A Research On Financial Risk Control Of Parent Company In Enterprise Group Over Subsidiary

With continuous marketization and globalization development of Chinese economy, large enterprise groups play more and more important role in society and economy of China. However, these large enterprise groups are confronting lots of seriously practical problems in their operation and development, e.g. the increase of integral financial risks of the group. Enterprise group comprises a core parent company and many member companies known as "subsidiaries". The financial risks of the subsidiaries are infectious inside and diffusible outside the enterprise group. How to effectively control financial risks of subsidiaries within the enterprise groups becomes a significant and urgent subject of research in fields like enterprise group governance, financial management, and internal control. Research on this subject has not only significant practical value (i.e.â‘ micro-economically, it can help preventing the enterprise group from financial difficulty, financial crisis, and bankruptcy, and strengthen the vitality and continuous competitiveness of the enterprise group;â‘¡macro-economically, it can help promoting the stable development of the social economy and guaranteeing safety of national economy), but also significant theoretical meaning, i.e. the research can diversify and deepen theoretical research on company governance, internal control and risks management.Based on scientific classification of subsidiaries and theoretical research fruit of Economics, Management, Financial Management, and Organizational Behavior, this paper innovatively explores the issue of financial risk control of parent company over its subsidiaries at the viewpoint of enterprise group; establishes a financial risks control system for parent company; and proposes some practical measures for financial risk control as well.This paper contains 6 chapters excluding Introduction and Conclusion. The major contents are as follows:In Introduction, this paper introduces the subject selection background based on financial risk situations that Chinese enterprise groups confront, and analyzes the theoretical significance and microcosmic and macroscopic practical significance of such research. Moreover, it also summarizes the research method that focuses on criterion research, and subordinates by demonstration research aiming at the research on financial risk control implemented by parent company to its subsidiaries. The major innovation and limitations of this research are introduced in this part also.Chapterâ… :firstly, this paper describes the development process of both domestic and foreign enterprise groups, and defines the concepts of enterprise group and parent company. Secondly, it proposes innovatively the classification of subsidiaries by 4 types, which respectively are "strategic functional subsidiary with single product", "strategic holding and managing subsidiary with diversified products", "overseas subsidiary with transnational business in foreign regions" and "subsidiary with company governance of independently and publically listed companies"; and addresses about the contents of financial risks and financial risk control. Then, it reviews and comments on relevant research results of the financial risk control implemented by domestic and foreign parent companies to their subsidiaries. At last, it explains the reason why this paper has selected financial risk control of Chinese household appliances enterprises as the research target.Chapterâ…¡:Being the theoretical base of the whole paper, it argues the issues in detail like corresponding ownership finance and financial control rights, financial administration, internal control, financial risk control by applying 4 important theories, namely, theory of property rights, theory of company governance, theory of all-directional risk management and theory of capacity. It addresses the theoretical evidence of this research; at the same time, this paper also discusses the application of the above theories in financial risk control of enterprise groups.Chapterâ…¢:Based on introduction of the classification, function and characteristics of "strategic functional subsidiary with single product", it identifies three kinds of financial risks like the stock, receivables, and financial HR of distribution subsidiary through Hierarchical Holographic Modeling. In respect of organization setting and scheme arrangement, it proposes particular managing and controlling measures and restricting measures for financial risk control of subsidiaries. At the same time, it points out a serial of schemes for tax risk defense and control based on analysis of causes and obvious characteristics of tax risks for functional subsidiaries.Chapterâ…£:it researches on financial risk control of "strategic holding and managing subsidiary with diversified products", which consists of two sections. In the first section, it points out the strategic target and classification of the diversified operation of enterprise groups, and analyzes representation of major risks of diversified operation and the special risks. It identifies the financial risks of subsidiaries with diversified operation through Hierarchical Holographic Modeling; and it designs a evaluation and alarming system for financial risk control of subsidiaries with diversified operation; and it establishes administration scheme and internal management scheme for financial risk control of subsidiaries with diversified operation. The latter section is case study, in which diversified operation of HX Group is selected as the typical case. It analyzes the control system of investment risks, financing risks, cash flow risks implemented by HX Group over its subsidiaries with diversified operation based on financial management concepts, financial risk alarming and financial management system of HX Group. It is expected to be helpful for enterprise groups with diversified operation to carry out more effective financial risk control over their subsidiaries.Chapterâ…¤:It researches on financial risk control of "overseas subsidiary with transnational business in foreign regions". Based on analyzing overseas investment of Chinese enterprise groups and risk characteristics of overseas subsidiaries, it designs a feedforward control system of internal controlling environment, tax risks, and foreign exchange risks for overseas subsidiaries relying on prophase planning for comparative analyzing, risk identification and risk control; it establishes a response system for tax risks, foreign exchange risks, liquidity risks and controlling of financial information system risks for overseas subsidiaries.Chapterâ…¥:It researches on financial risk control of "subsidiary with company governance of independently and publically listed companies" from the stand of the governance scheme and borderline of the parent company in the enterprise groups over their subsidiaries. This chapter comes to a conclusion of intrinsic financial risk features of Chinese listed companies and listed companies in Chinese household appliances enterprise groups through demonstration research. And then, it provides a favorable method and mode for objective judgment of the financial status of the listed subsidiaries and prediction of their future developing trend based on the case study of the application of efficiency coefficient method in financial risk alarming of listed subsidiaries in Chinese household appliances enterprise groups. At last, it analyzes on self-governance of parent company in the enterprise groups based on their own gift and governance route and logics implemented by the parent company to its listed subsidiaries based on the conclusion in demonstration research in the former two sections of this chapter. And it proposes road map of effective governance for listed subsidiaries.Potential innovations and contributions of this paper:Firstly, it has proposed for the first time the classification mode of four types of subsidiaries namely "strategic functional subsidiary with single product", "strategic holding and managing' subsidiary with diversified products", "overseas subsidiary with transnational business in foreign regions" and "subsidiary with company governance of independently and publically listed companies"; it has provided evidence for parent company in the enterprise group to identify different features of financial risks of its subsidiaries; and it has provided subdivision in risk control research so that parent company can control financial risks of different characteristics and features with pertinence. Such classification helps the positioning of control object of enterprise group over the subsidiaries become more accurate and clear. Secondly, it researches the issue that how shall parent company control the financial risk of the subsidiaries from the aspect of controlling implemented by parent company in the enterprise group, which is an innovation in researching aspect and researching contents of risk control research. Thirdly, it has introduced the spontaneity under theory of capacity into the theoretical system of financial risk control, which is a further diversification to risk control and theory of capacity. Fourthly, this paper has introduced hierarchical holographic modeling (HHM) by large scale, complexity, and multiple grading structures into identification of various financial risks of the subsidiaries, which is an innovative application of HHM. Fifthly, this paper has proposed many innovative risk control measures aiming at control system of financial risk for subsidiaries, like selling the receivables through combination of financing tools like trust fund, securitization, and insurance products to transfer the financial risks. Through comparison of financial risks between direct investment and indirect investment in overseas subsidiaries, this paper has proposed a suggestion of establishing finance and assets center and management center for foreign regions, i.e. through indirect overseas investment, the parent company in the enterprise group can implement international tax planning, and avoid risks of domestic policies on foreign exchange and risks of tax exposure, at the same time, it can control and manage the risks of overseas foreign exchange.