A Study On The Interest Conflict Between The Controlling Shareholder And Minority Shareholders Of China's Listed Companies

In a closely-held company, since the controlling shareholder holds the absolutecorporate control, the primary agency problem in corporate governance is no longer theone between shareholders and managers, which is proposed by the traditional corporategovernance theory, but the interest conflicts between the controlling shareholder andminority shareholders. As listed companies in most emerging markets, those in Chinahave high ownership concentration, with controlling shareholders in most cases. Moreextraordinarily, during a long period of time, the shares held by major Shareholders inChinese listed companies are basically non-circulation shares. Thus, major shareholdershave interests, which are not in accordance with minority shareholders, who usuallyhold public circulation shares. In this way, the interest conflicts between shareholdersare highlighted. Recently, major shareholders frequently get involved in cases asinfringement upon the benefit of minority shareholders, or tunneling of the listedcompanies. Therefore, the research on the particular corporate governance problem inChina, i.e. exploring the interest conflicts between shareholders and the solution forrestricting the expropriation behaviors of controlling shareholders has its practicalsignificance.Based on the review of related international and domestic literature, thisdissertation analyzes the root and system background of the serious interest conflictsbetween shareholders in Chinese listed companies, in respects of the functionalorientation of security market, the approval regulation of security issuance, thereforming and listing process of companies, the mechanism scheme of non-tradableshare reform, and the legal environment of investor protection in China. The particularsystem background aggravates the interest conflict between the controlling shareholdersand minority shareholders in Chinese listed-companies. Examining the typical cases thatmajor shareholders tunnel listed companies, this dissertation reveals the motivations andapproaches of their propping and tunneling behavior.This dissertation conducts an empirical study of interest conflicts between majorshareholders and minority shareholders in the view of related party transaction andrefinancing efficiency, and tests the effects of the check-and-balance ownershipstructure on the expropriation of major stockholders and those on the corporate operating performance, using the panel data of 1009 Chinese A-shares listed companiesin the fiscal years 2001-2004.Firstly, this dissertation makes an empirical test on whether large shareholderscarry out propping and tunneling. The empirical results indicate that, the stronger thecontrolling power the first shareholder possesses, the higher probability the related partytransactions occur and the larger transaction amount is involved. In addition, in the casethat the controlling shareholder exerts his influence on the listed companies through anindirect way, the amount involved in related party transactions is larger than that in thecase of a direct one. Through the related party transactions, the major shareholdersmight carry out tunneling, and at the same time, they might carry out propping when thelisted companies need such prompt spurred by refinancing, avoiding loss, and delistingrisk.Secondly, this dissertation examines the influencing factors of operatingperformance decline after equity refinancing in listed companies. Measured by eitheraccounting figure or investment return, operating performance of listed companies fallsremarkably after equity refinancing, which could be interpreted as how the ultimatecontroller exert his influence on the corporation as a critical factor. Operatingperformance falls further in the case that the listed company is controlled in an indirectway, which shows that the tunneling by large shareholders is an important reason forlow-level efficiency of equity refinancing.Finally, this dissertation analyzes the advantageous and disadvantageous effects ofthe check-and-balance ownership structure. This paper finds that check-and-balanceownership structure could restrict the expropriation of large shareholders, mitigate theirbenefits extraction, and protect the benefit of minority shareholders. However, thisstructure has significantly negative influences on the corporate operating performance,especially in the state-owned companies and well performed companies.The conclusions contribute some suggestions regarding the optimization ofownership structure and the improvement of the corporate governance mechanism.