Ultimate Controlling Stake, Control Levels And The Cost Of Capital

Ownership concentration of listed companies had become a universal phenomenon,accompanied bored a second agency problem: the ultimate controlling shareholder gotexcess control rights over its ownership through a complex ownership structure, minedthe interests of listed companies and formed a tunnel effect.Then, the investors mightloss profits,will they raise the minimum required rate of return? That’s the logicalstarting point of our study. The cost of capital reflects investors’ minimum required rateof return, helped corporate make investment decisions, the best financing choice andperformance evaluation, and was the basis to estimate the enterprises valuation. ThreeModels-Capital Asset Pricing Model (CAPM), Ohlson-Juettner Model (OJ) and EastonModel (ES)-were used to estimate the cost of capital.In the past, the majority of researches on the equity structure based on the directownership of listed companies.However,this paper based on the ultimate equitystructure.The ultimate shareholder must be the largest one owned the voting right morethan the fixed threshold, they controlled the listed company through the complex equitystructure.The width of the equity structure is the number of controlling chains, the lengthof it is the number of levels from the listed company to the ultimate shareholders. Theseparation of ownership and controlling stake comes true through the increasing ofcontrol levels and the controlling chains,and it makes the ultimate controllingshareholders occupied the interests of minority shareholders more easily and moremotivatedly.Take2004, which was the year ownership structure map was required to release,to2011China A-stock listed companies in Shenzhen&Shanghai Exchange assamples.11321valid datas were got through filtering without ulmate shareholders andcomplete datas. The ultimate shareholders’ average vote right(ultimate controlling stake)was42.53%， average cash flow right(ultimate ownership) was36.80%， averagedifference between ultimate shareholders’ average vote rights and average cash flowrights was5.73%,the average ratio of them was1.37, average control level was2.32.79.41%ultimate shareholders controlled the listed companies through onechain.Compared with the companies controlled by one person or a family,thegovernment was more inclined to use one chain to control the listed companies.44%ofequity structures were pyramid structure, the companies controlled by one operson or afamily were more likely to choose pyramid structure. The quantity of listed companies controlled by one person or a family increases smoothly from2004to2011, andexceeded the quantity controlled by government in2011.The cost of capital estimated by three models, the one estimated by OJ model wasthe highest, the one estimated by CAPM was the lowest, ES model’s result was in themiddle.2254valid datas was got through choosing the same datas of three models，theaverage cost of capital is0.137,was much higher than a one-year time deposit rates. Atthe0.05significant level, only the identity of the ultimate controller and governmentlevel could significantly distinguish the average cost of capital, the ultimate controllingstake ratio interval, the number of controlling chains,control level couldnot distinguishthe cost of capital.The pyramid structures’ cost of capital was definitely higher than thatof horizontal structure.The multiple linear regression was done beween the cost of capital and shareholders’average vote rights, the separation of shareholders’ average vote rights(controlling stake)and average cash flow rights(ownership),the control levels and the number of controllingchains,it was found the different of ultimate shareholders,the result was different, thelisted companies controlled by person and family,the cost of capital had negativecorrelation with the separation of shareholders’ average vote rights and average cashflow rights,and positive correlation with control level,while the companies controlled bygovernment had the opposite conclusion.The ratio of vote rights and the number ofcontrolling chains had no significant correlativity with the cost of capital. The conclusionof robustness test supported the result above.