Research On Subsidiary’s Autonomy In The Pyramidal Structure

The most significant feature of the parent-subsidiary company is the longitudinal and vertical type of organizational structure which takes equity control chain as the contractal link, specifically, pyramid holding structure. Many scholars found that Pyramid structure is common in East Asian and West European countries. Therefore, parent-subsidiary company is the most common and also more stable form of the business groups. Parent-subsidiary company, which takes pyramidal structure as the main feature, was called "Pyramidal Controlled Groups" by many scholars.Because the conclusions of parent-subsidiary company governance are inconsistent, "tunneling" or "support" behaviors, this paper believes that the existence of the inconsistent conclusions is mainly due to the defect of traditional economics and principal-agent theory, which assumes that the agent’s mission is to maximize the principal’s interests, and the contract between the principal and agent is static and unchanging. However, this assumption ignores the initiative of subsidiary company.In recent years, aiming at the deficiency of the assumption, through the application of Theory of reference-dependent preferences, some scholars gradually relaxed this assumption with the concept of "reference point" between the principal and agent, and pointed out that the renegotiation, even "rip off" should be allowed, which admitted the existence of the interaction between them. Many scholars confirmed that parent company is difficult to refuse the existence of this interaction. Therefore, this paper introduces a totally new "two-way governance" perspective which allows the interactions between parent company and subsidiaries, and expects to replace the existing "unilateral governance" perspective.Based on the "two-way governance" perspective, the governance of parent-subsidiary company is no longer the parent company’s "one-way", top-down control, but the result of a "two-way" bargaining process, which including a "bottom-up" balance, between. parent company and subsidiaries. This bargaining process determines the outcome and efficiency of the parent company’s governance behavior ("tunneling" or "support" behavior). The framework of the governance of parent-subsidiary company should also swift:for the listed subsidiary, the parent company should decide the layers that listed subsidiaries locate in the capital control chain, or the position in pyramidal structure, in order to ensure that the parent company still could maintain control and choose the governance behaviors freely ("tunneling" or "support" behavior). However, subsidiary’s shareholders or other stakeholders could still take part in the daily operation, and play the game with the parent company. Then, subsidiary is not "a passive recipient", but an active agent. Therefore, subsidiaries would take the necessary measures to balance the controlling behaviors of parent company, in order to enhance its bargaining capacity which could maintain its degree of autonomy. The governance mechanisms may provides a legal guarantee for the balance behaviors of the subsidiaries. Then, subsidiaries could set up suitable governance mechanisms to get rid of parent company’s direct control and migrate to the lower layers of the capital control chain.How about the governance effect of the autonomy of subsidiary after the bargaining process between parent company and subsidiaries? Does this bargaining process still influence the governance effect of subsidiary’s autonomy? Through focusing on information disclosure mechanism, this paper continued to test the governance effect of subsidiary’s autonomy, which studied the autonomy’s governance effects to the subsidiary’s information disclosure quality, and expected to answer the above questions. This paper obtained two important findings:First, subsidiary, located at the lower layers, which maintained a longer distance from the parent company or the actual controllers, had a higher degree of information disclosure quality. There may be two reasons to interpret this finding. On one hand, the subsidiaries which maintained a higher degree of autonomy were laid near the top of capital control chain, so that parent company could restrain the potential agency problems efficiently. On the other hand, subsidiary, located at the lower layers, could gain a higher degree of autonomy and balance the behaviors of parent company. Second, by means of the game between parent company and subsidiary, this paper further found the promotion of subsidiary’s information disclosure quality stemmed from the opposite moderation between parent company and subsidiary. Based on the degree of autonomy, subsidiary could balance parent company’s control and improve their own quality of information disclosure, so that could obtain stronger bargaining power, which confirmed the governance effect of subsidiary’s autonomy.In this paper, taking use of the data of companies listed on Shanghai and Shenzhen stock exchange market from 2008 to 2012, this paper execute an empirical research on the above problems. The main conclusions could be divided into two parts, the mechanism of subsidiary’s autonomy and its governance effect. There are four conclusions about the mechanism of subsidiary’s autonomy:(1) Subsidiaries, with a higher degree of autonomy, are more likely to be laid at the top of capital control chain, which are closer to the parent company or the actual controllers. This arrangement led to a lower degree of autonomy. Meanwhile, the subsidiaries with a lower degree of autonomy, are more likely to be placed at the end of capital control chain, which maintained a longer distance from the parent company or the actual controllers. This arrangement improved the degree of the subsidiaries’ autonomy. (2) There exist three mechanisms to moderate the promotion of subsidiary’s autonomy through lowering the layers which subsidiary was placed and maintaining a longer distance from parent company or actual controllers. These mechanisms are internal mechanisms (balanced ownership structure), external mechanisms (auditors with better reputation) and subsidiary’s characteristics (the importance to parent company). (3) With respect to the synergistic effect, the reputation of external auditor and the importance of subsidiary posed a positive moderation effect in regulating the relationship between subsidiary’s layer and its autonomy. This finding shows that as the external governance mechanism, the reputation of external auditor’s moderation effect was consistent with the importance of subsidiary, which is helpful to enhance the degree of autonomy. There are two conclusions about the governance effect of subsidiary’s autonomy:(1) the subsidiary’s position at the capital control chain had a significant influence on the quality of information disclosure. With the extension of capital control chain, the subsidiary’s information disclosure quality would get promotion gradually. (2) The strength of control from parent company and subsidiary’s autonomy all played a partial moderation effect in the relationship between subsidiary’s layer and its information disclosure quality, but theses two moderation effect were different directions. The conclusion confirmed that there also existed a game between parent company and the subsidiary in the process of subsidiary’s information disclosure subsidiary process, which indicated that the bargaining process between the actual controller of parent company and subsidiary significantly influenced the quality of subsidiary’s information disclosure. In addition, as shown that subsidiary’s positive moderation effect and parent company’s negative moderation effect, we could conclude that along with the promotion of subsidiary’s autonomy, subsidiary would tend to improve the information disclosure quality in order to obtain the support of external supervision to balance the controlling behaviors of parent company. Therefore, along with the subsidiary layer’s lowering, subsidiary’s autonomy does be helpful to improve its quality of information disclosure, which confirmed the positive governance effect of subsidiary’s autonomy.