Research On The Corporate Governance Effects Of Related Large Shareholders

China’s corporate governance has been deeply influenced by government intervention and traditional Confucian culture.And this is reflected in China’s corporate equity structure in that shareholders of listed firms can not just be divided into controlling shareholders and minority shareholders by their property right status,or insiders and outsiders by information status.Considering relations among shareholders,related large shareholders(hereafter,RLS)are prevalent in China’s listed firms.They have various contracts with controlling shareholders,lacking agency conflicts and informational disadvantages(Wei et al.,2011).In corporate governance,the controlling shareholders play two roles,propping benefits and monitoring managers(Wang et al.,2015;Jiang et al.,2017).Considering information and benefit sharing among RLS and the controlling shareholders,we are curious about roles of RLS.The existing literature points that RLS and controlling shareholders construct controlling groups so to aggravate tunneling and damage corporate value(Cheng et al.,2013a,b).Then we have a question that whether RLS with informational advantages and incentives monitor managers and increase corporate value.And this is the theme of this paper.Using a sample of all A-share listed companies affiliated to "Xi Zu" Group from 2003 to 2017,this paper researches governance effects of RLS.First,measuring the executive compensation contract effectiveness by compensation contract sensitivity,this paper examines effects of RLS on executive compensation contract effectiveness.And this paper distinguishes mechanisms in it and study effects of RLS in different situations from several perspectives.Next,promoting resources’ allocation efficiently and relieving financial constraints are key functions of internal capital markets in "Xi Zu" internal capital markets.This paper investigates effects of RLS on financial investment of "Xi Zu" listed firms and mechanisms in it.Further,this paper examines RLS’ functions in different circumstances and possible effects on corporate value.Lastly,this paper investigates effects of RLS on financial constraints and mechanisms in it as well as financial costs of "Xi Zu" members.The main conclusions are as follows,(1)RLS improve executive compensation contract effectiveness.Further study shows,RLS monitor managers and improve accounting information quality as well as decrease compensation peer effects of executives in the same "Xi Zu" Group.What’s more,effects of RLS on compensation contract effectiveness are more pronounced in firms with SOE nature,Director/CEO vertical interlock and shareholder invisible relations.(2)RLS curb financial investments.And the mechanism is that RLS decrease agency cost.Moreover,the effect of RLS is more pronounced when "Xi Zu" Group lack financial company,have diverse business,have less institutional investors and are SOEs.Other tests show that RLS decrease ROA,but increase Profit from principal operations in the same time.(3)RLS relieve financial constraints of "Xi Zu" listed firms.The mechanisms are that RLS reduce information asymmetry,improve resource allocation efficiency and decrease the first type agency costs.Effects of RLS are influenced by characteristics of "Xi Zu" Group,listed firms and RLS.Other tests show that RLS do not worsen other "Xi Zu" member financial constraints when improving itself.This study contributes to the literature in three ways.(1)This paper enriches the literature about the economic consequences of RLS.At present,there is still lack of literature about RLS.And attention on the economic consequences of RLS is limited,for more attention is paid to the deterioration of corporate governance by RLS.This paper provide empirical evidence for the bright side of RLS that RLS reduce information asymmetry between the Controller and branch listed firms,improve executive compensation contract effectiveness,curb managers’ financial investments,promote resources’ allocation efficiency and relieve financial constraints.(2)This paper adds to existing literature about consequences of internal capital markets.Prior literature based on emerging markets documents that ICM is ineffective.This paper shows,RLS monitor managers more and promote operating key functions of ICM in China’s "Xi Zu" Group.(3)This paper provides a pure environment to demonstrate the full governance functions of shareholders by doing research in "Xi Zu" Group.Li et al.(2004)points that large shareholders with higher equity ratio have less incentives for tunneling behavior.So it is easier to observe supervision effect of shareholders in "Xi Zu" Group with higher equity ratio.Besides,doing research in"Xi Zu" Group can control firm-level characteristics so to provide more clean and explanatory findings.