Conflict Of Interest Between The Shareholders

In China, visible conflict of interests among shareholders can be seen in both listing and non-listing companies. Apart from the ownership factor, many other ingredients contribute to this situation: Large shareholders control the board of directors and supervisors; the audit impact of accounting firms is relatively weak; the market for corporate control does not work well, and legal protection of minority shareholders still needs improving. With all these factors in play, it is necessary to turn our attention to the major issue in Chinese companies—conflict of interests among shareholders, rather than the conflicts between shareholders and managers. Under the circumstances of accelerated globalization in recent years, the economic transition in Former Soviet Union and Eastern Europe, the financial crisis and following economy recovery in South-East Asia, together with China's economic success, British and American scholars have come to appreciate that corporate institutions are substantially different in most countries. La Porta et al (1999) have asserted that in most nations all over the world, the primary corporate agent problem is to restrict the expriopriation on minority shareholders by the largest one, but not to prevent managers from building their own empire. From this perspective, the theme of this academic study has particular theoretical and pragmatic meaning.This paper contains the following contributions: (1) Thoroughly analyzes and compares the two concepts—agent cost and collective decision-making cost, and brings forward two new concepts—Enhancement Effect and Ebb and Flow Effect. (2) Systematically studies the relationship between shareholders' conflicts and the market value of listing companies in China. Firstly we build up new mathematical model dealing with the tunnelling and propping behaviors of controlling shareholders, then approve the validity of the model by utilizing the data of year 2000-2002. In the process, the characteristic of controlling is determined by the characteristic of actual controllers. In this way we point out a new method for the difficult problem of how to categorize the controlling shareholders, a problem puzzling the academia for years. Furthermore, the paper also presents pioneering ideas and advanced results: view that company performance is an inducement to the controlling interests' behaviors, and the creation and application of mathematical models and the results of empirical study. (3) Discusses the effects of conflicts among shareholders on accounting theories and research. We analyze the influence of this kind of conflicts upon listing companies' informativeness of accounting earnings, and point out one important non-accounting standard factor that impact this measure.The main conclusions from this paper are: (1) the conflict of interests between shareholders and managers are highly affected by the conflicts among shareholders. (2) In settling conflicts among shareholders, the actual controller with state-owned shares background performs even worse than controller with natural person shares. Enhancement Effect still exits obviously in list-companies controlled by state-owned shares. Not only are controlling interests' behaviors related to external factors—legal protection of minority shareholders, and also associated with internal factor—direct...