A Study On The Ultimate Controlling Shareholders And Corporation Investment Under Government Intervention

The investment is one of the major forces driving China's economic growth, but the inefficient investing behaviors, overinvestment and underinvestment, made by enterprises will be harmful to the stable economic growth. Based on the important role of the investment in corporation's finance, many scholars take extensively research on the corporation's investment by applying the principal-agent theory and gaming theory. Since most theoretic analyses and empirical studies have been refined from the background of the systematic environment and mature capital market in the west countries, the explanations made by the principal-agent theory upon the corporation's investment may fail to be convincible when they have been divorced from specific context.The corporations in many countries, especially to China being in the period of transitional economy, have suffered a lot due to imperfect systems of modern management. On one side, it is still serious of government's intervention to economy, because of desynchronized progress of economic and political reform and the deficiency of the principal-agent system of state ownership. On the other side, because of controlling shareholders, especially to ultimate controllers, it is highly possible that the decisions of listed companies are almost conformed to the ultimate controllers' willing. With a view to weak legal systems, it is also possible that the ultimate controllers seek to their private profits. Actually, because there is unique ownership structure in these corporations, with which the governments may affect corporation's investing decision. Thus, based on the frame of the LLSV theory, this paper mainly provides a comprehensive research on the influence resulted from government intervention and the ultimate controller's ownership structure to the corporations' investment. However, the similar perspectives are rare mentioned in current papers.Government intervention will lead to the economic phenomenon that is the prevalence of "the grabbing hand" of government. By taking the data of Local State-owned listed companies from 2002 to 2006, this paper investigates the effects of government intervention and pyramidal layers on overinvestment and under-overinvestment. The results show that government intervention has induced overinvestment in the local government control companies, and find that corporate overinvestment can be weakened by pyramidal layers. Therefore, in addition to extending growing pyramidal layers literature in emerging capital markets, the conclusions provide direct evidence of government intervention in economic transition period and an insight into the reform of separation of government and enterprise in China.Based on agency theory of large and small Shareholdings, this paper provides theory analysis about the effects on underinvestment and overinvestment made by deviation which comes from ultimate controlling shareholders of firms' controlling rights and cash flow rights, and studies the impact mechanisms of investment for the ultimate controlling shareholders. Using the data on China's listed companies' data from 2002 to 2006, we subsequently investigate governance effect of ultimate controlling shareholders on investment decision. We find that, as for ultimate controlling shareholders of private firms, the more the cash flow rights deviates the controlling rights, the more serious the ultimate controlling shareholders make underinvestment because of tunneling activities. The negative effects of agent problem on investment inefficiency are mainly in firms of the lower cash flow rights. Furthermore, we find that the high preference of cash holdings may possibly be the mechanism to ultimate controlling shareholders producing inefficiency investment. However, all these conclusions may fail to explain some phenomenon in the state-owned firms. Overall, the above research gives a useful reference for understanding the disputation of privatization to improve efficiency from the view of the investment. What is more, it also gives further discussion about the theory of the investments in developing countries.On the basis of the division of the flow direction of the interests of related party transactions (RPT), this paper analyzes the connection between firm's investment and by ultimate controlling shareholders. The results show that ultimate controlling shareholder tend to expropriation corporation resource by tunneling related party transactions as the degree of the divergence between the control rights and cash-flow rights increases. And the tunneling behavior is mainly in private and Local State-owned listed companies. Moreover, tunneling related party transactions can more easily result in the phenomenon of under-investment than propping related party transactions do. So the empirical evidence shows under-investment is caused by transmission mechanism of tunneling related party transactions.To summarize, based on the combination of theory development above and character of listed companies in China in transition period, this dissertation makes up the shortage that research on corporate investment are much more constrained in traditional frame of the neo-classical paradigm. To some extent, it enriches and develops the investment theory and empirical system of listed companies in China. This study has its practical significance in regulating the government behaviours and property right reform of the state-owned enterprises...