. And the deviation between two rights of ultimate controller is lower with declining the second agency problem’s servity. Then, it is very dramatic negative relationship between the gravity of second type agency problem and firm value. Next, it is providing evidence to certify that ultimate ownership structure has positive impact on firm’s performance, which, however, plays a negative role in ultimate ownership structure. At last, the second agency problem has great positive influence on the first agency problem.