| The common phenomenon in practice is that many executives of listed companies(such as the chairman,general manager,etc.)also hold positions in their controlling shareholder’s firm(in the data sample of this article,50% of the executives working in the controlling shareholder’ firm at the vertical level).However,as early as 1998 and 2001,the China Securities Regulatory Commission put forward the requirements of “Three Separates” and “Five Separates”.The Company Law and other relevant legal provisions also make regulation on the affiliated executives.Judging from the provisions of laws and regulations,for listed companies of non-state-owned enterprises,the legal provisions only require that the executives should not hold other positions except directors in the shareholder’s firms.However,for any executives of the controlling shareholder,there is no requirements for whether they hold a position in the listed company.The legislative significance of which is to make sure executives of state-owned enterprises to devote themselves to the operation of state-owned companies and protect state-owned assets from loss.It can be seen that although the policies and regulations do not directly prohibit the executives of the listed company from working in the shareholder’s firm,they are cautious about above phenomenon.In addition,there is an inconsistency between policy supervision and the practice of executives having positions in the shareholder’s firm,which has attracted the common attention of managers,policy makers and regulators and other stakeholders.Claessens et al.(2000,2002)found that controlling shareholders strengthen their control over listed companies in four ways: pyramid structure,cross-shareholding,different rights of the same share and affiliated managers.The fourth way is the executives of listed companies studied in this paper also serve in the controlling shareholders’ firm.Claessens et al.(2002)only studied the economic consequences of the first three control methods on the firm value,but because of limited data,the fourth was not studied.Since then,researchers have explored the relationship between the fourth control method and firm value or corporate performance and agency problems.However,there is no consistent conclusion on the economic consequences of the fourth control method,which mainly result in two viewpoints: First,affiliated managers can help controlling shareholders to strengthen supervision of executives in the listed company,reduce management agency problems,and improve the quality of accounting information.Second,affiliated managers may become tools of controlling shareholders to tunnel the listed companies and damage the firm value.The affiliated managers play an important role in promoting the financing of the internal capital market,alleviating the agency conflicts between shareholders and management,and conflicts of interests between controlling shareholders and minority shareholders,which are important factors that affect the corporate investment.However,so far,few literatures studies the impact of affiliated managers on corporate investment(investment efficiency and innovation).This paper systematically investigated the impact of affiliated managers on the investment efficiency,innovation output and corporate performance using China’s Ashare listed companies from 2009 to 2016.Considering that the chairman and the general manager,as the core of the strategy formulation and operation execution of the company,have a significant impact on the investment and the operation decision,this paper defines affiliated managers as the chairman or the general manager.In addition,compared with the horizontal interlocks,we call the situation that the chairman or the general manager holds a position at the same time in the controlling shareholders’ firm as the vertical interlocks.Our evidence in this paper shows that:First of all,the vertical interlocks of executives in China have not shown possible positive effects,such as reducing the level of information asymmetry and improving the quality of accounting information;strengthening the supervision of managerial opportunistic behavior to alleviate agency problems;providing resource support to alleviate corporate financing constraints.However,our evidence as a whole reflects the demand of major shareholders to tunneling the listed companies through vertical executives.Specifically,by reducing the implementation difficulty and cost of tunneling by controlling shareholders and reducing the risk of tunneling being discovered,the vertical interlocks enhance the tunneling motivation,which leads to a decline in the efficiency of resource allocation,the decrease of innovation willingness and funds available for innovation activities.At this time,the company’s investment efficiency and the innovation output decrease,the corporate performance becomes poor.This shows that in China’s emerging capital market,the vertical interlocks of the executives generally reflect the runneling effect of the controlling shareholders.Secondly,this paper argues that compared with state-owned enterprises,the first type of agency problem of non-state-owned enterprises is less serious,which is mainly manifested as the second type of agency problem of large shareholders’ encroachment on the interests of minority shareholders.At the same time,non-state-owned enterprises face serious financing constraints,which are more likely to become the window and platform for controlling shareholders to interact with external financing,and thus being “hollowed out”.This means that the controlling shareholder’s demand for tunneling through vertical interlocks is different between state-owned enterprises and non-stateowned enterprises(that is,the negative effects of vertical interlocks on corporate investment efficiency,innovation,and corporate performance are mainly manifested in the non-state-owned enterprise).Our evidence also finds that compared with stateowned enterprises,in the non-state-owned enterprises,the restraining effect of vertical interlocks on corporate investment efficiency,innovation,and corporate performance is more obvious in the non-state-owned enterprises.In further tests,this paper divides vertical interlocks of executives into the vertical chairman and the vertical general manager.In the Chinese enterprise group,the chairman is often appointed by the controlling shareholders,and there is an explicit or implicit social relationship with the controlling shareholders.Therefore,the chairman’s power is restrained by controlling shareholders in different ways,and is more likely to have substantial influence on the investment and business activities according to the intention of controlling shareholders;At the same time,as the legal representative of the company,the chairman has the highest powers granted by law,and has a more obvious influence on a firm’s operation,investment and other activities.Our evidence also shows that compared with the vertical interlocks of general manager,chairman’s interlocks showed lower investment efficiency,innovation output,and worse corporate performance.Finally,the paper further explores the path of controlling shareholders’ tunneling through vertical interlocks.This paper selects the ratio of other receivables to total assets,the number and the amount of related transactions as a measure of tunneling behavior of controlling shareholders.In the study of vertical interlocks on investment efficiency and corporate performance,it is found that the vertical interlocks increase the ratio of other receivables and amounts of related transaction transactions,the number of related transactions is also significantly higher.Similarly,the results of vertical interlocks on the innovation show that vertical interlocks are significantly positively correlated with the ratio of other receivables,the number and amount of related transactions.The result of mediating effect also shows that the ratio of other receivables,the number and the amount of related party transactions play a mediating role in the influence of vertical interlocks on the corporate innovation.This result shows that the principle of vertical interlocks on investment efficiency,innovation output,and corporate performance is tunneling and the specific implementation method is the occupation of the listed company’s funds and related transactions.Based on the existing research,this paper deeply and systematically examines the impact of vertical interlocks on corporate investment behavior(investment efficiency,innovation output)and corporate performance.Possible innovations include:First,within the theoretical framework of Claessens et al.(2000,2002)that controlling shareholders enhance their control over listed companies in four ways,our study enriches the economic consequence of vertical interlocks.Existing literature pays more attention to corporate performance,firm value,accounting information quality,etc.While few studies focus on the important field of corporate investment behavior(investment efficiency and innovation).This paper supplements the literature in this aspect,which also enriches the relevant literature on how controlling shareholders of non-state-owned enterprises in transition economies realize their private interests through vertical interlocks.Secondly,it enriches the related literature on factors of investment efficiency and corporate innovation.Combined with our country’s institutional background,this paper examines the impact of vertical interlocks on corporate investment behavior.With the continuous progress of China’s supply-side structural reform to improve the efficiency of funds,it is particularly necessary to explore the impact of vertical interlocks on the investment efficiency,which has an important reference value for firms to improve investment efficiency and promote economic growth.Previous literature on innovation most concentrated at the national,industry and enterprise levels.However,in our country’s institutional background,little literature pays attention to the influence of vertical interlocks on the innovation.Could vertical interlocks of executive better play the business group’s advantage,or is it just a tool for the controlling shareholder to satisfy their own self-interest? The research in this paper supplements and expands the relevant literature in the field of factors affecting the innovation.At the same time,previous literature found that vertical interlocks of state-owned enterprises promote corporate performance.The paper comprehensively uses the data of state-owned enterprises and non-state-owned enterprises to find out that vertical interlocks of executives inhibit corporate performance,which is more obvious in nonstate-owned enterprises.It supports the conclusion that vertical interlocks act to aggravate the tunneling of controlling shareholders.Our paper also discusses in detail the path that vertical interlocks affects corporate investment behavior and corporate performance,which further enriches the literature on vertical interlocks on corporate performance.Vertical interlocks as a corporate governance mechanism are not uncommon in the accounting practice in China.Therefore,the research results of this paper have the following practical significance:There are significant differences between the agency problems and corporate characteristics of state-owned enterprises and non-state-owned enterprises.The research in this paper finds that the restraining effect of vertical interlocks on corporate investment efficiency,innovation output,and corporate performance is more obvious in non-state-owned enterprises.However,China’s current policies and regulations only require that the managers of non-state-owned listed companies should not hold a position other than directors in the controlling shareholder’s firm,but there are still a large number of cases in which the chairman is employed in the controlling shareholder’s firm.Our findings help policy-making and regulatory authorities to manage the vertical interlocks according to the nature of China’s property rights,such as strengthening the supervision of the vertical interlocks of non-state-owned enterprise executives.In addition,in terms of the vertical types of executives,our research found that the vertical chairman has a stronger inhibitory effect on corporate investment efficiency,innovation output,and corporate performance.This conclusion helps the relevant regulatory agencies and policy-making departments to formulate different requirements in combination with the vertical types of executives in China,such as strengthening the relevant regulations and supervision of the vertical interlocks of the chairman,etc.,in order to better improve the investment efficiency,promote innovation and improve corporate performance. |
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