Study On Corporate Governance Structure And The Largest Shareholder Expropriation

The Chinese security market has made rapid progress in the size in thepast decade. Neither the numbers of the listed company nor the quantity of thefinancing in the early 1990s can compare with the current ones. With thedevelopment of the security market, the problems of the internal governance oflisted companies in China emerged, especially the problem of theexpropriation by controlling shareholder. Thus how to prevent theexpropriation and protect the interests of minority shareholders becomes thekey problem of corporate governance of listed companies in China.According to earlier studies, concentrated corporate ownership ispredominant in most countries. Although concentrated corporate ownershipincreases the incentive and ability for controlling shareholder to monitor themanager and deal with the agency problem between the manager andshareholder induced by dispersed corporate ownership satisfactorily, theinterest of controlling shareholder is not in accordance with minorityshareholders, so the expropriation to minority shareholders by controllingshareholder becomes the major agency problem. For his own benefit,controlling shareholder might transfer the assets and profit from the firm inany way possible, which expropriate the interests of other shareholders. For anexample, the controlling shareholder can send his delegates or authorize hisfamily members to act as top managers in firm, and pay them excessiveexecutive compensation, or sale the assets of listed company at a low price.Also they can transfer the assets from the firm through loan guarantees for thelisted company, dilutive share issues, insider trading, expropriation ofcorporate opportunities, even outright theft or fraud and so on.Previous literature has made extensive and detailed researches about thedefinition of expropriation by controlling shareholder and its impact oncorporation. But most of the academic literature has attempted to measureexpropriation indirectly using the deviation of cash flow rights from controlrights. So the analysis of the direct measurement of expropriation and itsdeterminant factors is absent. In contrast to earlier studies, we take thedeviation of cash flow rights from control rights as the reason of expropriation,so it is not the direct measurement of expropriation. Under the circumstance ofimperfection of relevant laws and regulations and poor protection of investorsin our country, related party transactions have become the main directapproach for the controlling shareholder to expropriate the interests of theminority shareholders and transfer the corporate resources. For example, thecontrolling shareholder can take the method of negotiable pricing in the tradewith listed companies to purchase raw material in low price or sell goods inhigh price through the control of the board of directors and managers. Thecontrolling shareholder's can also embezzle listed company's funds largely orask listed company to offer guarantees to its loans and so on.In our paper, based on previous studies we classify in detail the relatedparty transactions between listed companies in China and their controllingshareholders into five categories: purchase goods and accept services, sellgoods and offer services, embezzlement of listed company's funds, assetacquisitions and sales, loan guarantees. Our paper reflects the approaches forexpropriation by the controlling shareholder broadly.We compile a comprehensive database of ownership structure, board ofdirectors and top management data for 630 manufacturing listed companies inChina, allowing us to investigate the determinant factors of expropriation. Inthe aspect of ownership structure, we find that the largest shareholder'sshareholding is positively associated with expropriation in sell goods and offerservices by controlling shareholder; More expropriation in asset acquisitionsand sales happen in companies that are controlled by business groups; Thestate controlling shareholder have more expropriation in purchase goods andaccept services and loan guarantees.In the aspect of board of directors and top management, the scale of boardis positively associated with embezzlement of listed company's funds; Theproportion of directors controlled by the largest shareholder is positivelyassociated with expropriation in purchase goods and accept services;CEO-board chair duality is positively associated with expropriation in assetacquisitions and sales and loan guarantees; If CEOs of listed companies arecontrolled by controlling shareholders, controlling shareholders will havemore embezzlement of listed company's funds.We suggest that regulatory department should perfect the relevant lawsand regulations actively and protect the interests of minority shareholders,prevent the controlling shareholder from transferring corporate assets andtunneling, increase the information disclosure of great related partytransactions, perfect the laws of loan guarantees to other companies,implement the authorized procedure of loan guarantees to other companiesstrictly, prevent inside trading from expropriating the interests of minorityshareholders, strengthen the monitoring role of bank and financial institutions.The corporations should optimize the internal governance structure, exert therole of shareholder meeting and board of directors and make a restriction onthe assignment of directors and top management by the controlling shareholder.The board of supervisors of the company should fully exercise their functionswhich are supervision to board of directors and management. The corporationsshould also strengthen monitor and control to the managers, separate chairmanof board of directors and CEO, perfect the independent director's systemfurther and exercise independent director's role fully.The main contribution of our paper is that, based on previous studiesabout expropriation by the controlling shareholder we begin our analysis fromthe financial market circumstance and corporate governance circumstanceunder which the listed companies in China actually operate. Then we classifyin detail the related party transactions of listed companies in China. Our paperreflects the approaches for the expropriation by the controlling shareholder...