Pyramid Structure,Tunnelling And Company Performance

Since La Porta, Lopez-de-Silanes and Shleifer(1999) studied corporate ownership around the world, they found that ultimate holders of many countries throughout the globe control listed companies through such complicated shareholding ways as establishing pyramid structure and so on.Since the Reform and Opening-Up Policy, China has witnessed rapid economic progress over the past three decades; especially the private listed companies have played a more and more important role in the entire national economy. With the ever-increasing proportion of private enterprises in the entire national economy, people began to realize that private enterprises have become a substantial economic force. More and more scholars pay attention to the pyramid shareholding structure in private listed companies in China and the tunneling in the pyramidal shareholding structure and investigate it.Ultimate controllers of private listed companies in China control listed companies through such complicated shareholding ways as establishing pyramid structures and so on. In this way, listed companies can be controlled with less cash flow rights. Controlling shareholders in the pyramid structure achieve the purpose of tunneling the listed companies by transferring funds from them; at the same time there is evidence that controlling shareholders will prop the listed companies when they are of financial difficulties. Controlling shareholders are motivated not only to maximize the private benefits of control by tunneling, but also to support the listed companies by propping. Accordingly, the acts contain tunneling and propping are included in the study of this article.Firstly, the paper reviews the foreign and domestic researches on pyramidal shareholding structure. After describing the characteristics and conditions of the pyramidal shareholding structure in private listed companies, the paper analyzes how the pyramidal shareholding structure to affect the performance of the private listed companies and how the tunneling to affect the performance of the private listed companies. Based on the forgoing theoretical analysis, the research hypotheses are put forward. The paper researches the impact of separation between cash flow rights and control right on performance, and the relationship between tunneling and the performance of private listed companies, using the empirical data of Chinese private listed companies from 2005 to 2007. At last the paper researches the relationship between propping and the performance private listed companies. Finally, according to the results of empirical analysis, the paper suggests some policy recommendations.The results of the empirical analysis indicate that the pyramidal shareholding structure is very common in Chinese private listed companies. We find that cash flow rights and the level of accounting performance have a positive relation; the deviate rate of cash flow rights and control power is negatively correlated with the level of accounting performance, and also the market performance. We find a negative relation between tunneling and the accounting performance, the propping is positively correlated with the accounting performance. It is speculated that the propping is used for whitewashing accounting statement and the tunneling is used for interal funding. Therefore paper suggests improving the institution of equity financing, strengthening the disclosure of accounting information and supervision, improving the relevant legal system to strengthen the protection of small shareholders.