Research On The Impact Of Ultimate Controlling Shareholders On The Investment Behavior Of Listed Companies

With the development of the corporate governance theory and practice, the logical starting point of the corporate governance experience an evolution from the widely held ownership structure (Berle and Means, 1932) and the concentrated ownership structure (Shleifer et al.,1997) to the ultimate ownership structure with more complex characterization (La Porta et al. 1999). The ultimate controlling shareholders exercise control and ownership asymmetrically with the aid of the pyramidal ownership structure, cross-ownership as well as dual-class equity issue etc. Such a strengthen of control and separation between the control and the ownership lead the ultimate controlling shareholders holding more power and motivation to grab the private benefits of control and to occupy the interests of minority shareholders. In addition, controlling resources from the investment of monetary capital and physical capital is the basic source of the control benefits, which exerts a decisive influence on the growth and development the company. For this reason, ultimate controlling shareholders tend to expand the resources in their control by investment to produce private benefits not being shared by minority shareholders. Under the background of transitional economy in China, the listed companies are in the status of the super-control of large-shareholders as well as the universal pyramidal ultimate ownership structure. The ultimate controlling shareholders, as the actual controllers of listed companies, have a profound impact on the financial decision-making behavior related with the benefit of control. Furthermore, much food for thought was shown in the behavior of Chinese listed company, such as frequent change of committed investment project from the raised funds, blind diversification and low investment efficiency etc. Therefore, basing on the microstructure of ownership controlling train, the investigation on the mechanism and characterization in the investment behavior of the ultimate controlling shareholders upon the listed companies have great theoretical value and practical significance on the constraints of the profits grabbed by the ultimate controlling shareholders as well as the improvement of investment efficiency.By tracing the ownership controlling chain of listed companies, the effects of ultimate controlling shareholders on the investment of the listed companies are investigated in this thesis. With the aids of methods of normative research and empirical study, problem posing, theoretical analysis, realistic background analysis and empirical study are carried out step by step. The problem ware posed in the first section'Introduction', in which the research scope and content are also clearly shown. The theoretical analysis part of the posed problem is in the second section'Literature Review and Commentary' and the third section'Theoretical Analysis on the Impact of the Ultimate Control on the Companies'Investment Behavior'. In this part, the relationship between the ultimate shareholder control and investment of the company as well as the theoretical model with respect to the influence of the ultimate controlling shareholders on the investment of the listed companies are set up to creative the theory framework for systematic analysis and provide a theoretical basis for follow-up studies. The forth section is'Ultimate Ownership Structure and Investment Behavior Analysis for Chinese Listed Companies', which illustrates the realities of the ultimate ownership structure and investment in China. So, the real system and background were well considered in this empirical study, which lead the research in the light of the specific conditions in our country. The part of empirical study is composed of the fifth section'Studies on Relationship among the Ultimate Shareholder Control, Internal Cash Flow and Investment Behavior of Listed Companies'and the sixth section'Studies on Relationship among the Ultimate Shareholder Control, Debt Financing and Investment Behavior of Listed Companies' The empirical studies are based on 590 China's A-share listed company's research samples over the period 2005-2009. On the one hand, the impacts of investment of listed companies on the sensitivity source of the cash flow, underinvestment and overinvestment are investigated from the cut-in point of ultimate ownership structure. On the other hand, the effects of the debt financing on the investment behavior of listed companies are studied in three basic ways:the debt size, debt term structure and the sources of debt. The existence of the debt agency costs and the effect of the debt governance are also checked in the empirical study. The effect of ultimate ownership control on the debt mechanism is then further investigated. The ending of the thesis is the seventh section'Conclusions and Policy Recommendations'. In this ending section, the conclusions are drawn and the recommendations to the politics with respect to the governance of the non-efficient investments from Chinese listed companies are put forward. At the same time, the limitation and prospect of the research are also discussed in this part. According to the above, the following conclusions can be drawn as following.(1) Theoretical models show that the more interests from listed companies the ultimate controlling shareholders occupy, the more serious over-investment behavior of listed companies is. The higher proportion of cash flow rights is helpful to slow down the company's over-investment for the consistent interest between the ultimate controlling shareholders and the listed companies. The the bigger the divergence between the control right and cash flow right is, higher the control leverage became, which leads the overinvestment of the listed companies more seriously. Moreover, the increasing level of the exterior supervision is helpful to reduce the overinvestment of the listed companies.(2) In China, the listed companies are controlled by ultimate controlling shareholders in the way of pyramidal ultimate ownership. However, the cash flow rights and control of the ultimate controlling shareholders are not separated, especially as the central or local governments being the ultimate controller. The central or local governments tend to control the listed companies by a long control chain, which leads a mystery named'pyramid structures'. Compared with state-owned ultimate controlling companies, the non-state-owned ultimate controlling companies show a lower percent to employ the 'pyramid structures'. However, the proportion of these non-state-owned ultimate controlling companies who employ multi-control chains is highest. The ultimate controlling shareholders under the'pyramid structures' tend to obtain more ownership with lower input cash flow right. At this time, the control leverage is higher.(3) The cash flow sensitivity of the listed companies is widespread in China's listed companies. In general, the sensitivity decreases when ultimate controlling shareholders'cash-flow rights increase and it increases as the separation degree between the controlling shareholders'cash-flow right and their control rights increase, which confirms the overinvestment hypothesis and reflects the effect of ultimate controlling shareholders' convergence and entrenchment on investment. Moreover, ultimate controlling shareholders entrenchment not only needs ability and motivation, but also needs "opportunity" with sufficient cash flow. The overinvestment behavior of the ultimate controlling shareholders can be curbed effectively by less cash flow.(4) From the view point of debt financing, a significant negative correlation is shown between the corporate debt scale and its corporate investment spending, which indicates the debt inhibits the investment of the listed companies. In addition, the power of the inhibition also decreased with the increasing cash flow right of the ultimate controlling shareholders. The separation degree between the cash-flow right and the control rights increase with the increased control leverage, which leads increased inhibition of the investment consequently. Moreover, from the research with time sequence, the debt inhibits the investment of the high-growth companies, which lead the results of underinvestment. However, the debt exerts little binding effects on the investment of those low-growth companies. Under this condition, the debt management is weak for the investment.(5) From the view point of debt maturity structure, the liquidity constraints of the short-term liabilities can inhibit investment more effectively compared with those of the long-term one. The short-term liabilities, on the one hand, can lead the underinvestment of the high-growth companies more seriously. On the other hand, it exerts little effect on the little binding effects on the investment of those low-growth companies. With the increasing ultimate cash flow right, the inhibition of the short-term debt on the investment decreases firstly and then increases (a'U' shape variation). However, the separation degree between the cash-flow right and the control rights exert little influence on the relationship between the short-term liabilities and investment.(6) Bank loans and commercial credit are the indebtedness with different sources. Great difference exists in the relationship between the investment scale with bank loans and that between the investment scale and commercial credit. In general, the commercial credit has a more strong impact on the investment scale. The commercial credit can inhibit the overinvestment of the low-growth companies, however, it lead the underinvestment of the high-growth companies more seriously. Additionally, the effect of ultimate ownership structure on the relationship between the commercial credit and the investment is not significant.(7) There are great differences on the investment behavior and the effect suffered from the debt for the listed companies with different types of ultimate ownership. The investment of state-owned ultimate controlling companies shows less sensitivity to the cash flow, which indicate the inefficient investment is not significant basically. The overinvestment of the local-owned ultimate controlling companies is obvious. However, as for the companies ultimately controlled by the natural person or family, the support from the ultimate controlling shareholders make the sources of the positive investment cash flow sensitivity more complex. The state-owned ultimate-controlled listed companies have homogeneity property with the state-owned commercial banks. The homogeneity and the soft budget constraints increased the risk of the investment and reduce the inhibition of debt financing on the investment Furthermore, bank loans exert little influence on the investment of the listed companies. However, as far as the companies ultimately controlled by the natural person or family are concerned, the inhibition of the bank loans on the investment is obviously. In the meantime, commercial credit and short-term liabilities also exhibit strong inhibition on the investment.The innovation of the study can be presented in three aspects.(1) Taking the basic ideas and relative models of Motta (2003), Aggarwal and Samwick (2003) as well as La Porta (2002) as reference, a theoretical investment model is set up basing on the private benefits of ultimate shareholder's control, in which the control lever of the ultimate controlling shareholders (the ratio of ultimate control to the cash flow right) is employed. Simulation results confirmed that the increasing control leverage of the listed companies lead the separation degree between the cash-flow right and the control rights increase and the overinvestment more serious, which indicates the existence of interests occupation arise from the separation of the ultimate controlling shareholder's ownerships.(2) The empirical studies are performed on the sensitivity sources of the investment cash flow from the view point of ultimate ownership structure, in which the ultimate controlling shareholder's cash flow rights and control rights as well as their separation degree are taken as the proxy variables to reflect the degree of consistency between the ultimate controlling shareholders and the minority shareholders. In the meanwhile, with the aids of ultimate controlling shareholder's cash flow rights and the separation degree between the cash flow rights and control rights, the entrenchment effect and the alignment effect arising from the ultimate controlling shareholders are well distinguished. Comparing with the evaluation employing the percentage of the shareholder's ownership alone, the new method can also distinguish two competing explanations of the investment cash flow sensitivity effectively. Furthermore, it is found that the ultimate controlling shareholders entrenchment not only needs ability and motivation, but also needs "opportunity" with sufficient cash flow.(3) The effects of the debt under the ultimate control on the investment of the listed companies are also investigated. It is indicated the investment difference of the listed companies come from heterogeneous property of the liabilities, which is the debt maturity structure and its source. The internal mechanisms with respect to the relationship between debt and investment are analyzed with the aid of the new model that taking the ultimate controlling shareholder's cash flow rights and control rights as well as their separation degree in consideration.In the end, I had to say there is some limitation in this thesis. (1) The study is under the assumption of the solidified interests between the controlling shareholders and management directors. The effects of management goals, self-confidence, motivation and the agency problem between the controlling shareholders and management directors on the company investment are not taken in to consideration. (2) The effect of the pyramid Level and control chains on the investment of the listed companies are not investigated further. (3) Internal mechanisms of corporate governance are not investigated. In fact, the ultimate controlling shareholders, as the company's actual controller, will affect the mechanism and the effectiveness of the corporate governance inevitably. Consequently, it will exert strong influence on the investment decisions and investment behavior. Therefore, the role of the corporate governance between the ultimate control and the company's investment is also a good topic for further research. The above limitations and the topic about corporate governance are the directions for my later research.