Research On Ultimate Ownership Structure Of Family-controlled Public Firms In China

With the development of China's private economy, family-controlled public firms(Abbreviated as "FPFs" hereafter) have become an important part of China's capital market. As the world's largest transition economies and emerging markets, China's FPFs are mostly placed into family-controlled pyramidal holding structure(Abbreviated as "FPHS" hereafter). "Tunneling" emerges continuously and has been considered to be the central agency problem and one of the main constraints of China's capital markets. However, in contrast to the ubiquity of FPHS as a corporation control mechanism, little is known about it theoretically and there is even fewer research focused in emerging markets and developing countries. The methodology of tracing the chain of ownership created by La Porta et al (1999) has been applied to investigate corporate ownership all over the world. But China is not covered by international empirical research samples. The reason is that the ultimate ownership structure of China's FPFs and corresponding institutional environment are too unique to be incorporated into the "Law and Finance" cross-country comparison paradigm. Therefore, the conclusions will be inevitably biased for most domestic researches following the logic and analytical framework of international literature and with inadequate consideration to the features, causes and impact of the ultimate ownership structure of China's FPFs.Based on China's dual institutional environment of emerging market accompanied with transition economy and family-oriented culture as well, we believe that compared to investor protection, the legal regulation and governance environment related to corporate ownership have more important and observable effects on the ultimate ownership structure of China's FPFs. Based on existing studies, this research follows and improves both the cross-country comparison paradigm and methodology in computing ultimate cash-flow right and voting right created by La Porta et al (1999) and applies them to China. Using the sample of 1704 family-controlled public firms in 2004 to 2007 in China A share market, this research investigates the feature, causes and impact of FPHS in Chinain the light of discriminatory legal regulation, unbalanced regional governance environment and different regulation resulted from market split as well. Case studies, theoretical analysis, statistical analysis, mathematical analysis along with quantitative analysis are applied and the main findings are the following.(1) The typical ultimate ownership structure of China's FPFs is a broad-sensed FPHS which is different from the narrow-sensed one defined by international literatures. The ultimate controller together with his family or extensive-family members hold the great majority interest of the intermediate holding companies in China's broad-sense FPHS. Also their shareholdings are ambiguous and opaque, resulted in lower separation between ultimate ownership and control that is often over-estimated in empirical research. (2) The formation of China's FPHS is not mainly resulted from inadequate investor protection but from relevant legal system and governance environment. Specifically, with business characteristics and family involvement being controlled, discriminatory legal system, including listing system, share-holding system and tax system pose important impact on the layers and separation between ultimate control and ownership. Higher degree of regional marketization and dual restraints on B-share firms result in fewer pyramid layers, lower ownership concentration and higher separation between ultimate ownership and control as well. (3) More pyramid layers rather than higher separation between ownership and control can aggravate "tunneling". In a multi-layer FPHS, the transfer of resources among holdings and Subsidiaries is similar to the "father-son bonds" admitted by informal system, allowing for its persistence, universality and non-supervisory. The presence of outside shareholders in intermediate holding companies is the only source of separation between control and ownership. But those outside shareholders are not essentially "outsiders" or "small shareholders", which indicate that the controlling family can't benefit from tunneling at the expense of the interests of intermediate shareholders. Most domestic empirical research excluded pyramid layers from regression model and thus got a wrong correlation between ownership vs. control deviations and tunneling. This research proposes the concept of broad-sense FPHS and for the first time demonstrates the features of that kind of structure that is also the most typical ultimate ownership structure of China's FPFs. Relying on the conceptual framework of China's broad-sense FPHS, the research gives reasonable explanation to the causes and impact on tunneling, firm performance of China's FPHS, which has also been supported by large-sample empirical test. This study can correct some theoretical and methodological errors for related research and contribute to relevant international literature a special China's sample. The framework can work as complementary to cross-country comparison paradigm used by law and finance literature. Also the conclusion can enrich the existing knowledge of FPHS and provide reference for policy makers and regulatory authorities as well.