Research On The Cause And Economical Consequence Of Pyramid Structure In China Private Listed Companies

Pyramid structure now is one of the hot-spots and cutting-edge issues. Under pyramid structure the ultimate controlling shareholders generally gain the corporate control rights with less cash flow rights. The theory research shows separation between the cash flow rights and the control rights would bring to critical agency cost, which lead to low efficiency of organizational structure. But previous empirical evidence shows that corporate pyramid structure is widely used all over the world. There are critical deviation between the theory and realities. What lead to this phenomenon? Can the pyramid structure bring to significant agency cost? What potential advantages belong to pyramid structure? Does pyramid structure destroy corporate value? All these problems are open for theoretical analysis and empirical test. This paper explores the cause of pyramid structure from theory modeling and empirical test, and verifies empirically economical effect on pyramid structure from capital structure, cash dividends and corporate value.Putting financial constraint and bankruptcy crisis on a unify research framework, this paper extends the works of Almeida and Wolfenzon (2006a) and Riyanto and Toolsema (2008) , and constructs the decision model. This model describes the corporate controlling structure choice by the ultimate controlling shareholders. Furthermore, we test the model inference using the data of Chinese small and medium-sized private listed companies. The mainly contributions are: first, this research presents that the choice of corporate organization is endogenous. The financial constraint to a new initial company and bankruptcy crisis to an established one is the important elements which affect organization structure. Second, this study finds the national macroeconomic institutional environment is important, and the lower the tax burden, the company may more possibly choose the pyramid structure; after the share segment reform, ultimate controlling shareholders less use Pyramid structure to control the listed company. Last, this paper confirms pyramid structure is neutral. High private benefits of control are the phenomenon accompanied with pyramid structure. Under pyramid structure, ultimate controlling shareholders have an incentive to hire well-qualified accounting firms to transfer the signal of no tunneling to the outside investors.Based on the balance panel data of private listed companies from 2004 to 2006, this article analyzes the relation between ultimate ownership and the capital structure. Using time-varying specific information of ownership structure caused objectively by the share segment reform, this paper makes a choice between fixed effects model and random effects model with Hausman test, avoiding the model specific errors may arising with cross-section data Least-squares regression and multi-year data Mixed regression model. The main findings include two points: first, there are some positive correlation between cash flow rights of ultimate controlling shareholders and the debt, but separate degree of cash flow rights and control rights is unrelated with the debt. This finding supports that outside equity and liability is alternative financial approach, but does not support the assumption that separation between control rights and cash flow rights under pyramid structure lead to agency problem on capital structure choice by ultimate controlling shareholders. Second, in IPO corporate sample regression model, the coefficient of corporate risk is significantly positive, but in no-IPO corporate sample regression model, the coefficient is indifferent from zero. This result supports the equity financial preference prevailing in China listed companies from another viewpoint.From the new perspective on corporate cash dividends payment difference before and after share segment reform, this article analyses cash dividend's controlling and tunneling effect before share segment reform. The T-Statistics test shows Companies obviously prefer to pay high cash dividends before reform than after share segment, the Probit and Multiple regression results indicate that it can solely be explained that high cash dividends imply tunneling behavior of ultimate controlling shareholders. Without efficient capital market assumption, this paper finds new evidences about tunneling effect using cash dividends by ultimate controlling shareholders.Based on treatment effect model, this paper discusses the effect of pyramid structure in corporate value. The result shows pyramid structure has a positive effect on corporate value after controlling sample self-choice effect. This is contrast with most findings without controlling ownership structure as an endogenous varible. This result supports the assumption that pyramid structure can substitute for incomplete market or institute. Even though pyramid structure may accompany with critical agency cost, but pyramid structure in nature is a neutral control manner.