Study Of Entrenchment And Economic Consequences Based On Controlling Shareholder Agency

The practice of dometic and foreign securities business indicates that controlling shareholders have no more roles on monitor managers, but usurp on the benefits of minority and creditors which deteriorates corporate governance. Just as La Porta said, in most corporations the main principle-agent relationship have been becoming the controlling shareholders'entrenchment on minority shareholders but not manegers'entrenchment on exterior shareholders in the Berle-Means corporate governance mode.From Shleifer and Vishny, study about the principle-agent between controlling shareholders and minority shareholders teems which has becoming the main stream of corporate governance. However, analysis about literatures tell us that most existing study is empirical analysis but quantitative. Moreover, most study has an implied hypothesis that the entrenchment of controlling shareholders has no effect on creditors which neglects the effects of entrenchment on asset subsititution. At the same time, existing study pay less attentions to the reverse restraining of creditors on controlling shareholders. Based on the above analysis, entrenchment ways of controlling shareholders and its economic consequences will be dicussed in this paper and attempts to reply the following questions: 1) Whether the inefficience of investment can reflect controlling shareholders'entrenchment behaviour and extent or not; 2) Whether the inefficience of bankruptcy can reflect controlling shareholders'entrenchment behaviour and extent or not; 3) What level is the costs of controlling shareholders agency; 4) Whether the entrenchment of controlling shareholders can affect the agent costs of debt financing or not and what level. Concretely, the following research has been developed in this paper.Firstly, from the angle of system flux and codices criterion enolvement, the investment and financing of corporations, system background and legal circumstance are analized which make clear the changing and collocating efficience of investment. The development actuality and lack of securities business, controlling shareholder agency and the non-trable share reform are analized deeply. At the same time, the chang of bankruptcy law and its constituting and revising are dicussed which can educe the latter study.Secondly, based on the difference of income between minority shareholders and creditors, the cause of controlling shareholders'inefficient investment is analized. Then, acconting on the distortion of investment controlled by contrliing shareholders, the benefits conflict between contween controlling shareholders, minority shareholders and creditors are study.Thirdly, in order to study the economic consequences of controlling shareholder agency, the effect of controlling shareholders on agency costs are analized. The behaviour of controlling shareholders have effect not only on minority shareholders and creditors'benefit, but also on the loss of option of investment as a result of the distortion of investment and bankruptcy policy. The controlling shareholder agency costs are analized quantitatively firstly and then its affecting factors are discussed. What's more, accounting on the effect of controlling shareholders on creditors, the effect of controlling shareholders on debt financing are analized to study the effect of controlling shareholders on asset subsititution.Lastly, in order to testify the conclusion forementioned, the typical case of securities business in our country is selected to study. On the foundation of theoretical and case study, some policy advice is brought forward about investor protection.In conclusion, the innovation of this paper can be summarized four aspects:â‘ From the point of investment policy, real option models are bulit to study the effects of controlling shareholder agency on corporate investment policy. Analysis shows that the difference of income mode is the motive of controlling shareholders'entrenchment. Then, the conflicts between controlling shareholders, minority shareholders and creditors are analyzed from the point of investment timing. Result shows that the inefficient investment is one of the ways of controlling shareholders'entrenchment, which presents the departure of investment timing from optimal invsetment timing under the controlling of controlling shareholders. Moreover, the inefficience of investment is influenced by controlling shareholders'control rights, cash flow, separation of controlling shareholders control rights and cash flow and the ration of debt financing.â‘¡On the basis of above analysis, real option models of corporate bankruptcy policy are built to analyze the effects of controlling shareholder agency. Result of models shows that, based on controlling valuation maximizing, the bankruptcy policy under the controlling of controlling shareholders is inefficient presenting the departure of investment timing from optimal invsetment timing under the control of controlling shareholders, which is another way of controlling shareholders'entrenchment. Moreover, the inefficience of bankruptcy is influenced by controlling shareholders' control rights, cash flow, separation between controlling shareholders'control rights and cash flow and the ratio of debt financing.â‘¢In order to study the loss due to controlling shareholder agency, real option models are built to study the economic consequences from two aspects of controlling shareholder agency costs and debt financing agency costs. Result show that 1) By contrast with private benefits of control rights, the agency costs has a more low level which testifys the supervising roles of controlling shareholders on manager; 2) controlling shareholders aggravate the extent of asymmetry information between shareholders and creditors which results in increase of debt financing agency costs and the risk of creditors. While enriching the literatures of corporate governance field, the results provide a new angle to study the agency problems of controlling shareholders.