Tunneling And Corporate Liquidity In Bilayer-Internal Capital Markets Under Pyramidal Ownership

Whether the self-interests demand and autonomy of subsidiaries controlled by listed company affect the ultimate controller’s private benefits and parent-subsidiary group’s financial liquidity, is an important but haven’t answered question in corporate finance research. The literatures about the tunneling by ultimate controller of pyramid groups from the listed company, have emphasized too much about the power of ultimate controller’s private interest tendency, while assumed implicitly that the subsidiaries of listed company is passive in accepting the tunneling. Researches which examined the effect of pyramid-group’s internal capital market on listed company’s financial liquidity, mainly concern the influence of group membership on the listed company’s financial liquidity, or the impact of listed company diversification on the overall financial liquidity. There are two implicit assumption, One is the that the effect of internal capital markets upward and downward the listed company on financial liquidity is independent of each other, the another implicitly assumes is the business distribution between parent and subsidiary companies have nothing to do with the internal capital market’s financial liquidity effect,In fact, under pyramid structure, the listed parent company has a dual identity. On the one hand, as an external financing platform, it need to satisfy the both fund demand of the controlling shareholder and subsidiaries. On the other hand, as intermediate nodes of interest exchange, it need to coordinate the relationship between the interests of the two parties. As a result, on the one hand, subsidiaries’self-interest demand and autonomy will affect the fund amount which could be tunneled by ultimate controller. On the other hand, it will influence the parent-subsidiary group’s inter capital market efficiency. In the research framework of group governance and internal capital market in pyramid ownership, the following three problems remains to be further explored. First, whether and how subsidiary’s self-interest demand and autonomy will affect the ultimate controllers tunneling? Second, whether and how the fund contribution and Occupation of subsidiaries will affect the financial liquidity, and whether it will affect the relationship between group membership and financial liquidity? Third, will the tunneling of ultimate controller weaken, and will the parent-subsidiary internal capital markets’ financial liquidity effect the tunneling of ultimate controller?Specific to the above problem, this study established a multi-layer group governance and double-layer internal capital markets theoretical analysis framework, based on the basic research paradigm of agency theory and corporate finance theory, also using the organization theory and transaction cost theory. In the theoretical research part, I put forward three propositions. First, the private benefits expropriated by the ultimate controller under pyramid ownership is "double-determined", namely the ultimate controller’s private benefits mainly influenced by the controller’s intentions, it is also affect by the subsidiaries self-interest demand and autonomy. Second, under the pyramid structure the listed company’s financial liquidity is "double-determined", namely the listed company financial liquidity is not only affected by the upper group’s internal capital market, but also affect by the internal capital market between the parent-subsidiary. Third, the private benefits of ultimate controllers and the subsidiary’s financial liquidity is "interaction", the private benefits expropriation will damage the parent-subsidiary internal capital markets’financial liquidity effect, the financial liquidity effect of parent-subsidiary internal capital markets will influence the private benefits expropriation of ultimate controller in reverse.For the three propositions those were put forward in the theoretical research, this paper carried out the following three empirical test.First, this paper examined the influence of subsidiary’s self-interest demand and autonomy to the ultimate controller’s tunneling. It is found that the subsidiary self-interest demand and autonomy performs the function of reducing ultimate controller’s tunneling. While subsidiary’s self-interest demand and autonomy is bigger, the funds of listed companies occupied by the ultimate controllers decreased significantly, the damage degree of the operating performance and the value of the listed company by the pyramidal ownership is also weaken obviously. These results shown that tunneling is not only determined by ultimate controller, the subsidiaries is not also completely accept the tunneling passively. Thus, this paper get the first conclusion:the private benefits expropriated by the ultimate controller under pyramid ownership is "double-determined".Second, this paper examined the interactive influence of the double-layer internal capital markets under the pyramid structure on the listed company’s financial liquidity. The empirical results of the influence of parent-subsidiary level internal capital market’s on the combination of overall financial liquidity show that the negative relation between corporate diversification and cash holdings is much more significant in investment-leading companies. For investment-leading companies, the increase of subsidiary industry diversification, particularly the unrelated industry diversification reduced the level of cash holdings in consolidated accounts, and this results is more obvious when the internal cash is more focused to the parent company and internal capital allocation scale is larger. The ascension of subsidiary’s geographic diversification will increase the level of cash holdings in consolidated accounts, but when more internal cash held by the subsidiary with larger internal capital allocation, subsidiary geographical diversification will reduce the level of cash holdings too. Further, this paper investigate the combined impact of double-layer internal capital markets on listed company’s financial liquidity. The results show that the combined impact is "substitution effect". The parent-subsidiary internal markets mainly effect the financial liquidity when the proportion subsidiaries’business and related party transactions between parent and subsidiaries is larger. In contrast, the group internal capital markets will play a regulatory role in listed company’s financial liquidity. Thus, this paper get the second conclusion:under the pyramid structure the listed company’s financial liquidity is "double-determined".Third, this paper check the relationship between the corporate governance effect and internal capital markets’financial liquidity effect under pyramid ownership. The results show that parent-subsidiary internal capital markets’financial liquidity effect is weaken when the agency conflict between controlling shareholders and minority shareholder is seriousness. In contrast, the financial liquidity effect of parent-subsidiary internal capital markets’reduce the tunneling by ultimate controllers under the same agency conflict. Thus, this paper get the third conclusion:the private benefits of ultimate controllers and the subsidiary’s financial liquidity is "interaction".This article may have three academic contribution for the literature. First, the interests of the subsidiary requirements can reduce the tunneling by large shareholder under pyramid ownership, it break the implicit hypotheses that the subsidiaries is passive in accepting the tunneling. Second, reveals the interaction influence of double-layer internal capital markets on financial liquidity in pyramid groups, it extends the research of internal capital markets which was focused on single layer. Third, this paper provides a new explanation for the question that why the pyramid ownership and corporate diversification are still prevalence although they are vale damaging.